Let’s settle it out on the track!

Mark Twain said it best.

“It were not best that we should all think alike; it is difference of opinion that makes horse races.” Mark Twain

I’ve spent years understanding the opinions of horse racing and garnered them from the kings, queens, robbers and thieves of horse racing. What I can tell you is that horse racing is not short of opinion. As diversified as the views are from the private boxes to the paddock totes, these opinions are the lifeblood of the industry, they drive tote turnover, spark debate and ultimately make for great horse races.

So then why is that as an industry we are accepting a less competitive outcome? Why is it that we are turning our backs on the debate and selling ourselves into a racing future that will be won in a one horse race (I guess you can’t call it a race anymore)?

Money you say? Mmm how simple that would be, for then surely the most expensive horses would win the race. Were that the case would we, joe public, race? There would be no need of opinion, or for that matter training or thought! What for? Surely we would just follow the money.

So I’m pretty sure you all agree it’s not about money, right? It’s about opinion, that leads to discussion and debate, that leads to action and innovation, that leads to change and a chance of winning the race.

The greatest stories of our time come from a difference of opinion. I’ve talked to a lot of you and I’ve seen you nod your heads, I’ve sat face to face and listened to your opinions, debated alternatives with the so called left and right wings of racings establishment and I can tell you for sure that the future of horse racing will only be secure if we give opinion a platform to compete, to innovate, to race to win.

For what it’s worth, these are some of the opinions I’ve formed, some of them are yours too.
Fundamental to my view is that interests of horse racing must be secured through strong, transparent, professional competition. It’s no surprise that the Competition Commission was setup to ensure that competitive forces are secured, as they are inextricably linked to the development and improvement of any industry. You only have to look to the competitive forces recently at play in the thoroughbred breeding and auction industry and note that regardless of the tactics, in the result the buyer has more choice and is getting a better deal.

Imperative to the future success of the horse racing industry lies my belief that the currently fragmented gaming landscape will be better served by an integrated gaming strategy that benefits from several sources of revenue, efficiencies of scale, broad based stakeholder participation and deeper distribution and access to clients through gaming partnerships.

As South Africans we should demand that horse racing embraces diversity and transformation by effecting wholesale change at every level of participation.

Membership structures, badges, votes and privileges must be transferred to economically aligned, broad based shareholder interests and voting rights. The business of horse racing needs to secure commercial & legal structures that are designed to protect and retain the fair economic value of the members and stakeholders today and into the future. At the same time these structures need to empower the management to direct the strategic plans of horse racing so that it can more aggressively and effectively compete for its share of the gaming Rand.

These structures should include, amongst others:
Ring fencing the assets of horse racing from the business of horse racing and gaming
Introducing new sources of risk capital willing to invest in the turnaround strategy
Contractual, underwritten annual increases in the stakes
Transfer of membership rights and industry service to shareholding
Bottom up, broad based black economic empowerment benefiting racings labour force

In the final outcome, the operations of “putting on the show” should be secured through separate commercial bodies but contractually governed through a revenue levy like structure. In order for this to be possible the fortunes of horse racing must first be turned around and this cannot be done without substantial investment in a new plan.

This integrated gaming model and the eventual separation of the business of horse racing from the operations of horse racing has worked well in other markets, most notably in Australia where Tabcorp operates an integrated gaming model built from the business of horse racing and has developed into the second largest listed gaming company in the World with a market valuation of c. AUS$ 2.2 billion, some 22 times more than the comparative valuation of Phumelela. Whilst some would argue that this is not achievable in South Africa, given the relative size and demographics of the country, I would argue that on a relative basis South Africa’s GDP is 60% of Australia’s GDP and we have more than double the population yielding an opportunity that on a like for like basis could be worth near R10 billion in today’s terms.  Whilst achieving this might be some way off I have no doubt that the opportunity is real and goes some way to explaining the lack of liquidity in Phumelela’s shares. What’s more is that Tabcorp does not enjoy exclusivity over the assets and operations of racing in Australia and publicly competes for its gaming revenue on track, online, in store and internationally.

Importantly some of the key pieces in the integrated gaming puzzle that will help deliver these strong returns are set to be cast down over the coming years. These include the much anticipated online casino, poker and betting exchange licenses coupled with medium pay-out machines that will no doubt fuel the transformation of racing venues to “Racinos” over time and better utilise the land based assets which stand empty 6 out of 7 days a week.

Horse racing is well placed to secure such licenses as a significant employer and contributor to the South African economy and in fact, in my view, makes a stronger case for these licenses over the land based casino operators who employ 1/20 of the people for every gaming Rand earned.

Whilst horse racing’s dividend demise and ‘blame it on the bookie’ continue to be the hymn sheet for the industry leaders it is interesting to note the success the operators are enjoying in soccer pools and international broadcast rights. Both are inextricable linked to horse racing, obvious enough when considering the picture, but what about the tote which enjoys national exclusivity in being one of only two gaming platforms (the lotto being the other) that is capable of running national pools or jackpots, consider for a second the value of that alone in the hands of a casino operator.

So while the dividends continue to flow out of an industry under siege you have to question where would these same shareholder be were it not for horse racing? The answer is not as obvious, nowhere! Horse racing if you like is the seed, from which all other initiatives grew, and like seed capital providers the world over it deserves an unashamedly disproportionate return for its upfront investment, laid down over almost a century of racing in the country.
I have expressed a number of opinions, some of them are yours, and I would love to hear more?

Isn’t that exactly what horse racing should be all about, opinions that we settle out on the track.

Charles Savage, Chief Executive Officer – PURPLE CAPITAL

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