Tabcorp, Tatts Propose $11.3b Gambling Mega Merger


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Two of Australia’s biggest listed gambling businesses, Tabcorp and Tatts, have agreed to merge and create an $11.3 billion giant which will control more than 90 per cent of Australia’s totalisator betting and generate revenues in excess of $5 billion.

The companies’ combined market capitalisation will be around $8.6 billion.

Boards of both companies unanimously agreed to the scrip and cash deal which will effectively give Tabcorp control of the merged business.

Tatts shareholders will receive 0.8 Tabcorp shares plus 42.5 cents for each Tatts share they hold.

However, the deal still needs approval from the Australian Competition and Consumer Commission (ACCC) which has expressed reservations in the past, including blocking a similar proposal in 2006.

The rapid growth of online betting and the influx of offshore gambling operations is one factor that has changed since the original merger plan was scuttled a decade ago.

However, ACCC chairman Rod Sims told an investment conference in Sydney yesterday he was concerned about the overlap between the two companies.

Mr Sims said a key consideration would be whether online betting would provide sufficient completion to constrain the merged business.

Together the merged entity would control totalisator betting in every state and territory except Western Australia.

It would also likely to be a clear favourite to take over the WA tote, if the Government there proceeds with plans to privatise the business.

The merged business would also run the biggest suite of lotteries.

After details of the planned merger were made public this morning, the ACCC said it will be undertaking a comprehensive review of the planned deal.

“Our understanding is the proposed merger will require a public review that will examine a range of potential issues and areas of overlap, with the focus on various gaming and wagering services,” the competition watchdog said in a statement.

“The ACCC may also consider possible overlaps in other areas, such as systems for managing poker machines and lotteries/Keno.”

Deal expected to generate $130m in saved costs

Based on yesterday’s closing price the deal implies a 20 per cent premium being paid for Tatts shares, while the implied value of Tabcorp’s shares are 11 per cent lower than the last price of $4.89.

On completion of the deal, existing Tabcorp shareholders will own around 42 per cent of the combined company and Tatts shareholders 58 per cent.

The combined group is also expected to buy back $500 million of its shares.

The merger has already been supported by one of Tatts’ largest shareholders, Australian Super, which has indicated it will support the deal in absence of a superior offer.

The companies said they expected the deal to release $130 million per annum in synergies and business improvements, with the total benefit being around $1.4 billion.

The focus is likely to be removing overlapping IT platforms, merging head offices and cutting jobs.

Tabcorp chief chief executive David Attenborough said the actual number of jobs to be shed had not been discussed.

However, one job to go will be Tatts chief executive Robbie Cooke who said he was “gutted” not to be running the combined company.

“It is best for me to get out of the way,” Mr Cooke told a media conference.

“The deal creates a billion dollars worth of shareholder value and no manager is worth a billion dollars.”
Tabcorp’s Paula Dwyer will continue on chairing the new board, while Tatts chair Harry Boon will stay on as an independent director.

Ms Dwyer said the transaction would allow the business to invest, innovate and compete both in Australia and globally.

“This transaction is expected to deliver significant value for both sets of shareholders, and material benefits to other key stakeholders including the racing industry, business partners, customers, and governments,” Ms Dwyer said.
In a statement to the ASX, Tabcorp said the deal would provide an additional $50 million worth of funding to the Australian racing industry via larger wagering pools delivering stronger returns.

Mr Boon said the scale and efficiency benefits were needed to compete with the new business models and rapid consolidation of gaming and wagering companies globally.

“We believe the implied value accretion for Tatts shareholders fairly reflects the strategic value of our businesses,” Mr Boon said.

The merger is expected to be completed by mid-2017 if approved by shareholders and regulators, with a full integration of the two companies not expected to be finalised for another two years after that.

Morgan Stanley gaming analyst Nick Markiewicz said while the deal could be up to 14 per cent value accretive to Tabcorp shareholders, a higher than expected premium paid for Tatts and increased debt raised risks.

Mr Markiewicz said the 20 per cent premium was well above the 10 per cent which had been expected and he was cautious about the synergy benefits given the increased competition in wagering posed by online operators.

“While targeted synergies are higher than expected, clearly the elevated bid premium places more importance around management achieving the full amount, raising risks,” he said.

Deal lowers risks around Tabcorp: S&P

Global credit ratings agency Standard and Poor’s said the proposed deal would improve Tabcorp’s risk profile despite increasing its debt.

“In our opinion, Tabcorp’s new exposure to the lotteries segment will be the greatest driver of the improvement in its business risk profile,” Standard and Poor’s analyst Graeme Ferguson said.

Mr Ferguson said the Tatts lotteries business will deliver Tabcorp greater scale and earnings diversity.

“Tatts’ lotteries business has exclusive and long-dated licenses, which we view as a high barrier to entry in the retail distribution of lottery tickets,” he explained.

“The historically stable revenue and margins of lotteries would also provide Tabcorp with an additional source of cash flow stability and support the company as it navigates structural change in the wagering industry, potential changes in the competitive landscape, or regulatory changes.”

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