Australia Gambling on the Jackpot: Rival Bid Emerges for Tatts

For years now, Tatts Group and Tabcorp have been the biggest rivals in the Australia gambling industry. In October, Tabcorp proposed a $6.4 billion offer to merge with its long-time nemesis; a move that would create a $11.3 billion empire. What seemed an inevitable, virtual monopoly on the nation’s wagering market, just may be thwarted by a consortium’s counter bid of $7.3 billion.

Pacific Consortium is lead by investment banking firm Macquarie Capital, also made up of First State Super, Morgan Stanley Infrastructure, and Kohlberg Kravis Roberts. The group has valued Tatts at somewhere between $6.4 and $7.3 billion, and is offering $4.40 to $5 per share in an all-out takeover bid.

Unlike Tabcorp’s bid, this new proposal is made up of 100% cash and shares. The cash side involves $3.40 per share of Tatts, plus shares in a new wagering product valued by the consortium at $1 to $1.60 per share. The higher end of that price quote is estimated on synergetic fluctuation, should a strategic buyer take interest in the new product.

Tabcrop Still the Better Deal?

When Tabcorp proposed it’s merger deal two months ago, the offer was valued at $4.34 per share, just under the low-end value of Pacific Consortium’s bid. However, some analysts still believe Tabcrop’s offer to be the better deal for the Australia gambling giant.

“We do not believe the (consortium) proposal ascribes a sufficient premium for the lotteries business and we believe the valuation of the wagering and gaming businesses is based on some overly optimistic assumptions,” said Mark Wilson, an analyst with Deutsche Bank.

“With two proposals on foot, there is clearly interest in Tatts’ suite of businesses and one could not rule out possibility of a competing bidder nor a higher offer from one of the existing proponents,” he said.

According to inside sources, Goldman Sachs, hired adviser to Tatts Group on the matter, suggested the Australia gambling arm host an auction. The advisory group believes it would result in the best value for Tatts.

An auction would encourage major international operators like Ladbrokes Coral, Paddy Power and William Hill – all of which have established businesses in the Australia gambling market already – to rival Tabcorp’s bid. In turn, Tabcorp would be heavily persuaded to increase its offer in an effort to prevent those companies from gaining a much more significant foothold in the region.

Stay Calm And Prosper

In the opinion of Larry Gandler of Credit Suisse, analyst for Tabcorp, his client should stay the course rather than increasing its offer. Gandler believes the consortium’s bid is less valuable, as its new wagering product is coming in with $378 million debt and no forecasted earnings. Add to that a pair of licencing fees to NSW, and it increases the total debt to $500 million by 2019.

“It would actually be strategic for Tabcorp to let such a sub-scale wagering business straddled with high levels of debt to continue to lose market share, then acquire at a discount,” said Gandler.

So long as Tatts rejects the idea of auctioning its business to the highest bidder, the Tabcorp-Tatts merger is still the most likely outcome, creating an Australia gambling juggernaut that would be difficult for any competitor to rival.