And then there were two: the curious case of the Tatts take over

IN case you have been living under a rock over the past couple of days, the Australian gambling landscape has been shaken to its core after a consortium swooped in with a massive bid to take over Tatts Group.

And – just in case you’ve also been in hibernation – Tatts Group runs lotteries, wagering and sports betting, as well as holding a massive footprint in the electronic gaming industry.

It was already the subject of a $6.03 billion merger bid by Tabcorp that looked a fait accompli, with only the competition watchdog to sign off.

But it appears to have been blown out of the water by a consortium that includes private equity firm KKR, Macquarie Group, Morgan Stanley Infrastructure and First State Superannuation.

That group has offered more than $1 billion more to secure the gambling giant, with a $7.3 billion carrots that has investors salivating.

But what does it all mean?

It means that Tabcorp’s bid to become a mega gambling mogul is on hold.

It also means the Tatts ship hasn’t sailed just yet. IE: it won’t be the last offer we see.

Experts are tipping the bid will drive up the price of the Tatts sale, with firms beginning to recognise just how valuable the lotteries industry is.

And, guess what? That is music to the ears of shareholders, who are now basking in the glory of a nine year high stock price, with its value soaring by as much as 13 per cent in the wake of the news of the rival bid.

Under the proposal by the consortium dubbed ‘Pacific Group’, Tatts would be split into two separate businesses – one for wagering and one for lotteries.

It would take control of the lucrative lotteries business, but has no interest in its wagering interests – and would ditch it via either an ASX float, or trade sale.

Macquarie Group would secure a 10 per cent stake, with the other three interests holding 30 per cent each.

And, probably the biggest carrot dangling for the deal is that because the consortium does not have a stranglehold in the Australian gambling industry like Tabcorp, it means it does not have to go through the ACCC’s intense rigmarole.

What does it mean for Tabcorp?

Plenty of short term pain.

The Tote’s shares fell nearly two per cent after the offer was announced on Wednesday – and that means its ability to stump up for an inflated offer becomes more difficult.

Tabcorp offered 0.80 of its shares, plus 42.5 cents cash for each Tatts share in its bid last year.

And, judging by the rhetoric coming out of Tabcorp headquarters, it does not plan to up its offer any way:

“Tabcorp remains committed to completing its proposed combination with Tatts,” it said in a statement.

“Our proposal is simple, more certain and delivers for shareholders, the racing industry and a wide range of other stakeholders.”

And, even if its original bid is rejected and the Tatts board decides to go with the new player, Pacific Group’s plans to sell off the wagering arm still keeps Tabcorp in the box seat.

It is widely tipped to swoop on the wagering arm, giving the monstrous business totalisator and fixed odds licences and retail wagering networks in NSW, Victoria, Queensland, South Australia, Tasmania, the ACT and the Northern Territory, with about 4300 retail outlets.

Aaaaand, it would also receive a $55 million break fee from Tatts to help it in its new purchase.

That’s serious business.

What about the punters?

Well, guess what. Your odds of winnings lotto aren’t good.

They are minute.

Tiny.

One in 45 million!

And, of course, that is why there is plenty of interest.

The lotteries are fuelled by the hopes and dreams of punters. And, for the corporations, that word, hope, represents massive dollar signs.

Tatts generated nearly $2.15 billion from its lottery sales last financial year – a jump of more than eight per cent on the previous year.

While it had to pay nearly $1.2 billion in tax to state governments, any idiot can see that is some serious, serious coin left over.

So what happens next?

Not a whole lot immediately.

Tatts now has to do its due diligence and look into the offer, compare it with the Tabcorp one and then wait and see if another rolls in.

“The Tatts board and its advisers will assess the indicative proposal including its terms, underlying financial assumptions and conditions, and will provide a further update on the outcome of that review as soon as practicable,” the company said in a statement.

“In the meantime, the directors of Tatts continue to believe the proposed Tabcorp merger is in the best interests of Tatts shareholders and unanimously recommend the proposed Tabcorp merger, in the absence of a superior proposal and subject to an independent expert concluding the proposed Tabcorp merger is in the best interests of Tatts shareholders.”

That’s corporate speak for keeping the big dog happy, but we reckon shareholders might just be a little hot under the collar, with the latest bid valuing the lottery side of the business much higher that Tabcorp.

Did they get caught up in the hype of the Tabcorp offer and lose sight of the goal?

Or is the fact that it wants the whole kit and caboodle the safe option for shareholder?

Time will tell.