The Age 16/08/04 Business rlh040816.001.001 Tattslotto Generic. Tatts. Lotto. Lottery. Pic by Rebecca Hallas DIGICAM TATTS Photo: Rebecca HallasThe $11 billion battle to create Australia’s mega gaming and wagering group is starting to get interesting and by Friday, Tatts will decide which of the two players vying to acquire it has the superior offer. But at this stage neither has produced an offer that comes close to punching the lights out.
Choosing between the two bids is a tough call because on paper the money being offered by Tabcorp – which started the bidding process in December – and the interloper Pacific Consortium are pretty similar.
On Monday, Pacific Consortium tweaked its proposal by offering to pay Tatts shareholders a dividend beyond the end of the 2017 financial year if the deal drags on.
In doing so it was not offering Tatts shareholders more upside – just limiting the downside of accepting its offer.
But Pacific Consortium isn’t even in the contest yet.
It needs to come up with an offer for Tatts that is superior in order to get a seat at the table because Tabcorp signed exclusive negotiating rights with Tatts unless someone comes up with a better offer.
Had Pacific Consortium meaningfully improved its offer the Tatts board would be obligated to let it into the tent and the bidding war could really begin.
Instead the consortium – made up of Morgan Stanley, Macquarie, KKR and First State – is being a bit cute. It is relying on Tatts shareholders that want competitive friction to get the auction started, to put pressure on the Tatts board to give them a seat at the negotiating table.
In doing so it is seriously turning the screws on the Tatts board to let it into into the auction.
But comparing the two offers is a tough call – they are not apples and apples.
If a Tatts shareholder accepts the Tabcorp offer, they will get some cash but mostly Tabcorp shares.
And the value of that offer moves with the Tabcorp share price.
The Tatts board also has to make a call on how much upside there will be once its business is combined with Tabcorp.
The Pacific Consortium offer is just cash.
Additionally Tabcorp needs to get regulatory approval from the Australian Competition Tribunal, which won’t happen until mid-June. While the betting is that it will probably receive a tick – it’s not certain.
Pacific Consortium members need to get through probity – which although more likely – is a process that can take up to a year.
Even if the Tatts board does declare Pacific Consortium’s bid superior that doesn’t mean Tabcorp will walk away. There are many reasons why Tabcorp is desperate to get is hands on Tatts. It needs Tatts’ wagering business to bulk up its TAB operations (Tatts owns most of the state-based TABs that Tabcorp doesn’t have and a merger would give it near-national coverage and all the operational and cost benefits that go along with that). Additionally Tatts is big in lotteries – a division that is lucrative and less subject to competition from corporate bookmakers.
The shareholders clearly think that one and possibly both of Tatts’ bidders have more in the tank and want them to be able to bid against each other.
Tabcorp doesn’t need to enhance its offer price until or unless the Pacific Consortium bid is deemed superior.
And while this corporate chess game is playing out the value of the offers for Tatts are going down rather than up.
When Tabcorp launched its initial offer it valued Tatts at $4.34 a share – compared with $4.27 its valued at now.
When Pacific Consortium made its original offer it was valued at between $4.40 and $5 compared with the $4.21 its offering now. Its original offer was never taken seriously given it was based on a whole series of rubbery synergy assumptions and the sale of the wagering business for a price beyond its worth.
Tatts is currently trading at $4.44 – well in excess of the price of either the current offers.