Australian lottery and wagering firm Tatts Group has snubbed a disruptive rival bid from a Macquarie-led consortium of investors, due to valuations that were ’either incorrect, inconsistent or unknown.’
[dropcap]H[/dropcap]aving seemingly nestled into an All-Aussie merger with Tabcorp, Tatts Group became the subject of a bidding war in December when a consortium of investment firms sought to poach the deal with a seemingly competitive offer.
The so-called Pacific Consortium, led by the Australian investment bank, Macquarie Group, had proposed between A$4.40 and A$5 per share for Tatts, outstripping Tabcorp’s October bid of A$4.34. However, Tatts announced 23 December that the consortium’s proposal was “not a superior proposal, and cannot reasonably be expected to result in a superior proposal.”
The consortium, which also included private equity firm KKR, superannuation fund First State and Morgan Stanley’s infrastructure division North Haven, was only ever interested in Tatts’ highly lucrative lotteries business, and had planned to spin off its wagering and gaming divisions.
Governance at Tatts had initially announced to the Australian Securities Exchange they had “not yet formed a view” of the new deal, but believed Tabcorp’s offer to be strategically in the firm’s best interest and would continue to back it in the absence of a better one.
The consortium’s offer included a cash component of A$3.40 per Tatts share, and one share in its wagering and gaming company which it values at between A$1 and A$1.60. They then planned to sell off the wagering company to a strategic buyer, or list the business on the ASX. The A$7.3bn offer, they said, equated to 18 times Tatts’ earnings.
It’s an effective monopoly with an average of 35-year concessions in the states it operates in and it has phenomenal pricing power.
After reviewing the proposal, Tatts countered that the new bid was based on a number of key assumptions, net debt and licence renewals “that are either incorrect, inconsistent with Tatts’ current expectations or unknown.”
Tatts makes most of its revenues from its lotteries business, and had come under pressure earlier in the year from its own activist shareholder, Sandon Capital, to spin off its betting and gaming divisions. At the time the bid was made, Sandon’s managing director, Gabriel Radzyminski, was quick to note that while it confirmed his own thoughts on Tatts’ wagering assets, it still undervalued the company.
“The lotteries business is the jewel in the crown of Tatts business,” he said. “It’s an effective monopoly with an average of 35-year concessions in the states it operates in and it has phenomenal pricing power.”
The deal could potentially have been lethal for Tabcorp. British bookmakers Ladbrokes and William Hill were already reported to be circling Tatts discarded wagering assets. While they have already torn chunks out of Tabcorp’s digital market share, neither have launched attempts to corner the retail wagering sector.
Should Tatts have given the consortium’s offer much more thought, Tabcorp – whose ongoing merger with Tatts has been seen by some as “a do or die situation” – would have been forced to up their offer.
The latter will undoubtedly be relieved to learn that even if the consortium revised its assumption the offer would still be rejected “given Tatts believes the total value offered is not superior to the proposed Tabcorp merger.”