The consortium of financial heavyweights trying to grab control of lotteries and wagering giant Tatts Group will need to lift its $8.4 billion bid and find a way to offload Tatts' battling wagering division, industry insiders say.
Last week Tatts rejected an $8.4 billion bid by the Pacific Consortium – which includes Macquarie Group (a 10 per cent stake), private equity firm KKR (a 30 per cent stake), Morgan Stanley's infrastructure wing North Haven Infrastructure Partners (30 per cent) and local superannuation investor First State Super (30 per cent) – and said it would stick with an $11 billion deal proposed by Tabcorp.
Most investors had expected the Tatts board would reject the Pacific Consortium because of uncertainty over its offer for Tatts' wagering division.
While the consortium offered $3.60 in cash for the lotteries business, it said it would either float the wagering unit or look to sell it to a "strategic buyer" in a deal that could value the business at $1.60.
But the Tatts board rejected this idea, saying it had not had an offer for the wagering business in the past two years and there were no guarantees that Tabcorp will co-operate with the Pacific Consortium and buy the business. While the consortium has not approached Tabcorp it is seen as the most likely bidder because it can generate the most synergies by merging Tatts' wagering business with its own.
Many in the market believe the consortium will look to link up with an overseas gambling company – such as one of Britain's big bookmakers, which have large online operations in Australia – to strike a better deal for the wagering business.
But this will not be easy.
Few synergies
A local executive of a big British bookmaking firm that has been mentioned as a possible bidder said a foreign player was unlikely to be in a hurry to buy the Tatts wagering business, because it offered few synergies with their existing online operations and would require substantial investment to improve its performance.
Tabcorp was the only bidder that made sense due to synergies it could extract – and few online operators would be in a hurry to try to stymie such a deal.
"While they are a good competitor, buying Tatts won't make Tabcorp a better competitor," he said.
Tatts group also said the consortium's valuation of the prized lotteries business was also "inadequate".
But in an example of the sometimes twisted logic seen in takeover defences, Tatts also said the consortium's assumptions about the lotteries business were overly optimistic. Tatts revealed the lotteries division has had weaker-than-expected earnings because there were fewer jackpots above $5 million in the last six months compared with previous years.
The Pacific Consortium said on Friday it was "reviewing its position and absorbing the details of the material profit downgrade announced by Tatts Group".
But surely the fact that Tatts' lotteries punters have had a lucky streak is unlikely to dissuade a consortium of deal-making heavyweights from formulating and executing a Plan B – one that will likely require it to lift the value of its bid for the Tatts' lotteries business, and find a solution to the wagering conundrum.
