Betting Giants Tabcorp and Tatts Finally Push Through

Last Friday, The Australian came out with a report that further fueled speculations over a potential merger between Australian gambling giants Tabcorp and Tatts Group. The Australian reported that the two companies are on the verge of completing AU$9.4 billion merger, which according to the news publisher's top-level sources will be declared any day soon.

Tabcorp operates the TABS agency in New South Wales and in Victoria and has market capitalisation aggregating AU$3.7 billion. Tatts market capitalisation on the other hand is valued at AU$5.7 billion and carries out betting operations in South Australia, Queensland and the Northern Territory.

Neither Tatts nor Tabcorp has come out with statement confirming or refuting the supposed merger transaction. The Sydney Morning Herald (SMH) though later reported that the two betting firms would be coming out with an announcement on Monday to confirm, whether the merger will finally push through. However, SMH added that the latest developments indicate that the negotiation discussions between the two betting companies failed.

SMH stated that Sandon Capital, a Tatts shareholder, is against accepting a merger of equals with Tabcorp, but should instead consider separating its lottery businesses from its wagering operations, as alternative. Gabriel Radzyminski, the Portfolio Manager at Sandon Capital voiced his opposition to a merger agreement if it will not bring about a payment of premium to Tatts Group shareholders. Mr. Radzyminski, argues that the Tatts Lottery business has a particular value, as it generates revenue requiring minimal capital investment.

Yet Paul Skamvougeras, the Head of Equities at Perpetual told Fairfax Media that his company, the largest shareholder at Tatts, is supportive of both, the sale of Tatts' wagering division or consider a merger of equals with Melbourne-based Tabcorp.

Sam Theodore, an analyst at asset management and investment banking service firm UBS Australia, opines that a tie-up between the two homegrown Australian betting companies pose potential advantages. Such advantages include AU$65 million in synergies should the two companies merge successfully, as their combined group will emerge as the lone national gambling operator in Australia.

Mr. Theodore asserts combining forces and resources would make both companies better equipped to carry out betting operations, in what is deemed generally, as an uneven playing field in Australia's wagering industry. The advent of betting businesses established by foreign bookmakers on Australian soil in the likes of Paddy Power, Bet365, Ladbrokes, Unibet and William Hill, has increased the level of competition in Australia's gambling market.
Failed merger talks between the two betting companies though is not something new, as exploratory talks about a potential Tatts and Tabcorp merger had cropped up before, but did not come into fruition.

Sacha Krien of the Credit Lyonnais Securities Asia (CLSA), an independent brokerage and investment group commented that the spate of merger and acquisition transactions in the UK gambling industry had raised awareness about the importance of scale and synergies. The CLSA is of the opinion that merger or trade acquisitions among equals benefit shareholders and has likely potentials of receiving regulatory approval.

The CLSA analyst explained further that a takeover bid by Tatts would bring around diluted earnings per share for Tabcorp shareholders. Tatts shareholders on the other hand would benefit from a merger transaction as such a deal could de-risk the turnaround or financial recovery of the business.