Tabcorp, Tatts announce $11.3bn merger
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Australia's two biggest listed gambling businesses will create an $11.3-billion monolith that will control more than 90 per cent of the country's totalisator betting market.
Tabcorp (ASX: TAH) and Tatts Group (ASX: TTS) on Wednesday said they will merge to create a gambling group worth around $11.3 billion, marking the second such attempt at a tie-up in less than 12 months.
Under the proposal, Tatts shareholders will receive 0.80 Tabcorp shares plus 42.5 cents cash for each Tatts share held. Tatts shareholders will own about 58 per cent of the combined group.
Based on the most recent closing price of Tabcorp shares, the offer implies a value of $4.34 per Tatts share and represents a premium of approximately 20.8 per cent to the most recent closing price of Tatts shares.
Morningstar equities analyst Ravi Reddy said the merits of this transaction stem largely from combining the wagering operations of both companies.
"In our view, the combination is also a tacit recognition of the structural challenges facing traditional forms of wagering from digital competition," he said.
"Longer term, the combined business will clearly be in a better position to meet this threat.
"Keeping in mind integration risks, this is an attractive offer for Tatts shareholders in terms of price, earnings diversification benefits, synergies and exposure to a stronger and more profitable wagering business."
While Reddy believes Tabcorp and Tatts' combined retail networks of 4,300 physical stores and widely recognised brands still have value, digital disintermediation has a history of disregarding incumbency with customers invariably "voting with their feet".
"This is the very reason why Tabcorp and Tatts have proposed to combine again--to get scale, extract synergies and amortise costs over a larger customer base," he said.
While there are a lot of hurdles to be overcome before this deal is consummated, Reddy thinks the merger has a "good chance" of being completed.
In a joint statement, the two companies said they expect the merger to deliver at least $130 million of annual earnings synergies and business improvements, and revenue of over $5 billion.
They also expect the deal to be earnings per share accretive (before significant items) and value-accretive for both Tabcorp and Tatts shareholders.
The combined group--which is estimated will control more than 90 per cent of Australia's totalisator betting market--will also target a dividend payout ratio of 90 per cent of net profit after tax.
The merged group will also undertake a $500-million share buyback, after implementation of the transaction and subject to board approval and market conditions.
Tatts said it will pay its shareholders a fully-franked special dividend of 20 cents per share immediately prior to implementation of the transaction in lieu of part of the cash consideration.
A fully-franked dividend of 20 cents per share would have approximately 8.6 cents per share of franking credits attached.
Completion of the merger, which has been unanimously recommended by the boards of both Tabcorp and Tatts, is expected in mid-2017.
"In today's rapidly changing landscape, bringing together our businesses will create a strong and diversified business that is well placed to invest, innovate and compete, both in Australia and globally," Tabcorp's chairman Paula Dwyer said.
"In wagering, combining our two complementary businesses will give us a national footprint and could create a pathway to larger wagering pools.
"We are excited by this opportunity, which we believe will deliver an enhanced wagering experience for our customers and, in turn, will generate stronger returns to the Australian racing industry, underpinning its sustainability."
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Nicholas Grove is a Morningstar journalist.
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