Tatts (TTS) shareholders were the big winners yesterday from the proposed $11.3 billion merger with rival Tabcorp (TAH).
Melbourne-based Tabcorp has agreed to pay a 20% premium for each Tatts share and the combined company will launch a $500 million share buyback on completion of the merger, which is expected by the middle of 2017.
Tatts shareholders will will receive four fifths of a Tabcorp share plus 42.5 cents for each Tatts unit they hold.
With Tabcorp shares priced at $4.89, that represents a 20.8% premium on Tatts’ current $3.59 price.
Tatts shares ended up 15.8% to $4.16 while Tabcorp shares drifted up 3.4% to $5.06 at the close. The move is subject to regulatory and shareholder approval, and one major holder, AustralianSuper, has already indicated it intends to vote in favour of the merger because of the gains it sees for its stake.
The sweet terms (Tatts is a bigger company than Tabcorp) will see Tatts shareholders owning 58% of the merged company and Tabcorp holders the rest. That’s another reason why Tatts shares jumped sharply.
The two companies say the new group will generate revenue of more than $5 billion, and have around $1 billion a year in earnings before interest, tax, depreciation and amortisation. There was nothing in the announcements today to indicate that his merger is anything but defensive – earnings growth will be driven by cost cuts and tight cost controls.
Dividend payout will be 90% and the companies say the racing industry will benefit from an extra $50 million in funding each year (Opposition from racing could sink the deals because the betting groups have to use the industry’s intellectual property – the race fields which are vital to the gaming and some of the sports betting).
“In wagering, combining our two complementary businesses will give us a national footprint and could create a pathway to larger wagering pools," Tabcorp chairman Paula Dwyer said. “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."
Tabcorp chief executive David Attenborugh will run the new company, with Ms Dwyer as chair. The board will consist of the current Tabcorp board plus current Tatts chairman Harry Boon who will remain as a non-executive director.
In other words, Tatts shareholders get the loot, Tabcorp management and board get to dominate looking forward.
Leaving aside significant items including transaction costs of about $90 million, the merged companies will be looking for cost savings through cost and job cuts of $130 million a year. They claim it will add to earnings two years after the merger, but will add to earnings per share in the first year (the $500 million buyback helps).
The new combined company’s pro forma enterprise value would be about $11.3 billion, with a market capitalisation of about $8.6 billion and combined revenue of more than $5 billion.
The merger will face scrutiny from the Australian Competition and Consumer Commission, which has already flagged “major concerns”. They will be easily met. The $50 a million extra to racing buys their approval; the $500 million buyback shuts up shareholders who may have been restive. The presence of Ladbrokes, William Hill, Sportsbet (Paddy Power) and Bet365 represent competition. Deal done!
