A group backed by private equity firm KKR & Co (KKR.N) on Wednesday said it had made a revised A$6.15 billion ($4.65 billion) offer for Australia’s biggest lottery operator Tatts Group Ltd (TTS.AX), upping the ante in a bidding war against Tabcorp Holdings Ltd (TAH.AX).
Both proposals are valued at less than Tatts’ trading price and shareholders are divided over whether the board should favor the KKR-led all-cash bid over Tabcorp’s cash-and-scrip offer and allow the U.S. firm to do due diligence.
KKR-backed Pacific Consortium’s bid of A$4.21 a share compares with the A$4.209 offered by Tabcorp based on its closing price on Tuesday. Tatts shares were trading A$0.03 higher at A$4.38 on Wednesday.
“We would like to see Tatts grant due diligence,” Gabriel Radzyminski, managing director of activist investor Sandon Capital said. “Not because we like the Pacific Consortium offer at the moment but because we want to see if they can increase it.”
Tatts is a prized asset given the lucrative and reliable earnings from its lotteries business, which benefits from monopoly licenses. It also owns a smaller wagering business that competes against Tabcorp, the nation’s largest betting operator.
Australia offers the likes of KKR a rare opportunity to own this type of business, as in most countries lotteries remain in government hands.
Charlie Green, a director at Hunter Green Institutional Broking, which owns Tatts shares, said the board had enough grounds to reject the consortium bid as inferior to the Tabcorp offer. Tatts rejected an earlier offer from the group in December.
“It is all cash, so there is no capital gains tax roll-over relief,” he said of the Pacific Consortium offer. “There are no synergies available for Tatts shareholders. The great advantage of the Tabcorp bid is that Tatts shareholders get to share in the upside.”
PROS AND CONS
Brisbane-based Tatts said it was assessing whether Pacific Consortium’s bid was superior to the Tabcorp deal agreed in October, which Tatts and Tabcorp touted as having A$130 million a year in synergies.
A Tatts-Tabcorp merger would form a gambling powerhouse that would help both companies fend off a challenge from overseas online rivals such as Britain’s William Hill PLC (WMH.L) and Ireland’s Paddy Power Betfair PLC (PPB.I) that have made huge strides into Australian wagering in recent years.
Pacific Consortium also includes Macquarie Group Ltd (MQG.AX), Morgan Stanley Infrastructure and First State Superannuation Scheme.
The group said it had obtained indicative equity commitments of A$4.6 billion and conditional debt financing for the remainder. The proposal is subject to the unanimous recommendation of the Tatts board.
Pacific Consortium Chairwoman Kerry Schott said the all-cash proposal provided greater certainty for investors and was free of competition issues. The Tatts-Tabcorp merger has yet to be approved by the Australian Competition Tribunal.
A Tabcorp spokesman declined to comment.