A counterbid in Australian gambling looks like a long shot. A buyout team has gatecrashed the friendly tie-up of Tabcorp and Tatts, which is meant to create a near-$9 billion giant managing lotteries and pool-based "tote" betting across Australia. The new approach for Tatts is fiddlier and the valuation is rather slippery. Still, the target’s board should be able to use this to wring a bit more out of Tabcorp.
At first glance, the so-called Pacific consortium has blown Tabcorp out of the water. The quartet of funds from First State, Morgan Stanley, KKR and Macquarie is promising between $A4.40 and A$5.00 a share. Tabcorp's largely share-based offer for its bigger rival was initially worth A$4.34 - and 20 cents less at Tuesday's close, after a dip in its own stock price.
Reality is slightly messier. For a start, Pacific touts A$3.40 a share for the cash component. Unlike Tabcorp, though, that figure counts an interim dividend of 9.5 Australian cents. So the comparable figure is A$3.305.
The bigger issue is the fate of Tatts' "wagering" business, which handles bets on sports and racing. As part of the deal, Pacific will spin off this business which it says is worth an additional A$1.00 to A$1.60 a share. Even the lower valuation for the unit is a relatively punchy 11.7 times trailing EBITDA, which seems to factor in a bit of a takeover premium. The top end explicitly assumes a subsequent takeout by Tabcorp or another suitor, such as a foreign bookmaker.
There's no guarantee the wagering unit will attract another buyer, of course, and no certainty on the timing. Given the potential for value creation, if Tabcorp is gazumped, it should be able to swallow its pride and swallow up the wagering leftovers. But it might at the very least wait for the spinoff's shares to sag before pouncing.
As ever, the target's directors need to weigh these distinct pitches for value, certainty, and deliverability. Pacific is offering more cash, but it would look even better if it was all-cash, with a buyer lined up in advance for the spinoff. Meanwhile, Tabcorp has long wanted a union with its larger rival. So Tatts may be able to browbeat an improved share-swap ratio out of it instead.