Australia’s Tatts rejects KKR-backed bid in favor of Tabcorp’s

Industry: Other 2016-12-24

Australia’s Tatts Group (TTS.AX) on Friday rejected a takeover bid worth up to A$7.3 billion ($5.27 billion) from a consortium backed by KKR (KKR.N) and Macquarie Group (MQG.AX), saying it preferred an earlier offer from Tabcorp Holdings Ltd (TAH.AX).

Tatts, Australia’s biggest lotteries operator, said the proposal from the Pacific Consortium of four financial investors relied on assumptions that were either incorrect, inconsistent with Tatts’ current expectations or unknown.

The offer also undervalued its lotteries business, Tatts said, even though the Brisbane-based firm issued a surprise profit warning for the division on Friday.

While the rejection leaves Tabcorp’s scrip and cash offer, valued at about A$6.2 billion, as the only proposal on the table, some shareholders expect higher offers to be forthcoming.

“I would be very surprised if they packed up and went home,” said Gabriel Radzyminski, managing director of activist investor Sandon Capital which holds shares in Tatts, referring to the consortium.

Pacific Consortium said in a statement it was “reviewing its position and absorbing the details of the material profit downgrade” in the lotteries business.

Tatts in October agreed to a merger with Tabcorp to form a gambling powerhouse that would help both companies fend off a challenge from overseas online rivals in the wagering business.

In many countries, lotteries remain government-owned, so Australia offers the likes of U.S. private equity firm KKR a rare opportunity to own this type of business. The consortium has said it is attracted to Tatts’ annuity-style returns.

WRONG ASSUMPTIONS

The consortium offered A$3.40 per share cash for the lotteries business and shares in a spinoff wagering company it values at A$1 to A$1.60 a share. Tatts on Friday said the wagering valuation was unrealistic.

As a result of its analysis, Tatts said it would not grant the Pacific Consortium due diligence.

“It is an invitation for the consortium to go away and sharpen their pencils and pay more for lotteries and less for wagering,” said Charlie Green, a director at Hunter Green Institutional Broking which owns Tatts shares.

In an unexpected development, Tatts warned that operating earnings in its lotteries business had fallen by 13 percent in the first half, meaning it was unlikely to be able to grow profit in the business this year.

Even so, Radzyminski said he expected the consortium to return with a better proposal, possibly after finding a buyer for the wagering business such as Britain’s Ladbrokes Coral Group (LCL.L) or William Hill (WMH.L) that would allow an all-cash offer.

Approvals for the Tabcorp merger from Australia’s competition regulator and Tatts shareholders are expected to take six months, leaving a window for others to make fresh bids.

Tatts shares fell 4 percent on opening on Friday, while the broader market was trading 0.1 percent higher.

Tabcorp declined to comment. ($1 = 1.3860 Australian dollars)