The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
A big tie-up in Australian gambling has better odds as a takeover. On Oct. 19, Tabcorp unveiled plans to buy larger rival Tatts for about A$6.4 billion ($4.9 billion) in stock and cash. This makes more sense than an earlier aborted merger, and should help the pair better combat foreign bookmakers. The real gamble is with antitrust regulators.
The long-mooted combination would create a giant that would manage lotteries and “tote” betting across most of Australia. The strategy has been supported by divergent performance: since previous talks ended in November, Tabcorp shares have gained 11 percent while Tatts stock has fallen a similar amount.
That presumably helped Tabcorp return with a straightforward takeover proposal while ceding some value to Tatts shareholders, who will get a 20 percent premium. But none of the awkward power-sharing that can hobble mergers of equals: Tabcorp will supply the chairman, chief executive and board.
Financially, the deal looks respectable, promising an EBITDA uplift of A$130 million-plus, well above analysts’ previous estimates for annual synergies of about A$100 million. There are also strategic merits. The Australian gambling market has been transformed by online gaming, and by the arrival of European rivals such as William Hill and Ladbrokes. A merger wave in Europe is bolstering some of these invaders such as Paddy Power Betfair. So the pressure was on Tabcorp and Tatts to bulk up too.
There is one big gamble, however: that watchdogs will not bark. Ten years ago the Australian Competition & Consumer Commission stopped Tabcorp buying Tatts’ precursor Unitab. In most states, either Tatts or Tabcorp already enjoys monopoly rights to run the “totalisator,” a system for pooling bets and dividing the spoils between winners. Morgan Stanley analysts say the new group would have 51 percent of the total market for betting on horses, dogs and sports. There could also be problems with the impact on competition in gaming services.
Given the time spent at the table, both sides should have counter-arguments rehearsed by now. But there is still a chance this long-running deal falls at the final hurdle.