Written on the 19 October 2016 by Nick Nichols


INVESTORS have welcomed news of a proposed $11.3 billion merger between Tabcorp Holdings (ASX:TAH) and Tatts Group (ASX:TTS) with shares in both companies rising on the announcement this morning.

Tatts shares surged more than 18 per cent in early trade, while Tabcorp's stock lifted 2.8 per cent as the gaming groups revealed the merger would lead to at least $130 million synergy benefits and deliver an extra $50 million in funding to Australia's racing industry.

The proposed merger will create a business with revenue of more than $5 billion and EBITDA (earnings before interest, tax, depreciation and amortisation) of more than $1 billion.

The merger, expected to be completed in mid-2017 subject to shareholder and regulatory approvals, will also be accompanied by a $500 million share buyback as the Brisbane-based Tatts Group is absorbed by the Melbourne-based racing and gaming giant.

Under the proposal, Tatts shareholders will receive 0.8 Tabcorp shares plus 42.5c cash for each Tatts share they hold.

Based on yesterday's Tabcorp closing price of $4.89, this places a value of $4.34 on Tatts shares.

Tatts' stock rose to a high of $4.24 in early trade, while Tabcorp shares edged up 2.8 per cent to a high of $5.03.

Tabcorp says the new entity will create a diversified portfolio of gambling entertainment businesses that will be armed to pursue global acquisitions.

While the merger is subject to shareholder approval, AustralianSuper, one of Tatts' largest shareholders, has indicated that it intends to back the deal.

Tabcorp chairman Paula Dwyer says the merged entity will 'create a strong and diversified business that is well placed to invest, innovate and compete, both in Australia and globally'. 

"Together we will be able to pursue more investment and innovation to deliver a winning offer for customers, including best-in-class digital products and experiences," she says. 

"In wagering, combining our two complementary businesses will give us a national footprint and could create a pathway to larger wagering pools.

"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.

"At the same time, bringing together our lotteries, Keno and gaming services businesses will give us the capability to create an even more compelling offer for customers and retail stakeholders as the combination increases capability, while increasing diversification."

Tatts chairman Harry Boon highlighted the 'tangible' synergy benefits of a combined group.

"It comes at a time of escalating competition from new business models and rapid consolidation of gaming and wagering companies globally," he says.

"The scale and efficiency benefits from this combination will provide a stronger platform in this dynamic environment.

"We believe the implied value accretion for Tatts shareholders fairly reflects the strategic value of our businesses.

"In addition to our shareholders, the benefits of this combination are also very clear for the racing industry and for customers who should, in due course and with racing industry support, be able to access deeper and more liquid wagering pools."

Tabcorp and Tatts provide the largest source of funding for Australia's racing industry, totalling about $1 billion in FY16.


Author: Nick Nichols





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