General | Feb 03 2006
Whichever way you look at it, brokers are in agreement that the proposed merger between wagering companies Tattersall’s (TTS) and UNiTAB (UTB) is mutually beneficial. It is clear Tatts got the better end of the deal, as it will secure synergies and earnings accretion almost right away without having to pay an acquisition premium.
For UNiTAB, market consolidation has been the buzz word around the Australian and New Zealand wagering markets for a while now, and with only a limited number of licences to go around, it has to be a case of untied we stand, divided we fall.
A merged Tatts/UNiTAB would be a powerful force in the upcoming licence negotiations.
And this is where the dilemma lies for Tabcorp (TAH). As the date approaches for the crucial Victorian licence renewals, both Tatts and Tabcorp have suffered constrained share prices and cautious broker ratings as the consensus is that one will win and one will lose, and no one can say which. What is accepted is that the loser will suffer.
If the Tatts/UNiTAB merger proceeds, the general feeling is that the merged entity will up its chances of securing said licence. Thus the obvious thing for Tabcorp to do is to come out fighting for survival, and counter-bid for UNiTAB.
That’s exactly what the market is expecting, with the UNiTAB share price already trading at levels the brokers agree are assuming Tabcorp will respond. But as a result of this bid premium, brokers also agree it is just not a done deal. The bottom line is: can Tabcorp afford to pay up?
SB Citigroup analysts have done a lot of number crunching. They have looked at the situation in a number of different possible scenarios, pulled it apart, put it back together and concluded – no. Interestingly, the analysts are hanging on to a Buy rating for Tabcorp.
This contrasts with GSJB Were, whose analysts have held a short term Underperform rating for some time now. They didn’t change their minds last week as they give a counter-bid low probability.
Were Tabcorp to buy UNiTAB, it would affect significant earnings dilution for Tabcorp shareholders. If it doesn’t, will the company be left out in the cold?
ABN Amro has given it some thought, and the analysts have thrown up the suggestion that a Tatts/UNiTAB merger might actually be good for Tabcorp. For starters, it would highlight a marked difference in valuation multiples between the two entities, in theory making Tabcorp look cheap. But that brings us back to the Victorian licence.
ABN notes the incumbent (in the case of wagering – Tabcorp) usually has the upper hand in renegotiations. Nevertheless, were the competition to secure that licence (there is presently only one) then Tabcorp still has its casino interests and gaming (pokie) interests to fall back on. Furthermore, notes ABN, Tabcorp and Tatts enjoy a duopoly in gaming, and UNiTAB was always a threat to the cosy arrangement. This threat would be removed by a merger.
So where does all this leave us? Confused probably. While brokers are united on their doubt of a Tabcorp counter-bid, they begin to differ on their on-going views for each player whatever happens. One thing is certain however, and that is the Victorian licence hoodoo won’t go away in a hurry. While it’s usually described as “upcoming”, a decision will not be made till 2012. A lot of horses will run, and a lot of handles will be pulled before then.
