Morgan Stanley Group Offers $5.5 Billion for Lotteries Giant

(Bloomberg) -- A consortium including Morgan Stanley and KKR & Co. offered as much as A$7.3 billion ($5.5 billion) for Australian betting and lotteries business Tatts Group Ltd., setting up a potential bidding war with Tabcorp Holdings Ltd.

The proposal is worth between A$4.40 and A$5 for each Tatts share, the Brisbane-based company said in a statement Wednesday. The Pacific Consortium, which also includes Macquarie Group Ltd. and First State Investments, plans to sell or separately list Tatts’s wagering and gaming business.

Tatts’s shares soared in Sydney trading after the bid opened the field to other potential suitors, despite Tabcorp last month seeking to ward off any counteroffers by securing a 10 percent stake in the company. The eventual buyer would gain a lotteries business that generated record earnings in its most recent fiscal year and operates in almost every Australian state.

“Tatts have phenomenal pricing power in lotteries which they have not really exploited,” said Gabriel Radzyminski, managing director of Sandon Capital, which owns Tatts shares. “It’s effectively an unregulated monopoly.”

The company’s stock closed 8.4 percent higher in Sydney at A$4.49, the highest since August 2007. Tabcorp declined 0.9 percent, while Macquarie rose 1.7 percent to a more than nine-year high.

KKR, Morgan Stanley and First State each own 30 percent of the Pacific Consortium, according to a statement released by the group. Macquarie, which has been focusing on building more stable business lines to shelter it from volatile trading and capital markets, owns 10 percent.

Wagering Spinoff

The consortium would be attracted to Tatts for its stable revenue stream, said T.S. Lim, a banking analyst at Bell Potter Securities.

Tatt’s lotteries business, with brands such as The Lott and Golden Casket, generated record earnings before interest, taxes, depreciation and amortization in the year ended June 2016. Ebitda climbed 10 percent from a year earlier to A$345.5 million.

According to the terms of the Pacific Consortium’s bid, Tatts investors will receive A$3.40 in cash and a share in the newly separated wagering unit that will be valued at between A$1 and A$1.60.

The offer still undervalues Tatts’s lotteries business, Sandon Capital’s Radzyminski said. The firm made a similar argument in a February study, in which it put Tatts’s equity valuation at A$5.38 a share.

Tabcorp in October agreed to buy Tatts in a deal valued at the time at A$4.34 a share. Based on yesterday’s close, Tabcorp’s proposal values Tatts at A$4.15 a share.

Best Interests

Tatts said it is assessing the offer and hadn’t formed a view on how it compares to Tabcorp’s. In the meantime, it said its directors “continue to believe” the Tabcorp bid is in the “best interests” of shareholders. A spokesman for Tabcorp didn’t return a voicemail seeking comment on the new offer.

A merger of Tatts and Tabcorp would create a pan-Australian betting company to take on online rivals such as Bet365 Group Ltd., William Hill Plc and Ladbrokes Plc. Such overseas rivals have made day-and-night online betting accessible to Australians, who lose more gambling per capita than any nation in the world.

The combined company would take bets on horse racing, greyhound racing and sports matches across Australia. It would also have wagering licenses stretching out to the end of this century in three states, including the most populous New South Wales. 

That tie-up needs competition approval and the watchdog plans to announce a decision on Feb. 23. 

Rod Sims, chairman of the Australian Competition and Consumer Commission, told the Age newspaper in October that it would raise “major concerns” and “there’s a lot of overlap” between the two companies.

--With assistance from Emily Cadman

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net, Brett Foley in Melbourne at bfoley8@bloomberg.net.

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Darren Boey, Paul Panckhurst