agering giant Tabcorp could revive merger talks with rival Tatts, analysts say, with predictions the sale of the WA TAB – which could have stalled deal activity – not expected soon.
Deutsche analyst Mark Wilson has outlined that the investment bank estimates that Tabcorp could pay up to $4.75 per Tatts share for 100 per cent of the company in order to be 1 per cent earnings per share accretive. He said that figure assumed $80 million in synergies and debt/equity funding of 40/60 per cent.
Shares in Tabcorp were tracking more than 6 per cent higher in late morning today, at $5.14, a day after it reported an annual result that was broadly in line with market expectations. Tatts was up 1.3 per cent higher at $4.09.
“While both Tabcorp and Tatts confirmed that no further discussions are taking place between the parties relating to a merger or any other form of corporate transaction, we believe Tabcorp will continue to assess the merits of a merger or the acquisition of Tatts’ Wagering business,” Mr Wilson said in a client note.
“We believe the regulatory risks can be overcome by way of providing undertakings to the respective state governments and racing bodies.”
The gaming analyst said that he did not believe the competition watchdog would block the transaction given the significant changes to the industry since 2006.
The rise of online corporate bookmakers battling Tabcorp for market share has increased competition in the market but it has also raised regulatory concerns
Tabcorp chief executive David Attenborough outlined yesterday that there were a list of issues facing the sector, including taxation, online betting on live sports, illegal offshore wagering and the level of sports betting advertising.
Mr Wilson said while the regulatory environment appeared to be returning in favour of the traditional wagering operators, like Tabcorp, firm action was yet to be seen
He added that key developments included the Federal Government’s illegal offshore wagering bill which would ban click-to-call in-play betting services and credit betting and the potential ban on gambling advertising during G-rated television programs. Another hit to the online bookmakers is the South Australian Government’s plan to introduce a wagering place of consumption tax.
“Notwithstanding these developments, we do not expect the competitive environment to ease in the near term and earnings risks (to Tabcorp) include the additional compliance and Sun Bets (UK) establishment costs,” Mr Wilson said.
Credit Suisse analyst Larry Gandler questioned Tabcorp’s investment in Sun Bets, which is a joint venture with News UK.
Tabcorp had announced late last year it was launching into the British and Irish markets after signing an offshore partnership deal with News Corp’s British arm.
The new venture combines Tabcorp’s wagering capabilities with News UK’s customer base and market-leading media assets, including The Sun newspaper and associated sports and racing products
Mr Gandler estimated Tabcorp has committed a $70m investment in that joint venture, adding that if the Tabcorp board was prepared to earmark $70m for a new initiative, it should have been a market share initiative in Australia.
He said the Australian-listed company’s wagering operation was higher margin, proprietarily branded, and strategic in value.
“We think there are opportunities for Tabcorp to take market share in (Australian) states where it has traditionally not marketed aggressively,” he said.
“The revenue share agreement with News UK only affords Tabcorp a variable contribution margin of 20 per cent, after content fees and taxes.”
The analyst highlighted that to absorb the costs Tabcorp would incur from its move into the UK, Sun Bets would need to achieve about a 2.5 per cent market share in the $7 billion UK on-line wagering and online casino market.
“There are four, very large incumbents in the UK wagering market, that control in excess of 75 per cent of the wagering market. These competitors are not new to Tabcorp, all operate subsidiaries in Australia. Their success in Australia has been predicated on new products, innovative marketing and cost advantages relative to incumbents like Tabcorp and Tatts.”
Mr Gandler added though that Tabcorp did have The Sun newspaper actively promoting its wagering venture, which is a paper that has 10 million readers per week and a fantasy soccer competition with one million players.
“But we still believe it would be an optimistic outcome for that marketing venture to grow Tabcorp’s betting share to 4 per cent alone.”