This Lottery Is No Lottery
What would one of the world's biggest infrastructure investors want with a gambling business? More than you might think.
The Pacific Consortium taking on Tabcorp Holdings Ltd.'s October offer for Australia's Tatts Ltd. with a A$7.3 billion ($5.5 billion) bid looks more like the sort of group you'd see bidding for a toll road or an electricity network.
There's a Morgan Stanley infrastructure fund, private equity giant KKR & Co., utilities powerhouse Macquarie Group Ltd. -- and even a retirement fund, First State Superannuation.
That collection isn't so surprising when you consider that gambling businesses -- particularly monopoly lotteries such as Tatts -- bear more similarity to regulated utilities than the volatile consumer companies they superficially resemble. Compare Tatts to an honest-to-god utility -- say, the London water companies in which Morgan Stanley and Macquarie are invested -- and the likeness becomes clearer.
Households have an unvarying demand for fresh water and sewerage. Governments are prepared to have private companies run these natural monopolies in return for a measure of control over the sorts of investment returns they're able to screw out of the punters.
Gambling in Australia isn't much different: The country loses more money per capita on betting than any other nation, but state governments keep things in order by controlling licenses for casinos, slot machines and betting shops. Clipping lottery tickets, a monopoly business in every Australian state, is as reliable a route to safe, stable cash flows as tolling the cars crossing Sydney Harbour Bridge.
With a notional value of between A$4.40 and A$5-a-share, the Pacific Consortium's proposal isn't especially generous, but it still poses a threat to Tabcorp's agreed offer, which was worth about A$4.34-a-share when it was announced. Much of the mood music around that bid was about whether the company could persuade antitrust regulators to let it have Tatts' smaller wagering business, which takes bets on sporting events.
That was a distraction. As Gadfly argued at the time, the real jewels in Tatts' crown are its lottery monopolies, which could help shore up Tabcorp's core wagering business from online competitors such as William Hill Plc and Paddy Power Betfair Plc.
The consortium's offer makes that explicit by promising to pay A$3.40-a-share and then spin off the wagering unit, with its estimated A$1 a share to A$1.60-a-share value forming the premium over Tabcorp's original offer. 1
With a top end of A$5-a-share once the spinoff is factored in, that's probably too conditional a price to convince the likes of Sandon Capital Ltd., a fund that has argued the strength of the lottery business merits a A$5.38-a-share valuation. But it should help investors ignore the three-card monte over wagering and focus on the real prize inside Tatts -- the right to collect rents on that most renewable of resources, Australia's lottery addiction.
The higher A$1.60 valuation is based on an assumption that a strategic buyer such as Tabcorp could squeeze A$130 million of synergies from the betting unit.
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