Australia’s largest gambling company Tabcorp announced its intention to acquire its biggest domestic rival, Tatts, on Wednesday.
The on again-off again merger has been rumoured at least five times in just the last year. But the deal is now further ahead than it ever has been, as the companies near the creation of a A$11.3 billion ($8.66 billion) gambling and entertainment giant with market share in Australia of more than 60%.
The combined company will certainly be a behemoth — but that is part of the problem. Some market participants fear that the Australian Competition and Consumer Commission will either block the deal, or take a long time weighing up the costs.
“The company is guiding the pay date of the deal by June next year,” said an M&A expert in a hedge fund based in Australia. “However, I’m not too sure if they can get ACCC’s approval in time, especially when Tabcorp currently has another acquisition [the takeover of Intecq] under review by the ACCC.”
Some analysts also pointed to the fact that the company has included a three month extension from the anticipated September 2017 end date, suggesting it is expecting a lengthy fight with the regulator.
“Regulatory hurdles could be meaningful,” said Morgan Stanley analysts in a research report. “We expect the regulator would also focus on the competitive outlook for [gambling games] Tote and Keno, and lotteries license renewals after any merger.”
Judging by previous ACCC approvals, Tabcorp is right to anticipate a long wait. Brookfield’s A$9billion takeover of logistics giant Asciano and Foxtel’s buyout of Austra both took about 11 months to get the green light.
Tabcorp will give 0.8 of its shares for each share of Tatts that investors hold, plus A$0.425 cash per share. That offers Tatts’ investors a premium of 20.8% to the previous closing price on Monday.
Tabcorp said that after merging, the two companies would create synergies worth at least A$130 million, from technology integration, the consolidation of bets, corporate cost reduction and the benefits of economies of scale.
Perhaps more notable for investors, Tatts intends to use the cash consideration from Tabcorp to pay a fully-franked special dividend of 20 cents per shares and an approximately 8.6 cents per share of franking credits attached. They add up to be 28.6 cents, represent a 6.9% yield.
Franking credits allow domestic companies to pass taxes on to their shareholders. But those shareholders can, in some cases, they get some of that back from tax authorities.
Both Tabcorp and Tatts' stocks were halted on Tuesday pending the announcement of the deal. After resuming trading on Wednesday, Tatts’ stock price immediately opened up 16.7%.
Since Tabcorp’s stock price also went up 2.2%, event-driven portfolio managers were left with a 7.7% spread if they put on a risk arbitrage trade on Wednesday.
The deal is also subject to approval from Tatts’ shareholders, the the Australian Competition Tribunal and the Federal Court of Australia.
Tabcorp’s financial adviser is UBS and the legal adviser is Herbert Smith Freehills.
Tatts’ financial adviser is Goldman Sachs and the legal adviser is Clayton Utz.