Tabcorp may increase its price to thwart UNiTABÆs merger plans

UNiTAB directors stand firm on a merger with TattersallÆs as Tabcorp writes to the companyÆs shareholders urging them to accept a A$2.1 billion takeover offer.
Tabcorp chairman Michael Robinson wrote to shareholders in UNiTAB on Tuesday urging them to accept a A$14.25 per share offer despite resistance from UNiTABÆs directors to the proposed acquisition.

The deal values the Queensland gaming company at A$2.1 billion, but UNiTAB says this is too low given the current trading price of A$14.78 and a three-month volume weighted average price of A$14.78 a share (calculated on 1 June).

UNiTAB has recommended that shareholders back a proposed nil premium merger with TattersallÆs Limited û TabcorpÆs rival in the Victorian gaming sector. The directors say the TattersallÆs plan gives UNiTAB shared control of the board, protects the companyÆs business model and gives it a higher post-merger value.

But as AustraliaÆs biggest gaming company, Tabcorp probably has a few more tricks up its sleeve. Market commentators say the price placed on the unsolicited bid for UNiTAB launched last Thursday wonÆt be TabcorpÆs last offer.

They say UNiTABÆs resistance is a ploy to extract a higher bid, and that attempts to get the competition regulator, the ACCC, to thwart the takeover bid are unlikely to work.

But, for now, Tabcorp can afford to sit on its current offer. TattersallÆs and advisers Goldman Sachs JBWere havenÆt yet come back with a counter-proposal and at a multiple of 12.6x EBITDA for the year ending June 30, the Tabcorp price is high enough to fend off competition from other buyers such as private equity investors.

The only other candidate put forward as a possible buyer for UNiTAB is James PackerÆs Publishing & Broadcasting Limited (PBL).

But PackerÆs company hasnÆt shown the same appetite for highly priced acquisitions as Tabcorp. PBLÆs last two acquisitions, MelbourneÆs Crown casino in 1999 and PerthÆs Burswood casino in August 2004, were bought for multiples of 8.5x and 9.3x respectively.

Tabcorp, on the other hand, paid 11.0x for Star City casino in Sydney in 1999 and 10.8x for TAB in July 2004.

In his letter yesterday, Robinson told UNiTAB shareholders to accept TabcorpÆs offer because it represents a pro-forma increase in earnings per share of approximately 59% and a pro-forma increase in dividends per share of about 39%.

He says the marriage with TattersallÆs is a risky proposal because TattÆs earnings base is almost entirely reliant on gaming activities in Victoria where the state government is set to review licencing arrangement in 2012. Tabcorp only generates one-third of its earnings base in Victoria.

If Tabcorp is successful in its bid it will create a A$12 billion betting, casino and poker machine business. Tabcorp will control more than 90% of all money spent on horse, greyhound and other races.

Shareholders are due to vote on the UNiTAB/TattersallÆs merger on July 6.
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