Double Bet

Today's announcement of a proposed $522 million merger between gambling groups, Tattersall’s and UNiTAB, wrong-footed investors who have overlooked just how well the two companies complement each other. Moreover, it is certain to stimulate a new round of speculative activity in the gambling sector.
Under the proposal UNiTAB shareholders will be offered 4.33 Tattersall’s shares for each UNiTAB share. In addition, Tattersall’s will fund a cash pool that will be used to acquire shares from UNiTAB shareholders preferring cash to scrip.

Among the biggest players in the market is the Packer family's PBL group. Although it is still classified as a media stock, about 50% of PBL’s new revenue is now flowing from its casino interests.

Another company now heavily involved in the casino industry is Tabcorp, which diversified into casinos after acquiring Star City and merging with Jupiters.

Tabcorp's acquisition of its NSW cousin TAB Limited in 2004 is yet to pay off and has been a real disappointment to shareholders.

Neither UNiTAB nor Tattersall’s holds any casino interests, but the deal will strengthen the merged entity's reach in both the betting and poker machine sectors.

Conveniently, UNiTAB was expected to make a bid for the Victorian lottery licence renewal in 2007; it is now safe to assume that Tattersall’s is a “shoo in” for this licence in the absence of any other rivals at present.

Tattersall’s lottery segment is expected to produce an estimated 6% of EBITDA in the newly merged company. Its lucrative gaming segment is expected to produce 53% of EBITDA, however the Victorian Government is set to renew this licence as well, in 2012. That such a large portion of its future revenue is dependent on regulation is unlikely to escape investors.

At the smaller end of the market are Aristocrat and Ainsworth. Although they don’t enjoy the huge profits of those that facilitate the services, they provide others with an essential component of Australian gaming: poker machines. Ainsworth is the smaller of the two, yet has great potential for growth. Yet like all small caps, it should be treated cautiously.