Tatts, Tabcorp, and the $338m sentence

 ‘The Australian Competition Tribunal has made its determination granting merger authorisation for Tabcorp to acquire Tatts.'  Those 16 dry words in a regulatory announcement added $338m to the companies' combined market values, with Tatts up 2.3% and Tabcorp up 4.8% on the news.

The Australian Competition Tribunal (ACT) expects to publish its reasons for the decision on 22 November, but nobody really cares – what matters is that it gave a thumbs up.

Tabcorp and Tatts have now received authorization twice from the ACT, after the Australian Competition and Consumer Commission (ACCC) applied to the Federal Court for judicial review of the ACT's earlier decision.

‘The Tribunal has now reconsidered the evidence, in relation to both anti-competitive detriment and public benefit, and concluded that the merger is likely to result in such benefit that it should be permitted to proceed' said ACCC chairman Rod Sims.

The ACT's ruling vindicates Tabcorp's unusual tactic to bypass the ACCC and head straight to the court-affiliated ACT, which is typically used as a last resort. Presumably Tabcorp's management had a feeling that last-resort tactics would be needed, given the concerns raised by the ACCC in its preliminary review.  

Still undervalued

The disagreement between the ACT and the ACCC highlights the thin line separating public good and corporate monopoly. Prior to the current plan, the Tatts-Tabcorp merger had been proposed twice since 2006 – each time failing on anti-competitive grounds. This ACT decision is a long-sought green light, but it's also a flashing neon sign that says ‘competition is on the rise', which we discussed in Tabcorp's full-year result.  

Tatts will hold its shareholder meeting to vote on the proposal on 30 November. As we explained in The lottery that always pays and Tatts gets revised bid from consortium, we think Tatts shareholders are getting a poor deal. The company's lottery division, which accounts for 70% of operating profits, is a regulated monopoly and offers a stable, growing income, while earning high returns on capital. The rest of the business – but almost all of Tabcorp – is the downward spiraling, increasingly troubled wagering operation. The deal materially undervalues Tatts and we recommend that you vote AGAINST the merger.

With a forward price-earnings ratio of around 26, Tatts' current share price of $4.33 is slightly below the implied offer price of $4.38 under the Tabcorp proposal (0.80 Tabcorp shares and 42.5 cents in cash for each Tatts share held). There's plenty to like about this company even if the merger fails and we're sticking with HOLD.

Tabcorp has now obtained all necessary approvals from each state's gambling regulatory authority. With ACT approval, Tabcorp has overcome almost all obstacles to it strengthening its wagering business and adding one of Australia's best assets – Tatts' lottery monopoly – to its stable. With a forward price-earnings ratio of around 24, we continue to recommend you HOLD.