Tatts looks to have come up with the numbers DAVID SYMONS March 30, 2010
WHEN Tatts Group's winning bid for NSW Lotteries was announced early this month, most commentators saw the deal as outstanding for government but a marginal proposition for Tatts. Dick McIlwain's $850 million offer was about $200 million higher than many had expected.
However, as analysts and rival bidders delve into the detail, the outlook changes. The issue is that Tatts' successful bid was non-conforming - unclaimed prizes that were meant to be turned over to government will instead be retained by Tatts.
Putting to one side the fairness of the tender process (other bidders recall being told that treatment of unclaimed prizes was not negotiable) this is a material financial issue, and Tatts looks to have outsmarted the New South Wales government.
Unclaimed prizes last year totalled $14 million - about 1 per cent of sales. Over the life of the licence, the value lost to government from giving up rights to unclaimed prizes could be as high as $300 million. (This is higher than market estimates of the value that Tatts will derive from the unclaimed prizes of about $200 million. A key issue is that the state should discount future cash flows at its cost of debt rather than Tatts' cost of capital.)
And yet Tatts paid no more than $150 million for the right to retain the prizes. Tatts is understood to have lodged two bids for the licence - $700 million with unclaimed prizes passed to the government, rising to $850 million with unclaimed prizes retained.
The highest credible bid from a bidder other than Tatts was a $730 million offer from a consortium that included G-Tech, a global leader in lotteries technology systems, and Ontario Teachers, a Canadian pension fund.
It seems that there were only two courses reasonably open to the state government. If a bidder other than Tatts were thought capable of maximising the performance of the lottery and submitted a complying bid of more than $700 million, that bidder should have been selected. In the event that higher complying offers were deficient in some subjective regard, Tatts' $700 million complying offer should have been preferred to its $850 million non-complying bid.
Despite initial indications, it seems that McIlwain will retain his reputation as a disciplined acquirer of gaming businesses after all.
In bets elsewhere THE most credible explanation for the NSW government preferring a lower value lotteries offer from Tatts Group to a fully priced bid from Ontario Teachers and G-Tech is that Tatts has a stronger reputation as a lotteries operator.
These concerns may be legitimate, but they don't seem to trouble overseas regulators. Just last week, Ontario Teachers was announced as the successful acquirer of Camelot, the operator of the UK National Lottery and Euro Millions - a business with sales of 5.5 billion ($A9 billion). Completion of the Camelot acquisition requires approval from regulators, but there is no indication that signoff will be hard to obtain.
TTS Price at posting:
$2.49 Sentiment: Buy Disclosure: Held
