KKR offers $5.5bn for Tatts Group

February 2017 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

In a move that has the potential to lead to a bidding war, US multinational private equity firm, KKR & Co, has announced that it is part of a consortium offering to buy Australian betting and lotteries business Tatts Group Limited for $5.5bn.

The consortium – collectively known as the Pacific Consortium – comprises Morgan Stanley Infrastructure Inc. (as adviser to and manager of North Haven Infrastructure partners II LLP), First State Superannuation Scheme, Macquarie Corporate Holdings Pty Ltd, and one or more affiliates of Kohlberg Kravis Roberts & Co. L.P., in addition to KKR.

The offer made by KKR and the other members of the consortium is an unsolicited confidential, non-binding, indicative and conditional proposal to acquire 100 percent of Tatts Group for a combination of cash and scrip consideration. The offer follows a previous bid by Tabcorp Holdings Limited. Tabcorp had attempted to prevent any counteroffers by securing a 10 percent stake in the Brisbane-based Tatts Group.

Certain members of the consortium had been in negotiations with Tatts Group prior to the Tabcorp bid, discussions which ceased upon that agreement being struck on 19 October. As yet, the Tatts Group board and its advisers have not formed a view as to how the consortium’s indicative proposal compares to that of the proposed Tabcorp merger.

“We will assess the [Pacific Consortium proposal] including its terms, underlying financial assumptions and conditions, and will provide a further update on the outcome of that review as soon as practicable”, said Tatts Group in a statement to the ASX. “In the meantime, the directors of Tatts Group continue to believe that the [proposed Tabcorp merger] is in the best interests of Tatts Group shareholders and unanimously recommend it in the absence of a superior proposal. Shareholders do not need to take any action in response to the [Pacific Consortium proposal] and should not assume that it will result in an offer or transaction.”

Speaking to Reuters following the announcement of the consortium’s offer, Charlie Green, a director at Hunter Green Institutional Broking, which owns Tatts shares, said: “The value of the lotteries business is starting to be recognised. It is now undeniably game-on in terms of an auction.” Tatts Group’s lottery businesses, which include brands such as The Lott and Golden Casket, generated record earnings of $345.5m in 2016, up 10 percent on 2015.

As far as the consortium is concerned, the offer is that of a proposed transaction to be executed via two parallel Tatts Group schemes of arrangement – the first for the separation of the organisation’s wagering and gaming businesses, and the second for the 100 percent acquisition of Tatts Group which will comprise its lottery businesses.

Further key terms, key underlying financial assumptions and key conditions in the proposal, include: (i) the transaction is to be financed through a combination of equity and debt; (ii) 1,468, 519,481 fully paid Tatts Group ordinary shares on issue, no options over unissued shares and deferred share rights over 467, 8666 unissued shares which will vest on a change of control; (iii) final approval of each consortium member following completion of satisfactory due diligence including accounting, tax, commercial, legal and regulatory matters; and (iv) the Pacific Consortium proposal is not conditional on Australian Competition and Consumer Commission (ACCC) approval but would be subject to other regulatory approvals.

Pending any material developments in relation to either the Pacific Consortium proposal or the proposed Tabcorp merger, the Tatts board has stated that it “remains fully committed to acting in the best interests of, and maximising value for, Tatts Group shareholders”.

Fraser Tennant