The bidding war over Australia's Tab Ltd. is heating up.
The Australian Competition and Consumer Commission (ACCC) announced Wednesday that it would not prevent NSW's Tab Ltd. from merging with either Victoria-based Tabcorp or Queensland-based UNiTAB. With the last legal barrier cleared, Tab Ltd. could safely accept either company's bid. Since the Tabcorp deal was much more beneficial to Tab Ltd. shareholders, Tab Ltd. today broke its merger implementation agreement with UNiTAB. To break the agreement, Tab Ltd. had to agree to pay a $5 million severance fee to UNiTAB, which immediately responded by offering a bid that was even higher than Tabcorp's.
The ACCC had spent the last month considering whether the two proposed mergers would violate section 50 of the Trade Practices Act of 1974 by substantially lessening gambling competition in Australia. The commission stated that what would be merged are essentially state-based monopolies with a significant level of regulation. There is a limited amount of cross-border competition among the companies, and their prices and daily operations are tightly controlled. Therefore, ACCC Chairman Graeme Samuel said, "The ACCC didn't believe that the proposed mergers would substantially lessen competition in the relevant markets."
Despite much speculation earlier in the week that Tab Ltd. could not possibly accept the inferior UNiTAB deal over Tabcorp's offer, Tab Ltd. issued its shareholders an update on Monday claiming the company was "progressing the merger agreement" it had with UNiTAB, while at the same time "actively investigating the alternative Tabcorp proposal."
But the permission of the ACCC on Wednesday represented the falling of the last legal obstacle, so with no government body left to object to a merger between Tab Ltd. and Tabcorp, Tab Ltd. became free to pursue the superior offer.
The terms and procedures of the UNiTAB merger had already been established after negotiations between the two companies, and both parties were legally bound to proceed with the agreement. If either company were to renege, it would have to pay the other $5 million as a severance fee. Tabcorp's offer, on the other hand, is an incomplete, unsolicited and non-binding proposal.
UNiTAB and Tab Ltd. representatives met today and decided to dissolve their merger agreement. Tab Ltd. has agreed to pay UNiTAB the $5 million penalty.
UNiTAB then came back with a higher bid of $2 billion. The group has proposed to acquire all shares of Tab Ltd. for a combination of cash and scrip that values each Tab Ltd. share at $4.50, $0.34 more than the Tabcorp offer. For every 100 Tab Ltd. shares, UNiTAB will give Tab Ltd. shareholders 47 UNiTAB shares and $145 cash, minus any dividend paid before the change in ownership.
Tab Ltd. Chairman Graham Kelly said he group's directors were "unanimously supportive of UNiTAB's proposal and intended to recommend it in the absence of a superior proposal."
Tabcorp is expected to counter with an even higher offer. According to a Tabcorp spokesman, "Tabcorp will assess and digest the UNiTAB offer, which has only been formally announced to the market today, and give a considered response in due course."
Several legal impediments stood in the way of both mergers when they were proposed in late October and early November, but they have all since been removed. On Nov. 13, the New South Wales government said it intended to introduce laws that would permit either deal. On December 4 the necessary amending rules passed both houses of the NSW parliament, and now they await proclamation. The NSW government amended a law that prohibited anyone from holding more than 10 percent of Tab Ltd.'s shares and removed a law that prohibited anyone from holding both a casino and a totalizator license in New South Wales (the removal of this second prohibition is only necessary to the deal with Tabcorp, which owns the Star City Casino in Sydney).
But the NSW government only agreed to pass the legislation provided some policy conditions are met. The government requests that if Tab Ltd. merges with Tabcorp, the newly formed company must divest Tab Ltd.'s Centralized Monitoring System business, must forfeit its gaming machine investment license and must divest its statewide linked jackpot business.
The NSW government also insists that the company that acquires Tab must have commercial arrangements with the NSW racing industry.
NSW Racing Pty Ltd. (NSWR), the organization that represents New South Wales' three racing codes, is willing to cooperate with either party and on Nov. 17 it laid out its own conditions. NSWR would like to see a product fee in line with totalizator wagering placed on fixed-odds race wagering. It also wants the newly formed company to sell Tab Ltd.'s racing television and radio stations, Sky Channel and Radio 2KY. NSW Racing is likely worried that it could lose content to Victoria after a Tabcorp takeover.
Tabcorp, however, has stated that it will not sell the Sky Channel or Radio 2KY if it merges with Tab.
"It's not even on the table. These are core assets," said a Tabcorp spokesman to the Melbourne Herald Sun on Nov. 17. But just last week The Australian Financial Review reported that NSWR's chairman Tony Hartnell is loosening on the organization's demands.