Macquarie and KKR — it’s hardly Father Christmas

THE most intriguing — and important — question is what exactly do two of the cleverest and greediest ‘guys’ in the proverbial ‘room’ think they are going to get out of this play, writes Terry McCrann.

Macquarie Group chief executive Nicholas Moore and chief financial officer Patrick Upfold. Picture: Hollie Adams

THE most intriguing — and important — question is what exactly do two of the cleverest and greediest ‘guys’ in the proverbial ‘room’ think they are going to get out of this play.

The ‘millionaire’s factory’-led group have not made an obviously compelling offer to Tatts’ shareholders that just can not be refused. And I mean, ‘not refused’ because of the price offered, not Godfather-style.

Game on for Tatts jackpot

Further, the way the offer’s been structured — had to be structured — makes it hard if not impossible for the group to embark on a bidding duel with Tabcorp.

Indeed, you would still favour Tabcorp to win either with a marginal lift in its offer or indeed at its original offer price.

So what’s their game?

The guys at Macquarie didn’t become — these days, we need to more accurately call them multi — millionaires by wasting their time and money; while their co-bidders from the legendary KKR, in nearly half a century of deal-making, have not made a habit of playing Father Christmas for target company shareholders, even seasonally.

Sure, the structure and intent of their proposal is like a hundred other deals they’ve packaged along their generally separate ways.

They act as the deal whizkids to liberate value. They share some of that with target company shareholders; they leave their partners — in this case, the local First State Super and a US infrastructure fund — with the attractive long-term investment they want, in Tatts’ lotteries business; while they, Macquarie and KKR, clip the ticket or pick up a quick profit on flipping the whole thing.

But self-evidently, you’ve got to actually do it.

If all you do is cause Tabcorp to pay a bit more, you and your partners get zip.

You become the guy bidding at a house auction who’s spent a few grand getting the property checked out and yet then failing at the last ‘the-property’s-on-the-market’ bid.

What Tabcorp is offering is clean and clear-cut.

A Tatts shareholder gets 42.5c cash plus a ‘New Tabcorp’ share in what becomes a national tote monopoly plus the growth utility-like Tatts’ lotteries business. It’s an extremely attractive package.

Tatts Group chief executive Robbie Cooke.

There’s a lot of obvious potential upside; and importantly, none of that upside leaks to someone else; it all stays in the shareholder room — split 42 per cent to existing Tabcorp holders and 58 per cent for Tatts’ holders.

What the ‘CG guys’ — that’s cleverest and greediest — are offering in counter, is cash in exchange for the lotteries business and leaving existing Tatts shareholders to try to execute that tote-merger side of the deal with Tabcorp or have it sold to someone else like a corporate bookmaker.

Maybe they get an auction, maybe they don’t, because in those circumstances Tabcorp could decide to leverage a combined NSW-Victoria tote that squeezed Tatts’ Unibet into the dirt.

I emphasise the ‘CG’ nature of the bidders not just gratuitously, but to make the point that they are seeking to take dollars, big dollars, out of this exercise, which can come from only one source: Tatts shareholders.

Add on that the two instos want to walk away with the lotteries business, having paid an attractive — for them — price, and the combination does not suggest the deal is structured to deliver big bucks to those Tatts shareholders.

The absolutely critical difference is that Tatts shareholders would emerge with 58 per cent of the enlarged and dramatically more attractive Tabcorp-Tatts combine — which, critically, would still have the lotteries growth utility arm.

That’s why crudely taking upfront ‘offer prices’ is more than misleading. On that simplistic basis Tabcorp was only ‘offering’ $4.11 on Wednesday as against the $4.40 to $5 the CG guys said they were offering.

But even the bottom end of that range is grossly overblown. The only bit that’s clear is the $3.40 cash, but even that includes a 9.5c Tatts ordinary dividend and a 20c special one — both of which would also be paid by Tabcorp.

So it’s worth $3.40 plus whatever the rump Unibet gaming business is worth versus $4.10 plus all the upside of both a merged national tote and the biggest lotteries business in the country.

In any event, there’s no hurry; Tatts’ shareholders can have a relaxed and Merry Christmas.

Originally published as Macquarie and KKR — it’s hardly Father Christmas