Australian Tab and Unitab Merger Proposed

After halting trading on Wednesday, Tab Ltd. and UNiTAB Ltd. confirmed in a joint statement on Thursday that the two companies negotiated a plan to merge.

The proposed juggernaut entity that would come out of the merger would monopolize the betting market in Queensland, New South Wales, the Northern Territory, and South Australia.

The merger has been touted by both companies as a "logical combination," which according to Tab Chairman Graham Kelly, "will provide new and exciting products, services, and facilities for its customers."

Calling itself UNiTAB, the company is expected to generate wagering turnover of $4.9 billion per year through its 3,000 wagering outlets and 115,00 electronic gaming machines. The new UNiTAB can also expect larger and more stable betting pools as a by-product.

The agreement still has some hurdles to clear but can move forward after the Queensland Government agreed to remove legislative impediments after the companies pledged that there would be no related job losses in the state.

Warren Wilson, Tab's managing director, said that the four states in which the company will operate, as well as the racing industry, should benefit.

“The merger will create a financially stronger business partner for the NSW, Queensland, SA and NT racing industries to continue to promote the long-term interests of racing in the jurisdictions in which it operates," he said. "The new UNiTAB will draw on the significant integration experience of both companies to ensure that the businesses and cultures are combined effectively.”

Queensland legislation requires that the new company remain based in the state. As a result the new company will retain the name UNiTAB and be based in Queensland, even though at the conclusion of the merger the Tab will have a majority board representation and its shareholders would hold about 77 percent of the company's shares.

Under the terms of the merger, which is described by many as a reverse takeover of UNiTAB by the larger Tab company, UNiTAB shareholders will be paid $4.84 cash per share by Tab for half of their shareholding in UNiTAB. Then Tab shareholders will acquire 48 shares for every 100 shares issued. In order to finance the acquisistion of the UNiTAB shares, Tab plans to borrow $318 million. UNiTAB may then buy back the shares acquired by Tab, otherwise they will be disposed after 12 months. When the merger process is complete, Tab shareholders will own about three-quarters of the shares in the UNiTAB.

UNiTAB Chairman George Chapman said that this scheme "is the most effective way of bringing our two companies together and provides an excellent forum for both sets of shareholders to have their say on the proposal." He added, "The transaction represents a natural progression for UNiTAB and Tab which will combine to become Australia's leading wagering company."

Graham Kelly, who is currently Chairman of Tab, will be Chairman of the new company. The rest of the board will be composed of all the existing Tab board members and three Queensland-based directors.

Tab's current Managing Director, Warren Wilson, will become Managing Director for the new UNiTAB. Meanwhile, the current UNiTAB Managing Director, Dick McIlwain, will step down from his position with a handsome $3.04 million severance payment.

The merger is not guaranteed, however, several conditions will have to be met for the deal to become official. First, the companies must obtain approval from the courts, as well as from various other regulatory authorities, including the Australian Competition and Consumer Commission.

But UNiTAB's managing director, Dick McIlwain, doesn't believe that the Australian Competition and Consumer Commission will oppose the deal between the two companies who are already subject to government regulation. He said, "It doesn't change the competitive landscape at all in any jurisdiction."

McIlwain first gave an indication that a merger like this could happen when he told the Sydney Morning Herald on Monday, "The idea of further consolidation in the wagering business is an irresistible concept that ultimately more will happen."

Derek Francis, the senior analyst for CommSec who wrote a controversial report in August that speculated on the amount of damage betting exchanges could cause to Australia, told the Sydney Morning Herald that the merger is in both companies' best interest.

"It makes perfect sense putting them together because they're both essentially fixed-cost distribution networks," he said. "You would get savings of about $17.3 million per annum."

Francis even speculates that Victoria's Tabcorp will merge with the others further down the road, adding, "All three will eventually get together."

On Friday, UNiTAB Chairman George Chapman told the Australian Associated Press that the merger was its only option for expansion besides venturing into new industries.

"If we hadn't gone with Tab, we would have had to have done (something else), whatever - tourism, or gone overseas or something," he said. "Otherwise we would have become an income-producing investment that would be safe, it would have grown steadily by turnover but nothing spectacular."

Chapman, like Francis, also indicated that a merger with Tabcorp was inevitable.

"There is a possibility of the Victorian TAB (in terms of consolidation), but that is the only possibility of any significance," he said.