From Robert Leitz of iolite Partners regarding the war between Tatts and Lottoland for Jumbo Interactive
To All Shareholders,
Two strategic buyers, Tatts (ASX:TTS) and Lottoland (private), are fighting for control over Jumbo Interactive (ASX:JIN), my largest portfolio position. I call all shareholders to lobby Jumbo’s management and board for a fair bidding process and to vote against the proposed issuance of share options to Tatts at what would be a material discount to market price and intrinsic value.
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Jumbo Interactive is Australia’s leading retailer of electronic lottery tickets and its customer database is of significant strategic value to the incumbent monopolistic lottery operator, Tatts, as well as Tatts’ disruptive market challenger, Lottoland.
Over the next couple of years, Jumbo will see a sharp improvement in earnings, as it is shutting down lossmaking international expansion projects while continuing to grow market share at marginal extra cost in its Australian home market. Given the platform-type business model, Jumbo’s competitive strength and value grows exponentially with every new subscriber added.
Over the last couple of weeks, a bidding war has emerged.
- On April 24, Lottoland disclosed the acquisition of 3.1 million shares (7%) in the open market.
- On May 12, Jumbo issued 6.6 million shares (15%) and another 3.5 million share options (subject to shareholder approval) to Tatts at a significant discount to the market price that day (AUD 2.37 vs 2.75). In return, Jumbo renewed all reseller agreements with Tatts for five years and, in addition to the cash raised, gained access to a new product (“Set for Life Game”).
I don’t have a problem with Jumbo forming a stronger alliance with Tatts, however Jumbo should at least agree on a price that’s fair to shareholders. Jumbo accounts for 10% of Tatts’ total lottery revenue and is in a strong position to further grow market share given its technical and marketing know-how. In addition, the ongoing Tatts/Tattersalls merger could further help expand and diversify Jumbo’s product portfolio going forward.
As a new market entrant, Lottoland could materially speed up its Australian expansion by acquiring Jumbo’s 400,000 active customers and almost AUD 200 million in annual transaction volume. The benefit of such a deal is obvious: rather than organically building a brand over time – at high cost and operational uncertainty – Lottoland would immediately secure a stable and growing stream of cash flow to build on with its attractive product offering.
Even before the bidding war emerged, I valued Jumbo at AUD 4.00/share on a standalone basis, based on the company’s strong balance sheet and cash flow profile going forward (recently written up on www.sumzero.com; investment thesis available upon request). I believe that Jumbo is worth even more to a strategic buyer. The company also looks very undervalued if compared to peers such as Lotto24 (FRA:LO24).
The renewal of all reseller agreements with Tatts undoubtedly strengthens Jumbo’s overall competitive position and significantly de-risks the business model. This alone justifies a market re-rating of the shares. However, I fear Jumbo’s board and management is unfairly favoring Tatts and unnecessarily giving too much value away:
- There is absolutely no justification for further diluting and short-changing existing shareholders in an apparently personally inspired move. Jumbo’s shares have already traded up to AUD 2.91 (a premium of 23% to the Tatts deal). I expect them to trade up even further in the course of the next couple of weeks. Tatts could always buy more shares in the open market if they so desired.
- By overly favoring Tatts, Jumbo’s management and board are possibly blocking a value-maximizing takeover offer from Lottoland. Of course, Lottoland can try to build a blocking stake ahead of the upcoming shareholder meeting to approve the option issuance. However, Jumbo’s recent actions is making any such attempt harder and might lead Lottoland to reconsider any such attempt.
Let this be a fair and open bidding process!