THERE were no Australia Day lamingtons or barbecued lamb chops yesterday for deal teams putting the finishing touches to offers for NSW Lotteries.
A 40-year licence to operate the business is up for grabs, with final bids due early next month. Tatts Group is regarded as the auction front runner, with Tabcorp another confirmed starter. A range of Australian and foreign industry and financial players round out the field.
Logic dictates that Tatts can pay the highest price as its existing lotteries businesses in Victoria, Queensland and Tasmania provide a platform for extracting cost savings from the NSW operation.
In a pre-Christmas research note, analysts from Deutsche Bank estimated a price tag of $570-630 million, representing nine to 10 times 2009 earnings before interest, tax, depreciation and amortisation (EBITDA).
According to Deutsche analysis, Tatts may be able to reduce operating costs in NSW by as much as $35 million from the current $70 million. Assuming a $630 million price tag, this would reduce the effective acquisition multiple to just under 6.5 times EBITDA.
However, a source close to the process cautions investors against assuming rapid realisation of cost savings. There are three big sources of synergies in a lotteries business, and only communications costs (which total $13 million for NSW Lotteries) are believed to offer low-hanging fruit. Communications may provide an easy $5 million of savings.
A second area of opportunity is systems expenses. However, NSW Lotteries is locked into a contract with G-Tech until 2012, precluding any quick wins.
Similar challenges exist in relation to staff reductions. With an eye on the political ramifications of job losses in the run-up to the 2011 election, the NSW Government is binding bidders not to force involuntary redundancies for three years.
The potential for cost savings is real, but it will take until 2014 for synergies to be fully realised.
Myer trades down
AFTER weeks of media comment regarding soft retail trading conditions in December, Citigroup retail analyst Craig Woolford last week led the market in putting through an earnings downgrade for Myer Holdings.
Citigroup reduced earnings-per-share (EPS) forecasts for the year to July 2010 by 5.9 per cent after downgrading first-half sales growth to 2.6 per cent. The prospectus forecast was for 4.2 per cent sales growth for the period.
Despite the downgrade, Woolford sees compelling value in Myer shares. Monday's record low closing price of $3.45, down 16 per cent on the November float price of $4.10, is well short of the Citigroup target price of $4.35.
Whether Myer's most loyal customers and shareholders, subscribers to the Myer One component of the float offer, take comfort from lofty analyst price targets remains to be tested. Myer One loyalty scheme members subscribed for 37.4 million shares in the float, and are now sitting on unrealised losses of about $25 million.
Myer's growth could be further challenged if these paper losses prompt belt-tightening among the ranks of Myer One members.
With expected sales of about $1 billion for the January quarter, every $10 million of sales that are lost to the wealth effect of a falling share price will lop 1 per cent off quarterly growth.
Cochlear won't hear of it
DESPITE company denials, speculation is building that Cochlear is in the running to buy Siemens' hearing aids unit. The Siemens business is the subject of a formal sale process, with final bids of about €2 billion ($A2.83 billion) due late next month.
While it is likely that Cochlear has kicked the tyres at Siemens, a big acquisition would be at odds with Cochlear's bright prospects and 15-year track record of stellar organic growth and no acquisitions.
Funding a stand-alone offer would be Cochlear's first challenge. As healthcare companies are noted for conservative balance sheet management, equity funding would be needed for more than two-thirds of the purchase price. A raising of about $2 billion represents a hefty proportion of Cochlear's $3.7 billion market capitalisation.
Then there is the question of strategic fit. Cochlear is best known for its implant, a device that helps the profoundly deaf hear.
While the company has a stranglehold on the implants market - with 70 per cent market share - it has little experience with hearing aids aimed at those with less severe hearing loss.
While acquiring the Siemens business would give Cochlear a 25 per cent global market share, Cochlear has not flagged an intention to expand into the hearing aid market. The strategic fit is not immediately obvious and some analysts question the synergistic benefits arising from the deal.
''You tend to think hearing aids are a pretty mature market. I can't see why they [Cochlear] would bother,'' said Wilson HTM senior research analyst Shane Storey.
