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Tatts in it to win it?

Gaming and lottery business Tatts Group (ASX: TTS) already has an investment in United Kingdom gaming venues, but it might be considering a further move offshore by entering the draw for Ireland’s national lottery.

The Brisbane-based company is yet to announce a position on the tender, which is expected to close in September, with the lucky winner probably to start operations in November. However, there have been suggestions that with the core gambling business mature and lacking opportunities for organic growth, strengthening the lotteries side with acquisitions could be a good move.

The Australian Financial Review even went so far as to speculate that it could lead to Tatts divesting its gaming assets, with Tabcorp (ASX: TAH) the obvious likely buyer. Both Tatts and Tabcorp had good news in Monday’s announcement that the Victorian Supreme Court had found against the state treasury’s attempt to impose on them a health levy of more than $42 million. With the overall market being battered, it didn’t do much for their stock prices.

Tatts has five operating segments, of which lotteries is the biggest, providing 45% of its revenue and operating everywhere nationally except Western Australia where they are run by the government: Tattersalls provides lottery products in Victoria, Tasmania and the Northern Territory; Golden Casket is Queensland’s only licensed lottery operator; NSW Lotteries also runs the Australian Capital Territory business; and Tatts owns SA (South Australian) Lotteries.

Gaming machines account for 32% of the revenue and TattsBet, a provider of totaliser and fixed price betting in Queensland, South Australia, Tasmania and the Northern Territory 16%. The other two segments contribute less than 8%.

The Irish lottery business is said by some to be worth as much as $850 million. Others reckon the sale of the 20-year operating licence is likely to net the government between $425 and $565 million. The proceeds will go towards shoring up the national finances and the government hopes the new operators will be able to increase the business’s current annual $320 million funding of good causes to $425 million within five years.

The only formal statement Tatts has made is that is examining the opportunity. One stumbling block may be that the Irish government announced earlier this week that the successful tenderer must base its operations in Ireland for corporation tax purposes. It also will be looking for assurances for the future of its current 107 National Lottery employees.

And there will be competition in the bid too, reportedly from the Italian-owned GTECH and the Ontario Teachers’ Pension Plan, which in 2010 acquired Camelot Group, the owner of the United Kingdom’s national lottery.

Tatts’s share price gain on the year to date is a modest 3.32%, but it has still outperformed its sector over the past three years and since September been discernibly ahead of its nearest rival Tabcorp. It has a healthy dividend yield of 6.1% and a share price with a $3.42 year high and $2.56 year low. Morningstar’s intrinsic valuation is $2.90.

Foolish takeaway

We should know well before its annual report in September if Tatts is buying a ticket in the Irish sweepstakes. But analysts are still lukewarm on the stock and even investors confident of a bid being successful and a breakthrough move should be looking to buy only on market weakness.

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Motley Fool contributor Andrew Ballard’s super fund owns shares in TAH but not TTS. 

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