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Could Tabcorp's newly demerged Lottery Corporation become a takeover target?

One day into its listed life, and this is what investors are already discussing.

Posted by
Mitchell Lawler
Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.
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Key points
  • The Lottery Corporation share price is barely budging on its second day of trade
  • Onlookers are debating whether the lottery giant could catch a bid from another party
  • An analysis suggests 65% of demergers result in a takeover within three years of splitting

There is little attention being paid to the Lottery Corporation Ltd (ASX: TLC) share price today with it trading flat. However, only one day into its listed life and investors are already discussing the potential of the Tabcorp spin-off becoming a takeover target.

As the clock ticks past midday, shares in the recently demerged lottery company are uneventfully sitting at $4.70.

Man drawing illustration of a big fish eating a little fish representing a takeover or acquisition.

Image source: Getty Images

Could a buyout be on the radar?

As a quick recap, the Lottery Corporation encompasses what was formerly the lottery and Keno businesses under Tabcorp Holdings Limited (ASX: TAH). Management made the decision to split this division off in a bid to create value for shareholders.

Now that the Lottery Corporation is destined to walk its own path, there are a few prime ways for it to fulfill its goal of creating further shareholder value, these include:

  • A re-rating in the price-to-earnings (P/E) ratio the market is willing to pay
  • Driving a higher share price through strong earnings growth
  • Returning excess capital via dividends to shareholders; or
  • Pursuing a takeover from another party.

Ultimately, all of these ways will require newly appointed CEO Sue van der Merwe to drive growth in the business. However, the odds are already in favour of the Lottery Corporation receiving a bid in the next few years of being a standalone company.

An analysis conducted by investment group Perpetual of 28 demergers showed that in nearly 65% of cases one of the two separated companies ended up being acquired within three years of breaking apart.

The appetite for relatively defensive ASX companies has been somewhat insatiable lately. Already this year companies such as Ramsay Health Care Limited (ASX: RHC), Uniti Group Ltd (ASX: UWL), and Cimic Group (ASX: CIM) have all been targeted by private capital.

What do analysts think of the Lottery Corporation share price?

Take-up of coverage by analysts for the Lottery Corporation is only beginning to trickle in. Yet, Morgan Stanley has been one of the first to share the possible future for this ASX share.

This morning, analysts at Morgan Stanley stuck an 'overweight' rating on Lottery Corporation shares. The broker believes the company holds "monopoly positioning" across the regions in which it operates.

Further explaining its bullish sentiment, Morgan Stanley stated that the company provides a rare mix of defensiveness, growth, and yield.

For these reasons, the broker holds a $5.15 price target. This would suggest an 8.5% upside from the current Lottery Corporation share price.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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