Tatts : and Tabcorp to combine

19 October 2016 Tabcorp and Tatts to combine to create a world-class, diversified gambling entertainment group

• Creates a leading, diversified portfolio of gambling entertainment businesses well placed to compete in a rapidly evolving marketplace and pursue growth opportunities globally

• Anticipated to provide a wide range of benefits for stakeholders and is expected to result in at least

  $50 million per annum of additional funding to the Australian racing industry, which enhances its long term sustainability

• Pro forma enterprise value of approximately $11.3 billion1, revenue of over $5 billion,

  EBITDA of over $1 billion2 and a strong balance sheet with an intended investment grade credit rating

• Combination expected to deliver at least $130 million of annual EBITDA synergies and business improvements, net of benefits to the racing industry

• Transaction expected to be EPS accretive (before significant items) and value accretive for both Tabcorp and Tatts shareholders

• Combined Group expected to target a dividend payout ratio of 90% of net profit after tax, before significant items and amortisation of the Victorian Wagering and Betting Licence

• Combined Group expected to undertake a $500 million share buyback, post implementation of the Transaction and subject to Board approval and market conditions

• Completion expected mid-2017 following Tatts shareholder, regulatory and other approvals

• Transaction is unanimously recommended by the Boards of Tabcorp and Tatts3

  Transaction details

  Tabcorp Holdings Limited ("Tabcorp") and Tatts Group Limited ("Tatts") are pleased to announce the companies have reached an agreement to combine the two companies via a Tatts Scheme of Arrangement in which Tatts shareholders will receive 0.80 Tabcorp shares plus 42.5 cents cash for each Tatts share held (the "Transaction").

  The Transaction will create a world-class, diversified gambling entertainment group, with a pro forma enterprise value of approximately $11.3 billion1, a national footprint and a diverse suite of product offerings across wagering, media, lotteries, Keno and gaming services (the "Combined Group").

  Based on the most recent closing price of Tabcorp shares ($4.89 per share as at 17 October 2016), the Transaction implies a value of $4.34 per Tatts share (before the value of synergies and business improvements). This represents:

• a premium of approximately 20.8% to the most recent closing price of Tatts shares ($3.59 per share);

  1 Based on the closing share prices of Tabcorp and Tatts as at 17 October 2016, being the last trading day prior to the announcement of the Transaction and pro forma net debt of the Combined Group as at 30 June 2016

  2 Based on reported FY 2016 revenue and EBITDA for Tabcorp and Tatts. Excludes the impact of synergies and business improvements

  3 In Tatts Board's case, subject to there being no superior proposal and also to an independent expert concluding the Transaction is in the best interests of Tatts shareholders

• a premium of approximately 18.4% to the 1-month volume weighted average price ("VWAP") of Tatts shares ($3.66 per share)4; and

• an implied enterprise value (EV) for Tatts of $7.4 billion and an implied FY 2016 EV/ EBITDA valuation multiple of 15.0x.5

  On completion of the Transaction, existing Tabcorp shareholders will own approximately 42% of the Combined Group and existing Tatts shareholders will own approximately 58%.6

  Based on a blended FY 2017 EV/EBITDA multiple for Tabcorp and Tatts of 10.7x7, the estimated synergies and business improvements are worth approximately $1.4 billion.8

  Taking into account the estimated synergies and business improvement benefits, the Transaction implies a pro forma value uplift for Tatts shareholders of approximately 30% per Tatts share (before taking into account any potential market re-rating).9

  Tatts intends to pay its shareholders a fully-franked special dividend of 20 cents per share10 (subject to the availability of franking credits) immediately prior to implementation of the Transaction in lieu of part of the cash consideration. A fully-franked dividend of 20 cents per share would have approximately 8.6 cents per share of franking credits attached.

  The Directors of both Tabcorp and Tatts believe the Transaction represents a unique and compelling opportunity to create significant value for Tabcorp and Tatts shareholders, a winning offer for customers and material benefits for stakeholders, including the racing industry, TAB agencies, licensed venues, small businesses, and Federal, State and Territory Governments and regional communities.

  The Directors of Tabcorp believe the Transaction is in the best interests of Tabcorp shareholders and unanimously support the Transaction. The Directors of Tatts believe the Transaction is in the best interests of Tatts shareholders and unanimously recommend that Tatts shareholders vote in favour of the Transaction, in the absence of a superior proposal and subject to an independent expert concluding the Transaction is in the best interests of Tatts shareholders. Subject to those considerations, the Directors of Tatts intend to vote all shares they personally hold in favour of the Transaction.

  AustralianSuper, one of Tatts' largest shareholders, has indicated that it intends to vote its Tatts shares in favour of the Transaction, in the absence of a superior proposal and subject to there being no material adverse change in circumstances.

  4 Based on the 1-month volume weighted average price of Tatts shares up to and including 17 October 2016, being the last trading day prior to the announcement of the Transaction

  5 Based on Tatts' reported net debt of $1,041 million as 30 June 2016, FY 2016 reported EBITDA of $495 million, Tatts' fully diluted

  shares outstanding of 1,469 million (including performance rights) and the Tabcorp share price as at 17 October 2016, being the last trading day prior to the announcement of the Transaction

  6 Based on Tabcorp's ordinary shares outstanding of 835 million and Tatts' fully diluted shares outstanding of 1,469 million (including performance rights) as at 18 October 2016

  7 Based on the Bloomberg consensus FY 2017 EBITDA estimates as at 18 October 2016, implying an FY 2017 EV/EBITDA multiple for

  Tabcorp of 9.1x, Tatts of 12.4x and the implied weighted average for the Combined Group of 10.7x

  8 Based on $130 million of expected EBITDA synergies and business improvements

  9 Based on the Bloomberg consensus FY 2017 NPAT estimates as at 18 October 2016, implying a FY 2017 P/E multiple for Tabcorp of 20.6x, Tatts of 19.6x and an implied weighted average for the Combined Group of 20.0x. Potential value uplift assuming Transaction

  terms and taking into account full pro forma run-rate EBITDA synergies and business improvements of $130 million, estimated transaction costs of approximately $90 million and net one-off estimated integration costs and capital expenditure of approximately $110 million

  10 Whilst Tatts estimates the special dividend will be 20 cents per Tatts share, under the Implementation Deed Tatts is able to pay a special dividend of up to 25 cents per share (subject to the availability of franking credits)

  Chairman's comment

  Tabcorp's Chairman, Paula Dwyer, said:

  "In today's rapidly changing landscape, bringing together our businesses will create a strong and diversified business that is well placed to invest, innovate and compete, both in Australia and globally.

  "This Transaction is expected to deliver significant value for both sets of shareholders, and material benefits to other key stakeholders including the racing industry, business partners, customers, and Governments.

  "Together we will be able to pursue more investment and innovation to deliver a winning offer for customers, including best-in-class digital products and experiences.

  "In wagering, combining our two complementary businesses will give us a national footprint and could create a pathway to larger wagering pools. We are excited by this opportunity, which we believe will deliver an enhanced wagering experience for our customers and, in turn, will generate stronger returns to the Australian racing industry, underpinning its sustainability.

  "At the same time, bringing together our lotteries, Keno and gaming services businesses will give us the capability to create an even more compelling offer for customers and retail stakeholders as the combination increases capability, while increasing diversification."

  Tatts' Chairman, Harry Boon, said:

  "The combination of Tabcorp and Tatts is based on clear industrial logic and a strong and tangible synergy proposition. It comes at a time of escalating competition from new business models and rapid consolidation of gaming and wagering companies globally. The scale and efficiency benefits from this combination will provide a stronger platform in this dynamic environment.

  "We believe the implied value accretion for Tatts shareholders fairly reflects the strategic value of our businesses. Further, the scrip consideration allows Tatts shareholders the opportunity to participate as shareholders in the Combined Group, with ongoing exposure to the future growth of wagering, while also retaining exposure to Tatts' unique and growing lotteries business.

  "In addition to our shareholders, the benefits of this combination are also very clear for the racing industry and for customers who should, in due course and with racing industry support, be able to access deeper and more liquid wagering pools.

  "A combination of Tabcorp and Tatts has been the subject of numerous discussions between the two companies over time and this transaction is fully supported by our respective Boards."

  Significant value for Tabcorp and Tatts shareholders

  The Directors of both Tabcorp and Tatts expect the Transaction to deliver a number of financial and other benefits to both sets of shareholders:

• The Combined Group is expected to have an attractive, diversified national portfolio of predominantly long-dated gambling licences, and be strongly positioned to invest, innovate and compete in an evolving marketplace

• The Transaction is expected to generate earnings per share accretion (before significant items) and value accretion for both Tabcorp and Tatts shareholders. The combination is expected to deliver at least $130 million of annual EBITDA synergies and business improvements, net of benefits to the racing industry, in the first full year following completion of integration. Completion of integration is expected to take approximately two years, subject to the receipt of all necessary regulatory approvals.

  Net one-off estimated integration costs and capital expenditure are estimated at approximately $110 million

• The Combined Group is expected to have a strong balance sheet, with the capacity to pursue capital management initiatives. The Combined Group will target a gross debt to EBITDA ratio of 3.0x to 3.5x and intends to have an investment grade credit rating

• The Combined Group expects to undertake a $500 million share buyback, post implementation of the Transaction and subject to Board approval and market conditions

• The Combined Group is expected to target a dividend payout ratio of 90% of net profit after tax, before significant items and amortisation of the Victorian Wagering and Betting Licence. Both Tabcorp and Tatts expect to continue to pay dividends in the ordinary course (subject to the Implementation Deed) until implementation of the Transaction

  Benefits to the Australian racing industry and beyond

• Tabcorp and Tatts are together the largest source of funding for Australia's racing industry, having delivered approximately $1 billion to the racing industry in FY 2016

• The Combined Group's commitment to investment, its national footprint and enhanced operational platform will create a stronger business, and provide a strong financial base to support the racing industry, strengthening its overall sustainability

• The Transaction is expected to result in at least $50 million per annum of additional funding to the racing industry, which will flow to participants and related industries across Australia

• Additional payments to the racing industry will create broader economic benefits, including in regional areas

• The Transaction provides a pathway to national pooling for pari-mutuel wagering, subject to regulatory and racing industry approvals and an enhanced ability to adopt strategies to address the national decline in pari-mutuel betting

Profile of the Combined Group

The Combined Group is expected to have a pro forma enterprise value of approximately $11.3 billion, market capitalisation of approximately $8.6 billion11, revenue of over $5 billion and EBITDA of over $1 billion.12

The Combined Group will have diversified national wagering, media, lotteries, Keno, and gaming operations including:

Wagering & Media

• Totalisator and fixed odds licences and retail wagering networks in NSW, VIC, QLD, SA, TAS, ACT and NT, offering wagering products in approximately 4,300 retail outlets

• National Sky Racing media business

  Lotteries

• An iconic Australian lotteries business with licences to offer products in NSW, VIC, QLD, SA, TAS, ACT and NT

11 Based on the closing share prices of Tabcorp and Tatts as at 17 October 2016, being the last trading day prior to the announcement of the Transaction. Pro forma net debt of the Combined Group as at 30 June 2016 (including estimated transaction costs of $90 million) adjusted for cash paid to Tatts shareholders under the Transaction of $624 million based on a cash consideration component of 42.5 cents per Tatts share and Tatts' fully diluted shares outstanding of 1,469 million (including performance rights). Excludes synergies and business improvements

12 Based on reported FY 2016 revenue and EBITDA of Tabcorp and Tatts. Excludes impact of synergies and business improvements