Who is Victorian Premier John Brumby kidding over the new lotteries deal for the state? The hard heads in the market were expecting the government to strike a much tougher deal with Tattersall’s; instead the company is grinning and relieved, and the hard heads among the brokers know a great deal when they see one.

So why is Tattersall’s so happy with the new lotteries arrangement in Victoria?

Well, it gets to keep 85% of the game, with Intralot of Greece gaining a 15% low growth, low margin business. A comment from two major investment banks today leaves the strong impression they know Tattersall’s has got a good deal and that the Victorian Government could have done better.

Tattersall’s will continue to operate products such as Saturday Lotto, Oz Lotto, and Powerball, while the Athens-based Intralot will take over the running of scratchies, or instant lotteries. One has repeat business through registration of players and clubs, the other is more impulse and gift driven.

No wonder the market pushed TTS shares up 3c to $4.13 with more than 16 million shares traded yesterday. TTS shares have shed over $1 a share since the peaks around March and April as the market grew to understand that it would probably lose the monopoly.

TTS probably thinks that it has done very, very well from this Government. How well? Well look at these comments given to AAP by the Tatts CEO. Dick McIlwain.

“It’ll knock about 15 per cent off sales, but, bottom line (profit), probably no impact,” he told AAP.

He said that in Victoria last financial year, the Tattersall’s turnover on instant lotteries was only about $58 million. The product was over-taxed, game sales were slow, and the games were going stale.

Merrill Lynch said this morning in a note to clients:

TTS has been awarded the main Victorian lotteries license until 2018 at a cost of $19M to be paid over the course of the license. Under the new license TTS will no longer be selling scratchies. We believe this business was of very low margin and will not impact the earnings of the Victorian lotteries business, which we anticipate will earn $40M in EBITDA in FY08.

We were surprised at the low price relative to our expectations. We had anticipated TTS would have to pay $90M in a one off up front payment. We have assumed the $19M is paid evenly over the life of the license at $1.9M pa.

After taking account of the removal of $9M in amortisation, the reduced interest expense and adding in the $1.9M in license fees every year we have upgraded FY08-FY10 by ~3%. We maintain our neutral recommendation awaiting greater clarity on the impact of horse flu.”

All in all a great deal for Tattersall’s with minimal financial damage and the Victorian Government can say it has broken the 54-year-old monopoly by giving Intralot a low margin, no growth business.

A mates’ deal, rather than a great deal for the people of Victoria.