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ANALYSIS-Italy scratch tender mixed blessing for Lottomatica

Published 09/15/2009, 03:59 AM
Updated 09/15/2009, 04:03 AM
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* Operators have until Oct 12. to file bids

* Lottomatica seen remaining an operator

* Upfront fees, card printing, outlets to curb rivals

By Nigel Tutt

MILAN, Sept 15 (Reuters) - Winning a fresh concession for Italy's 9 billion euro ($12.8 billion) scratch card betting business could be a mixed blessing for Lottomatica SpA, one of the world's largest lottery operators.

Lottomatica will either end up with competition to its current monopoly or, if it remains the sole operator, end up having to pay an upfront fee of 800 million euros all by itself, rather than share it with other operators.

To pay that fee, it might have to ask its shareholders for cash or cut its dividend for a second year, said analysts.

"We see a risk that Lottomatica remains mono-concessionaire, which could potentially imply a rights issue to finance the bid," analysts at Citigroup said in a research report.

Lottomatica will have to be "creative" in funding the new concession if just two bidders emerge, Bank of America-Merrill Lynch said in a research report.

"We also think there is the risk of a dividend cut to avoid more expensive capital-raising options," it added.

Lottomatica cut its 2008 dividend by 16 percent to 0.68 euro to be "prudent", given the economic crisis, even though net profit rose 27 percent.

So far, Lottomatica has yet to specify how it would fund the deal if it is once again chosen as the sole winner in the government tender, which runs to Oct. 12 and permits up to four winners.

Lottomatica Chief Financial Officer Stefano Bortoli told Reuters in July the group would keep within its loan covenants if two, three or four winners were chosen in the tender.

A source close to Lottomatica said earlier this month that the likelihood of only one winner was remote given the interest being shown in the tender by possible bidders.

Apart from Lottomatica, which has said it will participate in the contest, analysts see possible bids from Italy's SNAI, private equity-owned Sisal, Italy's Giocopiu, and from Greece's OPAP and Intralot.

Scratch-and-win cards, also known as instant lotteries, provide instant prizes and are mostly sold in bars or tobacconists.

Lottomatica, controlled by the De Agostini family holding company, has built the business to 9 billion euros of bets a year and 16 million players, which it says is the largest scratch card game in the world.

Italian lottery activities, including scratch cards and the Lotto game, represented 33 percent of Lottomatica revenue in the first half of the year. Scratch bets were worth 4.9 billion euros and Lotto wagers 2.9 billion. The rest of its sales come from slot machines, betting and lottery systems.

The scratch card tender, launched in mid-August, is part of the Italian government's plan to tap the traditionally recession-proof gambling sector to help cover a fall in government income of 3.6 billion euros in the first half.

ENTRY BARRIERS

New entrants face significant hurdles to win a concession, however, not least the upfront fee, and analysts see it unlikely there will be four winners from the tender. At the most analysts see three winners.

Limiting factors include the need to have a 10,000 point-of-sale distribution network, and finding a specialist printer to print the cards.

The upfront fee is 500 million euros this year and 300 million next year, to be paid equally by the winners, even though the new scratch card concessions only start in June 2010.

Milan broker Equita sees "a single bid or at the maximum two effective offers" in the tender, with these coming from Lottomatica and a consortium including Sisal.

"We will see various announcements in the next weeks from operators that are looking for financial partners or for, at least, a bit of visibility," it said.

On distribution, Lottomatica counts on 47,000 points of sale for its scratch card sales, including nearly 20,000 which are part of Sisal's network. Snai has less than 10,000 outlets and Intralot 600.

In addition, printing capacity is scarce. The biggest suppliers include Scientific Games, which is part of Lottomatica's consortium, Lottomatica unit GTECH and Canada's Pollard, after which there remain just a few small printers to choose from, said one analyst.

Lottomatica's share price has come off a July low caused by the scratch tender uncertainties, but firmed after its July 30 first-half results and full-year forecast, although it remains well off its January 2009 high.

Lottomatica trades on a price/earnings ratio of 21 times, below the 23 of Intralot, which has also expanded abroad, and well above the more Greek domestically-based OPAP on 8 times. ($1=.7008 Euro) (Writing by Nigel Tutt; editing by David Holmes and Simon Jessop)

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