ZEAL Network SE announces takeover offer for Germany's largest private digital lottery broker Lotto24 AG
Nov 19, 2018 8:27 AM
DGAP-News: ZEAL Network SE / Key word(s): Acquisition
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ZEAL Network SE announces takeover offer for Germany's largest private digital lottery broker Lotto24 AG
In the context of the deal, and consistent with its renewed strategy to de-risk its business model and focus on locally-licensed businesses, ZEAL intends to transform its German secondary lottery business into a locally licensed online brokerage model after reacquiring control of its myLotto24 and Tipp24 subsidiaries and, in due course, to relocate ZEAL to Germany. The transaction will significantly strengthen the German lottery market and expand returns to federal states and their lottery beneficiaries.
A strong platform for accelerated growth and shareholder value creation
The Group will also continue to pursue its international growth ambitions, building on the existing, diverse international portfolio (UK, Ireland, Spain, Norway, and Netherlands) and global development pipeline of ZEAL, with the aim of creating long-term growth and sustained shareholder and customer value.
ZEAL believes that the change to its business model in Germany will deliver significant benefits to ZEAL shareholders in the medium term as a result of reduced operational, tax and regulatory risk as well as improved growth potential. As part of the business model change, ZEAL has taken the decision to discontinue certain products and to focus on less volatile brokerage income in the German market, resulting in net annual run-rate revenue dis-synergies of ca. EUR 107 million, which is expected to be compensated for over time through accelerated growth of the enlarged Group. The combination with Lotto24 is also expected to deliver annual run-rate cost synergies of c. EUR 57 million through greater platform efficiencies and significant reductions in other operational costs. Further details of these revenue dis-synergies and cost savings are set out in Appendix A to this announcement.
In addition, ZEAL management has identified further cost savings of approximately EUR 4 million, which do not arise as a consequence of the transaction and sees additional potential future upside.
Dr Helmut Becker, CEO of ZEAL, said: "ZEAL will reunite with Germany's largest digital lottery broker. We will have a significantly enlarged, loyal customer base, strong technology and marketing platforms, and an exceptionally experienced team. Together with our plans to regain control of Tipp24 and transform its German business models, this puts us in an excellent position to accelerate online growth in both the EUR 8.7 billion German lottery market and EUR 270 billion global lottery sector - as a locally-licensed broker, licensed operator, and lottery investor. This transaction is good for shareholders, good for customers, and good for the German federal states and their lottery beneficiaries. We have held initial, constructive conversations with Lotto24 and look forward to further engaging with the management to achieve a successful combination of the businesses. We also look forward to a successful and constructive cooperation with Germany's state lotteries and invite all shareholders to join us on this journey."
Since its IPO on the Frankfurt Stock Exchange in 2012, Lotto24 has grown rapidly. In 2017, Lotto24 generated billings of EUR 220.7 million and revenues of EUR 25.2 million. In October 2018, Lotto24 upgraded its full year guidance, anticipating billings' growth of between 38% and 43% for 2018. In the first nine months of 2018, the company increased billings by 43% to EUR 235.9 million, revenues grew almost 50% to EUR 28.1 million, and the total number of registered customers rose by 36% to 2.04 million.
ZEAL has nearly two decades' experience as an online lottery operator, reseller and investor. In 2017, ZEAL delivered billings of EUR 280.5 million and revenues of EUR 134.3 million. In the first nine months of 2018, billings increased 5% to EUR 212.4 million, revenues rose by 19% to EUR 111.2 million, and the number of new customers grew by 54%, taking the total number of registered customers of the Group to more than 3.5 million.
Transaction supported by major Lotto24 shareholders
In a clear statement of shareholder support for the deal, ZEAL today entered into irrevocable tender agreements with major shareholders of Lotto24, namely with Günther Group, Working Capital and Jens Schumann. They represent approximately 65% of the shares and voting rights in Lotto24. By entering into the tender agreements, these shareholders have undertaken to tender their shares in Lotto24 into the offer.
Jonas Mattsson, Chief Financial Officer of ZEAL: "We believe this deal creates significant value for ZEAL and Lotto24 shareholders. The future growth prospects, significant reduction of regulatory risk and the related uncertainties, and EUR 57 million of annual cost synergies make the combined group a highly attractive long-term investment proposition. With our shared history, we are confident of achieving a seamless integration of both companies. We encourage all holders of Lotto24 and ZEAL shares to follow the major shareholders and take part in the offer."
An extraordinary general meeting of ZEAL is expected to be held at the end of December 2018, at which ZEAL will ask its shareholders to approve the offer, including the acquisition of Lotto24 shares from certain members of the Supervisory Board of ZEAL or persons connected with them, and authorise the Executive Board to allot a number of shares as required to fund the offer. As Günther Group has made it a condition to its tender agreement with ZEAL that it will not, as a consequence of the offer, be subject to a legal obligation to make a general offer for the shares in ZEAL which it does not own at that time, ZEAL will furthermore propose a resolution to its shareholders (other than Günther Group and persons acting in concert with Günther Group) to approve the waiver of such obligation granted by the Panel on Takeovers and Mergers. The ZEAL shareholder approvals will be a condition for ZEAL to publish the offer document.
Discussions with the German gambling regulatory body about the future licensing arrangements for the enlarged Group have already been initiated. ZEAL expects to complete the transaction in the first half of 2019.
Updated ZEAL Profit Guidance
Except for the narrowing of the previously forecasted EBIT range, the Executive Board confirms its previously published guidance and expects the ZEAL Group to generate Total Operating Performance (TOP) of EUR 150 million to EUR 160 million in the financial year 2018.
ZEAL invites media, investors and analysts to two separate webcasts and conference calls today to present the rationale and details of the transaction. The webcasts will be hosted in English by Dr Helmut Becker, CEO and Jonas Mattsson, CFO of ZEAL.
ZEAL Network SE Media Webcast and Conference Call:
Date: Today, 19 November 2018, 11.15 am CET / 10.15 am GMT
ZEAL Network SE Investor and Analyst Webcast and Conference Call:
Date: Today, 19 November 2018, 12.00 pm CET / 11.00 am GMT
The offer will be made exclusively under the laws of the Federal Republic of Germany, in particular under the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz (WpÜG)). The offer will not be made pursuant to the provisions of jurisdictions other than those of the Federal Republic of Germany. Therefore, no other announcements, registrations, admissions or approvals of the offer outside of the Federal Republic of Germany have been filed, arranged for or granted.
The ZEAL shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended, or with any securities regulatory authority of any state or any other jurisdiction of the United States of America ("USA"). Therefore, subject to certain exceptions, ZEAL shares may not be offered or sold within the USA or in any other jurisdiction where to do so would be a violation of applicable law. There is no public offering of ZEAL shares in the USA.
To the extent this announcement contains forward-looking statements, such statements do not represent facts. Forward-looking statements include all matters that are not historical facts. They are characterised by the words 'expect', 'believe', 'estimate', 'intend', 'aim', 'assume', 'plan' or similar expressions. Such statements express the intentions, opinions or current expectations and assumptions of ZEAL and the persons acting in conjunction with ZEAL, for example with regard to the potential consequences of the takeover offer for Lotto24, for those shareholders of Lotto24 who choose not to accept the takeover offer or for future financial results of Lotto24. Such forward-looking statements are based on current plans, estimates and forecasts which ZEAL and the persons acting in conjunction with it have made to the best of their knowledge, but which do not claim to be correct in the future. Forward-looking statements are subject to risks and uncertainties that are difficult to predict and usually cannot be influenced by ZEAL or the persons acting in conjunction with it. Actual events or consequences may differ materially from those contained in or expressed by such forward-looking statements.
This release and any materials distributed in connection with this release are not directed to or intended for release, publication or distribution (in whole or in part) directly or indirectly into or from the USA or any other jurisdiction where to do so would constitute a violation of the relevant laws of such jurisdiction, nor are they directed to, or intended for use by, any person or entity that is a citizen or resident or located in the USA or in any locality, state, country or other jurisdiction where such release, distribution, publication, availability or use would constitute a violation of the relevant laws of such jurisdiction or which would require any registration or licensing within such jurisdiction.
Lazard & Co., Limited ("Lazard"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for ZEAL Network SE and no one else in connection with the proposals referred to in this document. Lazard will not be responsible to anyone other than ZEAL Network SE for providing the protections afforded to clients of Lazard nor for providing advice in relation to any of the matters referred to or contemplated in this document. Neither Lazard nor any of its affiliates owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Lazard in connection with this document, any statement or report contained herein, any of the matters referred to or contemplated in this document or otherwise.
QUANTIFIED FINANCIAL BENEFITS STATEMENT
This Announcement contains statements of estimated cost savings, revenue synergies and dis-synergies arising from the Combination (together, the "Quantified Financial Benefits Statement").
A copy of the Quantified Financial Benefits Statement is set out below.
"The Executive Board of ZEAL (the "ZEAL Board") believes the following:
a) Business model change (non-personnel costs): Savings in direct costs of operations account for around 60 percent of the overall cost synergies:
-- all costs covering the bookmaking risks for the German market (hedging costs) will not be required after the transformation to an online brokerage business;
b) Organisational efficiency: Reduction of personnel and other operating expenses within the Combined Group, which represents around 40 percent of the overall cost synergies and will arise from:
-- removing business related duplicated roles enabled by the migration of the German broker businesses of the Combined Group onto one technology platform;
The total anticipated cost synergies of EUR 57 million per annum are equivalent to approximately 41 percent of the Combined Group operating expenses (including personnel expenses) from continuing operations of EUR 138 million, calculated based on the consolidated audited accounts for each of ZEAL and Lotto24 for the financial year ended 31 December 2017.
The ZEAL Board expects that the cost synergy realisation will take place progressively, with approximately 80 percent of the total cost synergies achieved by the end of year one, rising to 100 percent achieved by the end of year two.
The revenue synergies and dis-synergies will principally comprise:
a) Business model-related revenue dis-synergies of EUR 120 million will be generated mainly from:
-- billings loss: An overall billings loss due to the customer loss which will be caused by the transition into an online brokerage business, and reduced average billings per user, due to the restriction to the DLTB product portfolio; and
b) Revenue synergies of EUR 13 million: The revenue dis-synergies will be offset to some extent by increased billings generated by the Combined Group mainly arising from:
-- reduced customer acquisition costs due to improved access to and optimization of marketing channels within the Combined Group, which leads to more newly registered & active customers; and
The ZEAL Board expects the transformation of the business model to be implemented within the first full year following completion. Revenue dis-synergies will take effect at the same time as the business model change with a full run-rate by the end of year one following completion of the Combination.
The revenue synergies realisation will take place progressively, with approximately 40 percent of the total revenue synergies achieved by the end of year one, approximately 70 percent achieved by the end of year two and with full the run-rate effect achieved by the end of year three after the completion of the Combination.
The team, which comprised senior strategy, financial, technology and business personnel at ZEAL, worked to identify and quantify potential synergies as well as estimate any associated costs. The team engaged with the relevant functional heads and other personnel at ZEAL to provide input into the development process and to agree on the nature and quantum of the identified synergy initiatives.
In preparing the Quantified Financial Benefits Statement and to estimate the merger benefits relating to the Combination, the ZEAL Board has made use of publicly available information about Lotto24 along with knowledge it continues to have from the period prior to Lotto24's spin-off from ZEAL in 2012 and as a result of the separation of the technology platform in 2015. In circumstances where data has been limited for commercial or other reasons, the team has made estimates and assumptions to aid the development of individual synergy initiatives. ZEAL did not have access to the Lotto24 senior management or any current non-public information about Lotto24 and its business during the preparation of the Quantified Financial Benefits Statement.
The bases used for the quantified exercises are:
-- ZEAL: Full year 2018 P&L forecast data from ZEAL's financial planning contains 6 months actuals and 6 months forecast. Revenues and resultant synergies / dis-synergies are based on normalised revenue, which has been adjusted to match the statistically expected prize pay-out ratio;
In arriving at the estimate of synergies set out in this document, the ZEAL Board made the following operational assumptions:
-- the Combined Group will migrate the two broker businesses onto one technology platform;
The ZEAL Board has, in addition, made the following assumptions, all of which are outside its control:
-- a license and / or license extension will be granted to the Combined Group to enable the transformation of the myLotto24 sub group's German secondary lottery business into a licensed private online brokerage business;
The assessment and quantification of the potential synergies have in turn been informed by ZEAL management's industry experience as well as their experience of executing and integrating past acquisitions.
No statement should be construed as a profit forecast or interpreted to mean that the Combined Group's earnings in the first full year following implementation of the Combination, or in any subsequent period, would necessarily match or be greater than or be less than those of ZEAL and / or Lotto24 for the relevant preceding financial period or any other period.
Lazard & Co. Limited
19 November 2018
We refer to the statement regarding the estimate of expected merger benefits statement ("the Statement") made by ZEAL Network SE ("the Company"). The Statement, including the relevant bases of belief (including sources of information) is set out in Appendix A of the initial announcement of the proposed Offer in compliance with the Takeover Code (the "Announcement") issued by the Company dated 19 November 2018. This report is required by Rule 28.1(a)(i) of The City Code on Takeovers and Mergers (the "City Code") and is given for the purpose of complying with that rule and for no other purpose.
Save for any responsibility that we may have to those persons to whom this report is expressly addressed, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with, this report or our statement, required by and given solely for the purposes of complying with Rule 23.2 of the City Code by consenting to its inclusion in the Announcement.
It is the responsibility of the directors of the Company ("the Directors") to prepare the Statement in accordance with the requirements of the City Code.
It is our responsibility to form an opinion as required by the Code as to the proper compilation of the Statement and to report that opinion to you.
It is the responsibility of Lazard & Co. Limited to form an opinion as required by, and solely for the purpose of Rule 28.1(a)(ii) of the City Code as to whether the Statement has been prepared with due care and consideration and to report that opinion to you.
Basis of opinion
We conducted our work in accordance with Standards for Investment Reporting 1000 (Investment Reporting Standards applicable to all engagements in connection with an investment circular) issued by the Auditing Practices Board in the United Kingdom. We have discussed the Statement together with the relevant bases of belief (including sources of information) with the Directors and with Lazard & Co. Limited. Our work did not involve any independent examination of any of the financial or other information underlying the Statement.
We do not express any opinion as to the achievability of the cost and revenue synergies, as well as the revenue dis-synergies identified by the Directors.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
In our opinion, the Statement has been properly compiled on the basis stated.
The Executive Board
19 November 2018
Intended public takeover offer for Lotto24 AG by ZEAL Network SE ("ZEAL" or the "Company")
We have discussed the Statement (including the assumptions and sources of information referred to therein), with the Directors and those officers and employees of ZEAL who developed the underlying plans to which the Statement relates. The Statement is subject to uncertainty as described in this announcement and our work did not involve an independent examination of any of the financial or other information underlying the Statement.
You have confirmed to us that all financial and other information relevant to the Statement has been disclosed to us. We have relied upon the accuracy and completeness of all the financial and other information provided to us by, or on behalf of, ZEAL, or otherwise discussed with or reviewed by us, and we have assumed such accuracy and completeness for the purposes of providing this letter.
We have also reviewed the work carried out by Ernst & Young LLP as auditors of the Company and reporting accountants whose responsibility it is to form an opinion as required by Rule 28.1(a)(i) of the City Code on Takeovers and Mergers that the Statement has been properly compiled on the basis stated and that the basis of accounting used is consistent with the Company's accounting policies and we have discussed with them the opinion set out in Part B of Appendix A of this announcement addressed to yourselves and ourselves on this matter.
This letter is provided to you solely in connection with Rule 28.1(a)(ii) of the City Code and for no other purpose. We accept no responsibility to the Company or its shareholders or any person other than the Directors in respect of the contents of this letter. We are acting exclusively as financial adviser to the Company and no one else in connection with the transaction referenced above in connection with which the Statement has been produced and it was solely for the purpose of complying with Rule 28.1(a)(ii) that you requested us to prepare this letter. No person other than the Directors can rely on the contents of this letter and accordingly, to the fullest extent permitted by law, we exclude all liability (whether in contract, tort or otherwise) to any other person in respect of this letter, its contents or the work undertaken in relation to this letter, or any of the results or conclusions that can be derived from this letter or any written or oral information provided in connection with this letter, and in relation to any loss suffered by any such person as a result of, or in connection with, this letter.
On the basis of the foregoing, we consider that the Statement, for which you as the Directors are solely responsible, has been prepared with due care and consideration.
For and on behalf of
"Announcement" -- the announcement of the Company on 19 November of its intention to make the Offer;
"Combination" -- the proposed combination of the business of ZEAL and Lotto24 following successful completion of the Offer;
"Combined Group" -- the Existing Group as enlarged by the acquisition of control of Lotto24 pursuant to the Offer;
"Company" or "ZEAL" -- ZEAL Network SE;
"Completion" -- The completion of the Combination;
"DLTB" -- Deutscher Lotto- und Totoblock, the German Association of State Lottery Companies;
"Ernst & Young" -- Ernst & Young LLP;
"Existing Group" -- the Company, its subsidiaries and its subsidiary undertakings and associated undertakings whose results are fully consolidated into the Company's annual consolidated accounts, as at the date of this document;
"Lazard" -- Lazard & Co., Limited, independent advisers to the Company;
"Lotto24" -- Lotto24 AG;
"myLotto24" -- myLotto24 Limited, an associated undertaking of the Company whose results are fully consolidated into the Company's annual consolidated accounts and which carries on business in the United Kingdom as a bookmaker;
"Offer" -- the voluntary takeover offer pursuant to the German Takeover Act to be made by the Company to acquire all the issued shares of Lotto24;
"Takeover Code" or "Code" -- the City Code on Takeovers and Mergers.
|Company:||ZEAL Network SE|
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