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Expert Report of FLAVIO MENEZES Dated 9 March 2017

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Expert Report of FLAVIO MENEZES Dated 9 March 2017 Confidential Restriction on Publication Claimed IN THE AUSTRALIAN COMPETITION TRIBUNAL ACT of 2017 Re: Proposed acquisition of Tatts Group Limited by Tabcorp Holdings Limited Tabcorp Holdings Limited (Applicant) Statement of: Flavio Menezes Address: 19 Lomandra Place, Chapel Hill, Queensland Occupation: Professor of Economics, University of Queensland Date: 9 March 2017 The document contains confidential information which is indicated as follows: [Confidential to Tabcorp] [...…] [HIGHLY Confidential to Tabcorp] [...…] [Confidential to Tatts] [...…] [HIGHLY Confidential to Tatts] [...…] Filed on behalf of Tabcorp Holdings Limited (Applicant) Prepared by Grant Marjoribanks Herbert Smith Freehills Tel (02) 9225 5517 Fax (02) 9322 4000 Email [email protected] Ref 82602332 Address for service Level 34 161 Castlereagh Street Sydney NSW 2000 AUSTRALIA Confidential Restriction on Publication Claimed Independent Expert Witness Report For the Australian Competition Tribunal, in relation to the application by Tabcorp Holdings Limited for authorisation of merger with Tatts Group Limited 09 March 2017 Prepared by Flavio Menezes Associate, Economic Insights 2 Confidential Restriction on Publication Claimed INTRODUCTION 1. I, Flavio Menezes of 19 Lomandra Place, Chapel Hill, Queensland, have been engaged by Herbert Smith Freehills (HSF) to provide an independent expert report in relation to an application by Tabcorp Holdings Limited (Tabcorp) to the Australian Competition Tribunal for authorisation of a proposed merger with the Tatts Group Limited (Tatts). 2. Exhibited to me at the time of signing this report and marked “Exhibit FXM-1” is a bundle of documents. Also exhibited to me at the time of signing this report is another bundle of documents marked “Confidential Exhibit FXM-2”. Where in this report I refer to tabs in FXM- 1 or FXM-2, I am referring to the tabs of Exhibit FXM-1 and Confidential Exhibit FXM-2 respectively. I also refer to documents by reference to their unique document number beginning with a “TBP” prefix. I understand that Tabcorp and Tatts claim confidentiality over Confidential Exhibit FXM-2. 3. Tab 1 of FXM-1 [TBP.001.027.5154] is the expert retainer letter, which attaches the Federal Court Harmonised Expert Witness Code of Conduct. A letter of instructions listing the questions which HSF has asked me to answer, and providing instructions, is included as Tab 2 of FXM-1 [TBP.001.029.0003]. In particular, HSF has sought my opinion on:1 ‘(a) What are the economic principles and methodologies relevant to analysing the competitive effects and total economic welfare effects of Tabcorp’s proposed merger with Tatts (the proposed merger) on: 1. auctions or tenders for State Government licences for retail wagering, lotteries or keno? 2. the sale of State owned wagering businesses (such as RWWA)? 1 Tab 2 of FXM-1 [TBP.001.029.0003]. 3 Confidential Restriction on Publication Claimed (b) What would be the likely competitive effects and total economic welfare effects of the proposed merger on future processes for the award of State Government retail wagering licences (or in the case of Western Australia, the sale of RWWA), lotteries licences or Keno licences?‘ 4. Tab 1 of FXM-2 [TBP.001.027.1907] is a list of the assumptions that I have been asked to make in the letter of instructions that is at Tab 2 of FXM-1 [TBP.001.027.1907]. These assumptions are referred to in my report, either in the text or in footnotes, and are at Tab 1 of FXM-2, save that the confidentiality markings in this version have been updated. I have been asked to have regard to the following documents in preparing my report: (a) The Excel spreadsheet referred to as “TBP.001.018.5686.xlsx” containing wagering turnover data for financial years 2006 to 2016 (Tab 2 of FXM-2 [TBP.001.018.5686]); (b) The Excel spreadsheet referred to as “TBP.001.022.0002.xlsx” containing Tabcorp phone and online betting account data (Tab 3 of FXM-2 [TBP.001.022.0002]); (c) The Excel spreadsheet referred to as “Tatts Digital and Telephone Wagering Turnover FY12 to FY16” (also with Tatts document identification number “TAT.001.015.0804”) containing Tatts phone and online betting account data (Tab 4 of FXM-2 [TBP.001.015.0804]); (d) Tabcorp ASX release regarding the proposed merger with Tatts dated 19 October 2016 (“TBP.011.001.0110.pdf”) (Tab 3 of FXM-1 [TBP.011.001.0110]); (e) Presentation released to the ASX dated 19 October 2016 (“TBP.006.001.0121.pdf”) (Tab 4 of FXM-1 [TBP.006.001.0121]); and (f) Merger Implementation Deed (“TBP.004.011.0610.pdf”) (Tab 5 of FXM-1 [TBP.004.011.0610]). 4 Confidential Restriction on Publication Claimed 5. The opinions I have set out in this report are substantially based on my specialised knowledge and understanding of the economic theory and practice of auctions and tenders. I developed this knowledge and understanding through formal study, by undertaking research and authoring publications in areas relevant to the issues covered in this report, and through extensive industry experience as a consultant. 6. I hold the following qualifications: (a) Bachelor of Economics, UERJ (Brazil), 1985 (b) Master of Economics, FGV/EPGE (Brazil), 1988 (c) PhD in Economics, The University of Illinois at Urbana-Champaign (USA), 1993. PhD thesis: Four Essays on Auction Theory. 7. Upon completion of my PhD in economics, I joined the faculty at the Australian National University (ANU). I was appointed a Professor of Economics and Professor of Regulatory Economics at the ANU in 2003. I was also the Foundation Director of the Australian Centre of Regulatory Economics from 2003 to 2006, when I left the ANU to join the University of Queensland as a Professor of Economics, where I remain. I was also a part-time Vice President with the Regulatory Economics and Public Policy Practice at CRA International in Canberra from 2005 to 2006 and a Senior Consultant from 2006 until May 2007. I have worked as an Associate of Economic Insights Pty Ltd on a number of projects. 8. I have published over 60 journal articles on the economics of auctions, competition and regulatory economics,2 industrial organization, and market design.3 I have also authored ‘An 2 There is a deep connection between auction theory and monopoly pricing. See, for example, Klemperer, P., (2004), Auction Theory and Practice: The Toulouse Lectures in Economics, Princeton University Press, Chapter 2, Section 2.4. Available at http://www.nuff.ox.ac.uk/users/klemperer/virtualbook/11 chapter2.pdf. Therefore, there is a connection between auction theory and economic regulation. The former studies the allocation of goods and services under asymmetric information; that is, when the seller does not know the value that buyers place on the goods and services for sale. The latter studies how to regulate a monopolist 5 Confidential Restriction on Publication Claimed Introduction to Auction Theory’, a reference book in auction theory published by Oxford University Press. Its second-edition, in paperback, was published in 2008. 9. I have presented seminars and delivered lectures in the Americas, Europe and in the Asia Pacific Regions. I have lectured to both academic audiences and practitioners. I have had visiting positions at a number of renowned institutions. I am the co-editor of the Economic Record, and a member of the editorial board and associate editor of a number of learned journals. I am also the current President of the Economic Society of Australia (Queensland Branch), and the Deputy Chair of the Queensland Competition Authority. I am a member of the Standing Committee of the Econometric Society (Australasia), a fellow of the Academy of Social Sciences in Australia and a senior fellow of the Australian Institute of Business and Economics. 10. I have extensive relevant industry experience. Overseas consulting experience includes being the main advisor on the determination of a privatisation model for utilities, reviewing government procurement practices, and providing advice on regulatory reform and competition issues in the electricity, gas, telecommunications, banking, health and dairy industries. Consulting experiences in Australia include advising the Federal Government, AEMC, ACCC, IPART, QCA, the ACT and the Victorian Governments on market design issues in regulatory environments and providing economic advice to various private and public organisations on mergers, competition policy cases and regulatory issues in defence, energy, banking, health, transport and telecommunications. under asymmetric information; that is, when the regulator does not know the monopolist’s cost to supply the regulated service. 3 Market design applies auctions, tenders and other market mechanisms to solve allocation problems taking into account a variety of objectives and constraints such as economic efficiency, fairness, incentives and complexity. See, for example, Cramton, P. (2010), ‘Market Design: Harnessing Market Methods to Improve Resource Allocation’, available at http://www.cramton.umd.edu/papers2010-2014/cramton-market- design.pdf; Menezes, F. M. (2013), ‘Market Design for New Leaders’, available at http://espace.library.uq.edu.au/view/UQ:333613/WPP13 4.pdf ; Roth, A., ‘Market Design: Understanding markets well enough to fix them when they’re broke,’ 2010, available at http://www.vanderbilt.edu/AEA/econwhitepapers/white papers/Al Roth.pdf. 6 Confidential Restriction on Publication Claimed 11. A copy of my curriculum vitae with full details of my qualifications and experience is included as Tab 6 of FXM-1 [TBP.001.026.0850]. 12. In completing this report I have received assistance from Dr John Fallon, principal of Economic Insights, who has assisted with research and peer reviewed the analysis in my report and its application to the facts. 13. In preparing this report I have had regard to the materials specifically identified throughout the report, in the form of footnotes or in the text. 14. I confirm that I have read, understood and complied with the Federal Court General Practice Note GPN-EXPT (Expert Evidence), including the Harmonised Expert Witness Code of Conduct Federal Court of Australia.
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