Following the Annual General Meeting of Lotto24 AG at the end of August, the leading German online provider of lottery tickets has resolved to transfer the shares of the remaining minority shareholders to Zeal Network SE, with a majority of 98.36% of the votes cast. „The share of minority shareholders in Lotto24 most recently amounted to 4.8%,“ explained Sebastian Bielski, CFO of Zeal, in an interview with Börsen-Zeitung. In this respect, the high approval rate is no surprise. In any case, the majority shareholder must hold at least 95% of the shares in order to be able to apply for compensation for minority shareholders.

The cash compensation for the free float amounts to 479.25 euros per share, based on the price determined by KPMG. „The squeeze-out will cost us around 35 million euros,“ says Bielski. „The sum will be financed entirely through a loan,“ he adds. In total, the complete takeover of Lotto24 will cost Zeal around 350 million euros.

The value of the cash compensation for a squeeze-out under German stock corporation law is determined by a legally prescribed procedure in which, according to Bielski, two values must be taken into account: „Firstly, the average volume-weighted share price in the three months prior to the announcement of the squeeze-out, and secondly, the result of a valuation report by an auditor.“ The minority shareholders who are to be compensated must be offered at least the higher of the two values. In the case of Lotto24, this was around 360 euros in the market price analysis, says the Zeal CFO, „in the IDW S1 valuation report by KPMG it was 479.25 euros; this value or its calculation was confirmed by the court-appointed auditors from ADKL. We will pay this price per share to the free float.“

„The main reason for Zeal to carry out a squeeze-out at Lotto24 is tax advantages,“ Bielski emphasises and explains: ’Zeal Network SE as the parent company will incur losses, while Lotto24 AG as a subsidiary will generate profits. There is no profit transfer and control agreement between the two companies, so there is no fiscal unity. It was therefore not possible to offset Zeal's losses against Lotto24's profits. This resulted in a very high tax rate at Group level.’

„In addition,“ continues the CFO, ’after several years of losses, Zeal has considerable loss carryforwards that it has not yet been able to utilise.’ As a result of the squeeze-out, Zeal is now in a position to conclude a profit transfer and control agreement and thus a fiscal unity following the entry in the commercial register. „This means that the Group tax rate will be lower in the long term because it will then be possible to offset the results of Zeal and Lotto24. In addition, the tax loss carryforwards at Zeal can then also be utilised.“

In this context, Zeal's half-year balance sheet shows an unusual tax result – it is positive at 22.1 million euros. This is due to the fact that „under IFRS, tax loss carryforwards must be capitalised as soon as it can be assumed that they can be used,“ explains Bielski. „For us, this amounts to 27 million euros - the present value of the loss carryforwards. Although we are paying around 35 million euros to the minority shareholders of Lotto24 as part of the squeeze-out, we can utilise these 27 million euros.“ The CFO adds: „There is also a permanent tax effect, as we will be able to offset profits and losses in the future, even if we have utilised the loss carryforwards.“

Another advantage of the squeeze-out from Zeal's perspective is that the dividends previously received by minority shareholders will remain within the Group in the future. „The squeeze-out at Lotto24 will have a positive impact on Zeal Network's earnings per share and cash flow.“

„The approved squeeze-out represents the final step in the takeover of Lotto24 by Zeal,“ commented Andrea Behrendt, CFO of Lotto24, on the result of the Annual General Meeting at the end of August. However, this does not mean that the transaction is without legal repercussions. As Bielski recognises, there are always conflicting interests between the majority shareholder and the remaining shareholders. „The minority shareholders naturally want to get the highest possible price for their shares,“ says the Zeal CFO.

The German Stock Corporation Act provides for judicial review of the settlement price at the request of minority shareholders. „This right to judicial review is utilised in practically all squeeze-outs,“ says Bielski. „We expect that this will also happen in the case of Lotto24.“

„Such a judgement procedure usually goes through two instances, first the regional court, then the higher regional court,“ explains Bielski. „In rare cases, when very fundamental questions are involved, it can also go all the way to the Federal Court of Justice; in our case, however, I think this is very unlikely.“ Such proceedings can take a very long time; „at least three to four years should be taken into account,“ says Bielski, who admits: „Among the minority shareholders of Lotto24, we also have some who specialise in squeeze-out cases with subsequent appraisal proceedings, such as Scherzer & Co.“

Another option for taking action not only against the amount of the compensation, but also against the squeeze-out itself, is an action for rescission. „This can be filed by minority shareholders up to one month after the date of the squeeze-out AGM,“ explains Bielski. „They must prove that there were formal errors in the squeeze-out process or in the course of the squeeze-out AGM. I am not aware of any case in which such an action for rescission has been successful. The only thing it achieves is that the entry in the commercial register - and therefore the payout to minority shareholders - is delayed by a few months.“

In the case of Zeal and Lotto24, Bielski does not currently expect any legal challenges. „I therefore assume that the integration of Lotto24 into the Zeal Group will be entered in the commercial register and the payout to the free float will be made in mid-October.“ According to the CFO, the minority shareholders will have another three months after the entry in the commercial register to initiate appraisal proceedings. In these proceedings, however, only the amount of the compensation will be reviewed.

„Following the squeeze-out, there will be no changes in Lotto24‘s operating business, neither in terms of brand or product strategy, nor in marketing or personnel,“ Bielski assures. „Only the Supervisory Board of Lotto24, which currently consists of three external lawyers, among others, will no longer be used in the future.“ The two-brand strategy - Lotto24 and Tipp24 - will also remain in place. „Lotto24 is our main brand, which we also emphasise in our advertising. Tipp24 is our secondary brand; it is only advertised relatively little. But Tipp24 has a customer base that plays very actively and loyally with us,“ says Bielski

Bielski is „highly satisfied“ with the financial performance of Zeal 2024. After six months, turnover had increased by 40% year-on-year to 76.8 million euros. Earnings before interest, taxes, depreciation and amortisation (EBITDA) rose by 46% to 20.1 million euros and EBIT by 73% to 16.1 million euros. „We are doing really well this year,“ said the CFO. „For the year as a whole, we expect sales of between 140 million and 150 million euros after 116 million in the previous year. Our EBITDA forecast ranges from 38 million to 42 million euros after 33 million euros in 2023.“

The online penetration rate in the lottery market in Germany is 24%; according to Bielski, it is increasing by one to two percentage points per year. „This is a very steady process.“ According to the figures, the absolute volume of the online lottery market in Germany is around 2 billion euros. According to Bielski, the Zeal Group's share of the online lottery market in Germany was just over 41% in 2023. „This share should climb by an average of one to two percentage points per year,“ he says. The number of Zeal's monthly active customers had also risen sharply year-on-year as at the end of June, from 1.1 million to around 1.5 million.

The lotteries „6 out of 49“ and „Eurojackpot“ are by far the most important products for Zeal. Interestingly, the share of revenue generated by „Eurojackpot“ has been growing for several years at the expense of „6 out of 49“. Eurojackpot’ is now the biggest revenue generator. In the first eight months of this year, the share of „Eurojackpot“ in the gaming fees of state lotteries rose to 49%; in the previous year, the share was 43%. In contrast, the share of „6 out of 49“ has fallen from 32% to 27%.

At around 36 euros, Zeal's share price is between the record high of 46 euros (January 2021) and the four-year low of 25 euros (October 2022). The capitalisation amounts to 720 million euros.