Scientific Games Corp “is already executing on some synergies” following the acquisition of Bally Technologies Inc, said brokerage firm Wells Fargo Securities LLC.
Scientific Games, a U.S.-based specialist in lottery equipment and management, in November completed the acquisition of slot maker Bally Technologies, based in Las Vegas, in a deal worth US$5.1 billion.
“The quick realisation of synergies is necessary for Scientific Games to generate cash and de-lever swiftly,” a group of Wells Fargo analysts led by Cameron McKnight wrote in a report on Thursday.
They added: “We believe Scientific Games is already making progress with its synergy programme. Checks suggest Scientific Games began streamlining its cost structure in mid-December. We believe decisions on headquarters, headcount and production facilities could occur in Q1 and serve as positive short-term catalysts.”
Scientific Games has said it expects synergies arising from the integration of Bally Technologies will lead to US$235 million in cost savings. The firm plans to realise about 80 percent of those savings by the end of 2015, Wells Fargo said.
“While we believe the roughly US$130 million of headcount-related synergies is tangible, there is less visibility regarding the remaining US$105 million of non-headcount related synergies,” the brokerage noted.
Well Fargo downgraded Scientific Games from ‘Outperform’ to ‘Market Perform’ but maintained its US$12 to US$13 valuation range.
“We see balanced risk/reward here given generally low near- to medium-term visibility,” the analysts said. “If Scientific Games can execute on its synergy targets and gaming equipment industry fundamentals stabilise, we see a potential path to US$20/share.”
But they cautioned: “However, with 7x net leverage, we also see a potential case for US$7/share on any potential setbacks.”
Wells Fargo advised investors to move to the sidelines until the investment case and fundamental outlook becomes clearer, “which could occur late 2015”.
