Fitch Ratings Inc says it expects slot machine maker and online games provider Aristocrat Leisure Ltd to “pursue larger, strategic” mergers and acquisitions (M&A), as the Australia-based group has “strong excess cash balances”.
The company’s cash balances are supported by the AUD1.3 billion (US$932.2 million) equity that had been raised and earmarked for the acquisition of London-listed Playtech Plc, a leading gaming content provider for the online and land-based casino industries, noted the ratings agency in a Tuesday report.
That proposed deal was to have been funded with AUD1.1 billion in existing cash, new debt consisting of a AUD2.8 billion term loan, and a AUD1.3 billion entitlement offer.
In its report, Fitch said the Aristocrat group’s “liquidity is strong between full availability on its new US$500-million revolver and nearly AUD4 billion in excess cash pro forma for the AUD1.3-billion equity raise that was earmarked for the Playtech acquisition.”
The company’s free cash flow margin is also forecast to “remain robust, ranging from mid- to high-single digits percentage of revenue,” stated the ratings agency.
Fitch has assigned a ‘BBB-’ rating to Aristocrat’s new US$500-million senior secured revolver. Aristocrat Technologies Inc and Aristocrat Technologies Australia Pty Ltd are the borrowers under the new facilities.
The institution said it expected the Aristocrat brand to continue to pursue strategic acquisitions, particularly in the real-money gaming sector, adding that it assumed “AUD100-million of tuck-in acquisitions annually.” The term is used in investment circles for deals where a large entity completely absorbs a smaller one.
“Fitch expects a small amount of debt paydown relative to Aristocrat’s excess cash balances, with additional allocation toward dividends and tuck-in M&A,” it said.
“Aristocrat’s credit profile has headroom for M&A and Fitch expects future acquisitions to be funded in a manner that is consistent with ‘BBB-’ leverage metrics,” it added. “There is some flexibility for gross leverage to exceed Fitch’s 2.5 times downgrade sensitivity temporarily for strategic M&A when coupled with a credible de-leveraging path.”
The ratings agency said the Aristocrat’s ‘BBB-’ long-term issuer default ratings reflected the group’s “conservative credit profile based on low leverage, strong free cash flow generation, and solid market position as a global gaming supplier.”
Fitch said additionally that it expected Aristocrat’s gaming revenues to “fully recover to pre-pandemic levels by 2022 and grow in the mid-to-high single digit range thereafter, aided primarily by its robust gaming operations business in North America.”
“Digital revenue growth slows in 2022 as other consumer entertainment options enjoy more normalised operating environments, but long-term growth remains solid in the mid-to-high single digit range,” it stated.
In November, Aristocrat reported revenues of nearly AUD4.74 billion for its fiscal-year ended September 30, up 14.4 percent from the prior-year period.
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