“Deleveraging” – or flattening out of the weight of debt in a firm’s balance sheet – at International Game Technology Plc (IGT) and at Scientific Games Corp “will likely take some time”, says a new report from Fitch Ratings Inc, released this week.
“The continued weakness in the slots segment and – for IGT – lottery concession renewals will keep leverage elevated closer to 5.0x for IGT and 7.0x for Scientific Games over the next one to two years,” the ratings agency wrote.
It added: “We believe these pressures will offset much of the merger synergy benefits.”
Both IGT and Scientific Games raised debt to help fund their recent respective mergers and acquisitions with other gaming equipment firms. According to Fitch, IGT has a target of 4.0x leverage, while the target for Scientific Games is 5.0x.
Wells Fargo Securities LLC noted in September that IGT was making deleveraging the company and paying a “steady” dividend its “top” priorities. But analyst Cameron McKnight added at the time that long-term stability “could be an ‘18- to 24-month’ journey.”
IGT was formed in April via the US$6.4-billion merger of Italy-based lottery technology and services specialist GTech SpA and Nevada-based slot machine maker International Game Technology.
The new firm announced a year-on-year growth of 30 percent in consolidated group revenue for the third quarter of 2015, to US$1.22 billion.
However, a note in July from Telsey Advisory Group LLC stated IGT probably needed two years to turn around the fortunes of its slot machines business. The brokerage cited “a shrinking installed base and declining yield”.
Union Gaming Research LLC said in a note earlier this month that IGT was “taking a more aggressive stance in international markets.”
Scientific Games, originally a specialist in lottery equipment and management, in November 2014 acquired slot machine and floor management systems specialist Bally Technologies Inc in a transaction valued at US$5.1 billion. The deal came approximately one year after Bally Technologies acquired Nevada-based table games equipment and slot machine supplier SHFL entertainment Inc in a US$1.3-billion transaction.
In 2013, Scientific Games took over U.S.-based slot-machine maker WMS Industries Inc for US$1.5 billion.
Scientific Games posted a net loss of US$678.2 million in the third quarter of 2015, or US$7.88 a share, the company said in November.
Fitch’s report noted that despite the “impressive line-ups” of product demonstrated by IGT and Scientific Games at the U.S. trade show Global Gaming Expo in September, there weren’t what Fitch referred to as “game-changing” slot products that could motivate casino operators to make wholesale replacements of product on their floors.
“Instead, we see mobile gaming technology (e.g. social gaming, bring-your-own-device gaming) becoming more prominent, which may reduce demand for traditional cabinets,” Fitch noted.
The ratings agency stated that IGT and Scientific Games’ exposure to lottery “is a positive because lottery has better secular prospects relative to slots”.
But it added: “However, lottery is cash flow intensive, competitive and is subject to concession renewals. We view Scientific Games’ lottery business more favorably, given its lower concentration and heavier skew toward instant tickets.”
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”We expect Goa to quickly become a US$1 billion market as it transitions to land-based casinos (from US$150 million today), which is still just a fraction of India’s total GGR potential of US$10 billion to US$17 billion”
Analyst at Union Gaming Securities Asia