The casino industry equipment supply sector appears to be going through a period of realignment. It started in March last year when New York-based Scientific Games Corp, a supplier of technology to regulated lotteries, said it was acquiring the larger slot machine specialist WMS Industries Inc based in Chicago, in a leveraged buy out valued at US$1.5 billion.
In November, Las Vegas-based slot machine specialist Bally Technologies Inc completed the US$1.3 billion leveraged buy out of its Nevada neighbour SHFL entertainment Inc, a leader in supplying electronic card shufflers, traditional table games equipment and electronic table games.
Then in mid-June this year, lottery operator GTech SpA confirmed it is one among several rumoured suitors in talks to buy New York-listed gaming supplier International Game Technology (IGT) based in Las Vegas. That was followed by Australian gaming equipment maker Aristocrat Leisure Ltd saying in a filing in late June to the Australian Securities Exchange Ltd, that it was in “advanced discussions” about acquiring Video Gaming Technologies Inc in the United States. The value of the potential deal was not mentioned.
On Tuesday, Gaming Partners International Corp (GPI), a provider of casino currency and table game products, announced it is paying US$19.75 million for GemGroup Inc and subsidiaries, including Gemaco Inc, a manufacturer of playing cards, casino chips and table layouts.
Gaming industry finance specialist Union Gaming Research LLC said in a note in late June regarding IGT: “…if a buyer were to purchase IGT at current levels, we would estimate a total consideration of US$5.7 billion”.
With such large sums in play, it’s important that merger and acquisition (M&A) activity is quickly accretive to the earnings of the companies writing the cheques.
Matt Ryan, gaming research analyst at JP Morgan in Sydney, covering companies including Aristocrat Leisure, sees the current M&A activity in the sector as a potential positive for investors.
“The high fixed cost base of manufacturer R&D [research and development] and high variable margins means that manufacturers generate strong operating leverage when revenue is increasing. That is an attractive proposition,” he explained to GGR Asia.
In its third quarter fiscal 2014 results issued in May, Bally Technologies for example reported gross margins of 49 percent on its electronic gaming machines business, according to a filing with Nasdaq.
Matt Ryan says recent acquisition deals in the casino supply sector have been between companies with complementary products and capability. That was a point raised by other analysts in relation to the Bally-SHFL deal.
“We really haven’t seen much consolidation among equipment suppliers that overlap in the exact same product segments. Where you’ve seen a bit more consolidation recently is when you’re combining businesses in the gaming equipment space that do different things,” he states.
An industry insider, who asked not to be identified, was a little more bearish about recent M&A deals.
“I don’t think all this activity is purely coincidence. For example if WMS was firing on all cylinders and Scientific Games was doing the same, and both were super healthy and rolling in money, I don’t think you’d necessarily see this kind of M&A activity. There’s certainly some softness out there.”
Robert Shore of Union Gaming Group said in a note in late June it might be possible for IGT to spin off DoubleDown Casino, described as the world’s largest multi-game social casino network, before any sale of IGT. DoubleDown was acquired by IGT for approximately US$500 million in February 2012. Such a spin-off would “reduce required equity substantially,” in any sale of IGT, he stated. He didn’t indicate whether such an exercise could be done at a profit to IGT.
Mr Shore did state however: “…one opinion in the private equity marketplace views IGT’s acquisition of DoubleDown as a negative and potential downside, and perhaps one root of some of the current operating challenges, given that the segment represents a departure (i.e., a diverted reinvestment) from its core business.”
Mr Shore also spoke about the regulatory challenges of M&A for U.S.-based companies, pointing out that any deal for IGT would potentially need regulatory approvals from 300 separate jurisdictions where IGT does business.
That also raises the question of who would be eligible to buy such businesses.
A third finance industry source who asked not to be identified because the person is not authorised to speak on the record, told GGRAsia: “If deals were done between like-for-like companies rather than between complementary ones, there is the potential for regulatory complications in the U.S. via an anti-trust suit.”
Marcus Prater, executive director of the Association of Gaming Equipment Manufacturers (AGEM) based in the U.S., is confident that the current round of M&A activity will play out without being disruptive to the industry or its customers.
“In AGEM’s world, in 99 percent of cases involving market, regulatory or legislative events, what’s good for one equipment supplier is good for all the others. AGEM can have a role to play by providing a positive voice for the industry at a time when there’s a lot of stuff going on. There’s a cycle to business, and we’re in an interesting time,” Mr Prater told GGRAsia.
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"I am not going to speculate on what the [casino licence refreshment] tender requirements would be. I have full confidence and faith in the Macau government to treat everyone fairly"
Wilfred Wong Ying Wai
President and chief operating officer of Macau-based casino operator Sands China