Oct 08, 2024 Newsdesk Latest News, Top of the deck, World  
Total “replacement costs” for Light & Wonder Inc (L&W) to change the current disputed version of its “Dragon Train” slot product in the North America market could be “US$28.6 million”, according to a Monday note from David Bain, an analyst at B. Riley Securities Inc.
Court-related damages and other legal remedies could cost Light & Wonder somewhere in the range of “US$50 million to US$150 million,” added the analyst in a Monday memo.
Slot machine specialist Aristocrat Technologies Inc said in a September 23 announcement it had been granted a preliminary injunction by a court in Nevada in the United States, against market rival Light & Wonder, alleging infringement of Aristocrat’s intellectual property. Aristocrat had filed a lawsuit in March against Light & Wonder involving Dragon-themed titles offered by the two companies.
Light & Wonder’s president and chief executive, Matt Wilson, said last week that the company had plans to “build out” a new version of “Dragon Train”.
He further mentioned the firm would be replacing the circa 2,000 “Dragon Train” units deployed in the North American market, “in compliance with the judge’s order”.
The firm launched its Dragon Train title in Australia last year and in the U.S. market in early March.
Mr Bain said in his Monday note that the brokerage estimates that Light & Wonder sold “4,800 [Dragon Train] units in Australia”.
In his comments last week, Mr Wilson said Light & Wonder had “stopped selling the game” in Australia when the court order in the U.S. was issued. The gaming supplier has so far not announced any conversion or replacement of Dragon Train units in the Australian market.
If that were to happen, according to B. Riley Securities, it would involve costs of US$62.4 million for Light & Wonder.
“We assume that the replacement cost per unit, including speedy installations, is approximately US$13,000. We also assume that court-related damages, punitive or otherwise, could follow, which we estimate between US$50 million and US$150 million,” stated Mr Bain.
He added: “Light & Wonder must now replace Dragon Train games in existence. According to Light & Wonder, it has approximately 2,200 Dragon Train units operating in North America on lease. We estimate it has sold another 4,800 units in Australia.”
‘Dragon Train 2.0’
According to the analyst, while Light & Wonder’s stock had “declined US$19 per share or 17 percent” since the time of the court announcement, in the brokerage’s view, market sentiment regarding the stock decline from Dragon Train disruption was “overdone”.
“After estimating a potential success range from forward mitigation efforts and including possible one-time [legal] damages and previously unanticipated capital expenditure, we calculate an approximately US$6 per share [cumulative] negative impact from Dragon Train disruption,” wrote Mr Bain.
He added: “Light & Wonder is actively working with customers to replace Dragon Train. According to Light & Wonder and based on our own checks, we believe these communications have been fruitful, and, in our view, a sizable majority will take Light & Wonder game replacements.”
Regarding a replacement product that Mr Bain termed “Dragon Train 2.0”, he stated: “Notably, outside of certain math models, multiple other core elements of the game, such as secondary hold and respin, art, sounds, animation, and brand, are not in dispute.”
He further noted: “In other words, the game franchise is likely to continue, even if using different math – though, based on our experience over the years, we believe that math models are key to great game performance.”
The brokerage said that Light & Wonder had several times - since the legal tussle with Aristocrat was made public – reiterated its guidance to investors to expect US$1.4-billion earnings before interest, taxation, depreciation and amortisation (EBITDA) from the group in 2025.
“Light & Wonder states that Dragon Train accounted for less than 5 percent of its US$1.4-billion calendar-year EBITDA guidance, implying close to a US$70 million contribution next year,” said Mr Bain.
B. Riley Securities’ assessment also mentioned that recent merger and acquisition (M&A) activity in the gaming technology market “leaves Light & Wonder as a scarce public global gaming supply business with certain underappreciated assets, including its market-leading systems business.”
The institution added: “A spate of M&A by private equity essentially removes Everi Holdings, International Game Technology Plc’s gaming division, and PlayAGS Inc, as practical comparable trading peers.”
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