GGRAsia – M&A key for slot makers in 2017: JP Morgan

M&A key for slot makers in 2017: JP Morgan

Apr 19, 2017 Newsdesk Industry Talk, Latest News, Top of the deck

“Merger and acquisition continues” for top manufacturers of casino games products, said a Tuesday note from brokerage JP Morgan Securities Australia Ltd.

The note highlighted several recent transactions in the online digital casino games sector. It included Monday’s announcement that International Game Technology Plc was modifying its current exposure to the social casino games segment by selling its Double Down Interactive LLC unit to South Korea’s DoubleU Games Co Ltd for US$825 million cash; and the news on April 11 that Scientific Games Corp had acquired – under terms that were not made public – the privately held, Tennessee, U.S., -based, Spicerack Media Ltd, developer of a game called Bingo Showdown.

“Merger and acquisition for electronic gaming machine manufacturers would be a key feature for 2017… driven by consumer preference for mobile,” suggested the memo from Donald Carducci, Shaun Cousins and Shalin Doshi.

The brokerage said Scientific Games had reported the Spicerack deal had been “immediately accretive for earnings and cash flow”.

The note also mentioned the development of the digital online business of Australia-based slot machine maker Aristocrat Leisure Ltd.

Aristocrat launched at the end of December a digital platform application called Cashman Casino. The group says it is designed to complement its Heart of Vegas app. The latter was first released for the social media platform Facebook in 2013, and an iPad app was launched in September 2014.

“We think digital will drive Aristocrat earnings growth across platforms (iOS/Android) and multiple apps (Heart [of Vegas] and Cashman) as a result of title performance,” said the JP Morgan team.

Aristocrat Leisure’s revenue from digital operations rose 89.5 percent year-on-year in financial year 2016, to AUD279.7 million (US$211 million), according to its annual results filed in November.

In a Monday note issued before the announcement of IGT’s sale of Double Down, analyst David Katz of Telsey Advisory Group LLC said of IGT, Scientific Games and Everi Holdings Inc: “The stocks trade off the slot aspect of the business for the time being. From this perspective, we expect first quarter 2017 results to be somewhat disparate.”

The Everi brand was formed in August 2015, following a US$1.2-billion merger of Las Vegas-based Global Cash Access Holdings Inc and Multimedia Games Holding Co Inc.

Mr Katz estimated that in the first quarter of this year, IGT’s revenue from social gaming had posted a 28.3 percent decline year-on-year, to US$57.4 million, from US$80.1 million in the prior-year period.

He forecast that for Scientific Games, revenue from interactive operations would be up 22.1 percent year-on-year, to US$88.7 million, in the three months to March 31; while for social games the group’s revenue in that quarter would be up 37.3 percent from the prior-year period, to US$80.3 million.

Double Down sale

Mr Katz stated in a follow-up Tuesday note – after the IGT announcement regarding Double Down – that the move was “a positive” for IGT’s shares.

“Pending further information from management, our initial estimate is that the deal adds US$1 to US$2 in value for IGT.”

He noted: “The transaction presents a good price that generates earnings and valuation accretion at a time when the stock is under pressure.”

Mr Katz additionally stated: “It puts the interactive business unit in proper perspective in that it is not fully integrated with the company’s other technology, gaming and lottery assets and is therefore non-core. The competitive landscape in the social casino business has tightened and there is no indication it will improve, which suggests the timing is opportune.”

“We estimate Double Down represented only 4 percent to 5 percent of IGT’s consolidated EBITDA [earnings before interest, taxation, depreciation and amortisation],” said a Tuesday note from analysts Cameron McKnight and Robert Shore at Wells Fargo Securities LLC.

But they added: “We expect IGT shares to be up 5 percent to 7 percent on this announcement.”

IGT’s stock had risen 4.37 percent in New York on Tuesday during regular trading hours, according to Bloomberg data.

John DeCree, an analyst at Union Gaming Securities LLC, said in a memo: “We estimate net proceeds from the transaction will reduce IGT’s debt/EBITDA from 4.5x at the end of 2016 to 4.0x on a pro forma basis.”

Mr DeCree added: “Assuming IGT repays amounts under its credit facility, we estimate cash interest savings would be around US$25 million to US$30 million annually.”