GGRAsia – Sci Games expects slimmer loss, proposes refinancing

Sci Games expects slimmer loss, proposes refinancing

Feb 02, 2017 Newsdesk Latest News, Top of the deck, World

Casino equipment maker and lottery services supplier Scientific Games Corp on Wednesday announced “selected preliminary expected financial results” for the fourth quarter and full year ended December 31, with the expected results coming in above analysts’ consensus. The company said the announcement was made in connection with a proposed refinancing plan.

Scientific Games said it expects consolidated revenue to be in a range of US$748 million to US$755 million for the three months to December 31, compared to US$737 million in the prior-year period. The casino equipment maker expects a net loss in the range of US$105 million to US$115 million for the fourth quarter, including a projected US$69 million goodwill impairment related to the firm’s international lottery systems reporting unit.

Attributable earnings before interest, taxation, depreciation and amortisation (EBITDA) are expected to be in the range of US$290 million to US$295 million in the October to December period, the firm said in a press release.

“The midpoint of the company’s revenue guidance (US$752 million) is 2 percent above consensus. Fourth quarter EBITDA guidance of US$290 million to US$295 million is 3 percent above consensus,” commented analyst Cameron McKnight, from Wells Fargo Securities LLC.

Analyst John DeCree of brokerage Union Gaming Research LLC stated that the midpoint of the preliminary results announced by Scientific Games implies an attributable EBITDA margin of 38.9 percent, “which compares with that implied by consensus of 38.7 percent”.

“We attribute the better-than-expected [preliminary] results possibly to some unit shipments being pulled forward into fourth quarter 2016 from first quarter 2017 as well as some improvements in margin related to the initial impacts of the US$75 million of planned cost saves,” added Mr DeCree.

While preliminary segment results were not disclosed, Scientific Games noted improvements in its core gaming, lottery and interactive segments.

“Our preliminary results for the fourth quarter 2016 reflect ongoing improvements in our gaming, lottery and interactive operations, as well as the initial benefits from our recently implemented business improvement initiative that is expected to reduce our annualised cost structure by US$75 million,” said Kevin Sheehan, chief executive and president of Scientific Games, in a statement included in the press release.

For full-year 2016 revenue is likely to be in a range of US$2.88 billion to US$2.89 billion, compared US$2.76 billion in 2015, the firm said. The full year net loss – including the goodwill impairment charge – is expected to be in a range of US$348 million to US$358 million, with attributable EBITDA of approximately US$1.10 billion to US$1.11 billion. The Nasdaq-listed firm reported a net loss of approximately US$1.39 billion for 2015.

The company said it expects to report the full results on March 2.

Debt refinance

Scientific Games said the announcement of the preliminary results was made in connection with a plan to refinance and extend the maturity dates of its term loan debt and revolving credit facility.

In a separate release on Wednesday, the company announced a US$1 billion add-on private offering of 7.0 percent senior secured notes due 2022, which will be combined with the current US$950 million, 7.0 percent notes due 2022. The private offering will be done via subsidiary Scientific Games International Inc.

Proceeds from the offering will be used to pay down the term loan as well as redeem outstanding senior subordinated notes due in 2018; approximately US$250 million at 8.125 percent. The release noted that the repayment of the 2018 notes would likely occur only after March 15.

“Taking out the 2018 notes could save US$3 million in annual interest expense. Clearly, with leverage at seven times EBITDA, reducing costs and leverage are key,” said Wells Fargo’s Mr McKnight.

Between 2013 and 2014, Scientific Games was involved in several leveraged acquisitions of rival gaming equipment suppliers totalling billions of U.S. dollars in value. In 2013 it bought Chicago-based slot machine maker WMS Industries Inc for US$1.5 billion. In November 2014, Scientific Games completed a US$5.1-billion deal to acquire Bally Technologies Inc. A year earlier, Bally Technologies had itself taken over Nevada-based SHFL entertainment Inc in a US$1.3-billion transaction.

Scientific Games last month completed the acquisition of Canadian gaming supplier DEQ Systems Corp, in a deal valued at CAD27.2 million (US$20.9 million).

Union Gaming said in its Wednesday note that it believes that Scientific Games “is beginning to turn the corner with new CEO Kevin Sheehan at the helm”.

“Overall, we view Scientific Games as a levered-equity with tangible catalysts for deleveraging that should continue to enhance equity value going forward,” said Mr DeCree.