6x EBITDA but what do you expect for a declining business? Neutral to earnings but the cash position is building.
The sale of Barcrest to SGMS is only dilutive (by a penny) if one assumes that IGT just keeps the proceeds as cash. Despite its recent struggles, IGT is really starting to accumulate cash and should be able to take out the convert next year or commence a large buyback – both would be very accretive. By our math, IGT should generate around $300MM of excess cash per year.
Barcrest Sale Details
Purchase price: $66MM; which includes $12M of receivables that are on extended payment terms. The Barcrest business includes both sale and gaming operations.
Product sale impact:
- In FY2010, 8,600 units were sold at an approximate unit price of $4k. Margins on the for sale business are in the mid 30s%. We estimate that in 2010, the for sale business generated $34MM of revenues and $12M of gross margin. In FY2011 we estimate that unit sales will fall to just under 6,000 units and generate revenues of $24MM and gross margin of $8MM
- The for-sale business has been declining for the last decade. Before FY2003, IGT was selling over 30,000 units. By FY09 the unit sales fell to 12,150 and continue to decline.
Gaming operations impact:
- In FY2010, the install base of Barcrest units was roughly 8,000, earnings a daily yield of approx. $12. All the Barcrest units are part of IGT’s leased install base. We estimate that gaming operation business generated revenues of $36MM in FY2010 and a gross margin of 70% or $25M
- While the Barcrest install base has been declining, the declines are modest in nature so we assume that in FY11 gross margin contribution would have been about $24MM
Impact on R&D, SG&A, and D&A:
- Barcrest overhead is about $27-28MM in the form of SG&A and R&D and about $1MM of D&A
Forward multiple/ EBITDA:
- We see EBITDA declining from $15MM in FY10 to about $11MM in FY11. Therefore, on current year EBITDA the multiple is ~6.0x