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Borrow cheaply, buy cash flow and profitability at a reasonable multiple, utilize NOLs - worked for PNK and should work for SGMS.


"The acquisition of WMS is transformational for Scientific Games, enabling us to offer a complete portfolio of lottery and gaming products and services to both new and existing customers around the world.  We expect to combine our game content, technology, operational capabilities and respective geographic footprints to create an enterprise poised to capitalize on significant growth opportunities around the globe." 

-A. Lorne Weil, Scientific Games' Chairman and Chief Executive Officer

CONF CALL NOTES

  • Opportunity of a lifetime for both companies
  • Faster growth of their business has been outside the US but for structural reasons all of their interest expense and most of their operating expenses are inside the US. Therefore their EPS has lagged revenue growth.  They have racked up a huge NOL inside the US. 
  • WMS is almost a mirror image of their situation - 75% of WMS's business comes from within the US and they have a pristine balance sheet. Also have a large tax bill in the US
  • The merger will give them huge EPS growth and a significant number of investors care about P/E multiples. So at last they will look attractive on that valuation basis. This acquisition will allow them to reap huge cash flow savings as a result of utilizing their NOL.
  • Feel confident that SGMS's existing international footprint can help WMS cross sell their products. 
  • Feel that there will be more expansion by the lotteries (internationally) into traditional slot related product. 
  • Greek lottery is expected to create a national network of thousands of machines and SGMS is partners with OPAP, so that puts them in a unique position
  • The financial engineering rationale isn't the only reason for this acquisition. They have a lot of industrial logic.  They have virtually no competitive overlap between the WMS & SGMS businesses. However, the businesses are complementary.
  • Think that there is a huge revenue synergy from being able to cross sell each other products and create new products, systems and services that neither company is currently offering to the market
  • Think that that there is an opportunity for cost savings since they are both in the business of manufacturing, designing, acquiring 3rd party content, and expanding into the online world... therefore, there should be cost syngeries and scale benefit here.
  • The two companies have a high degree of cultural compatibility (that's a little scary...)
  • Need regulatory and government approvals to complete the transaction
  • SGMS: 
    • 50% of their revenue comes from their instant ticket business
    • 25% is from their traditional lottery systems business
    • 25% from providing machines and systems supplying to VLT markets with just a few devices per location vs. casino operators
  • In IL they are going to be providing the monitoring system for VLTs
  • Feel like WMS's business is on the verge of a turnaround 
  • Like WMS's game server intergration business and will complement their similar business. Together they can have a leading business.
  • Both companies are leaders in using licensed brands to promote their respective products. Have a few brands where they overlap and can help each other acquire developing content.
  • Thinks that the lottery distribution channel will be a huge opportunity for WMS
  • Feel like the US economy is in the beginning of a recovery, albeit perhaps a slow one.
  • Combined leverage with no synergies will be 5x on an LTM basis and 4.4x with synergies compared with current leverage of 4.0x

Q&A 

  • WMS is the best possible partner for SGMS with no close second.  
  • Integration with WMS: Expect to have 2 operating sectors with a lottery one and a gaming one
    • Regarding Barcrest: They will intergrate Global Draw with Barcrest and move that over into the "gaming sector"
    • They intend to keep the WMS brand and the senior management team to continue to manage the gaming sector - including whatever SGMS has
  • Term loan that they will use to finance the deal has a 7-year term and they will have a $300MM R/C
  • Do not believe that they will have to exit any businesses as a result of the combination
  • There are a number of lottery jurisdictions that are either run by a private operator like OPAP, where WMS's content can help them on the VLT side
  • Wouldn't characterize that WMS is in the midst of a turnaround, nor would WMS
    • huh?
  • Competitive implication of this combination is not likely to help the other gaming suppliers
  • The interactive opportunity? Thinks it's a big opportunity given SGMS's view that online gaming will proliferate through the government/lottery channel vs. federal legislation in the US. Their relationships with lotteries and foreign governments and WMS's content and efforts in that arena could be hugely synergistic.

 

HIGHLIGHTS FROM THE RELEASE

  • SGMS and WMS have "entered into a definitive agreement under which Scientific Games has agreed to acquire WMS for $26.00 in cash per common share or approximately $1.5 billion." 
    • Includes assumption of $85MM of debt and $55MM of cash
    • Price translates to a 6,0x TTM EBITDA multiple (looks low but this is just because WMS's cash flow conversion is terrible. They have always had a low multiple)
    • Acquisition is subject to WMS shareholder approval
    • Expected closing by end of 2013
    • SGMS has committed financing 
  • The combined company will have revenue of approximately $1.6BM and EBITDA of $579MM based on TTM results ended September 30. 
  • The transaction was unanimously approved by both company Boards
  • "We view this transaction as the next logical and strategic step in offering continued innovation in gaming. Shareholders will enjoy a meaningful premium for their shares and employees will have expanded career opportunities as part of a larger, broader and more diverse organization"
  • "Scientific Games expects to achieve synergies through revenue growth, shared costs and larger scale, as well as by monetizing its significant U.S. tax attributes. The combined company will also be able to efficiently utilize shared manufacturing, engineering, software, field maintenance and customer service to drive growth and cost savings"
  • Other reasons for the combination: 
    • Complementing businesses leveraging core competencies
      • "Scientific Games and WMS will draw on each organization's core strengths to broaden offerings, bring gaming products to new sectors and geographies, accelerate key growth initiatives and offer enhanced capabilities, systems, field service and content. Scientific Games' strong global footprint, including its position in server-based gaming, should help accelerate WMS' international development initiatives."
    • Diversification of revenues
    •  Strengthened position in interactive gaming
      • "The combined iLottery/iGaming platform and content will significantly expand the scope of the combined company's interactive products.  WMS has a well-developed iGaming platform, including social and mobile gaming, while Scientific Games has an advanced platform for iLottery, sports book and loyalty/rewards. Scientific Games expects significant opportunities to cross-sell these products to the companies' respective customers"