A takeout price much higher can still make PE (and current shareholders) a lot of money. Stay tuned for Hedgeye's 1pm EDT conference call.
THE CALL TO ACTION
IGT could be worth $18-22 to a private equity firm which would yield an IRR of 21%-33% by our estimation. The stock closed at $14.31, up 14% but considerable upside remains to our target valuation. Of course, no deal has been announced, nor has IGT made any announcement – only a Reuters article citing a source that IGT has hired an investment banking firm to sell the company.
Moreover, tragically low replacement demand could put near-term earnings slightly at risk with little relief in overall slot demand until 2016. Finally, regulatory impediments would likely result in a year-long closing process. Nevertheless, there is real cash flow and real value in the name, in our opinion, and private equity could make this a profitable deal for itself and current shareholders.
THE SETUP
A Reuters article yesterday suggested IGT had hired Morgan Stanley to pursue the sale of the company. There were enough details in the article to conclude that where there is smoke, there is fire. It makes sense to us - Hedgeye had already planned a BlackBook report and conference call for later this week analyzing a potential LBO scenario.
We’ve revisited the private equity option many times over the years. IGT’s cash flow and low capital intensive business model always seemed to be a candidate for the private marketplace, especially at low points in the cycle similar to now. The main hurdle has always been regulatory in nature. As someone who has been through the licensing process in 200 jurisdictions through my Board affiliation with Shuffle Master, I can speak to the uphill battle private equity would face.
However, we have seen private equity more involved in the gaming space in the last 8 years: HET and STN went private and Fortress pulled the plug, expensively, on a deal to bring PENN public in 2008. More recently and more directly, at least 4 private equity firms bid on WMS with 1 making it to the final round.
Other private equity/gaming relationships include Blackstone buying Cosmopolitan and the firm was involved in The Cromwell as well as Caesars; Fortress is the sponsor of GLPI; Icahn Enterprises sponsorship of Tropicana Entertainment; and, MacAndrew & Forbes has an ongoing interest in Scientific Games.
SUITORS
So what’s the play for PE? Buying a high cash flow generative company, despite secular and cyclical issues, at the low end of the slot cycle for a relatively cheap multiple. Bring IGT public again in 4-5 years when international demand should be humming and more domestic jurisdictions should be open or in the process of opening. Oh and there is a social gaming asset that may not be core and carries a multiple higher than the core business. A coincident sale of Interactive could pay for much of the equity contribution for the LBO.
PE would likely affect a management change, improve employee morale, and stem the brain drain of the last few years. We do not believe PE would value current CEO Patti Hart’s skill set. However, John Vandemere, CFO, could be a candidate for the role to keep some continuity. We have grown an appreciation for Mr. Vandemere’s cash flow focus and ability to cut costs – 2 skills necessary for an LBO CEO.
What’s the play for another manufacturer? Well, it would almost have to be an international slot manufacturer such as Aristocrat or Lottomatica. However, we believe this outcome is less likely than a private equity bid.
HEDGEYE CONFERENCE CALL
I will be hosting a 1:00 pm EDT conference call today to discuss Hedgeye’s thoughts and analysis on IGT as a private equity play. We will also discuss the near and long term issues facing IGT and look at potential catalysts should a sale not reach fruition.
If you are interested in joining us, please contact your Hedgeye salesperson or email for more information.