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IGT: Takeover Candidate?

Newsdesk by Newsdesk
Thu 27 Mar 2014 at 06:10
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Struggling with declines in its regional markets in the United States and a challenging business climate overseas, International Game Technology is cutting its global workforce, and analysts are wondering if the slot giant isn’t ripe for acquisition.

Chief Executive Patti Hart said the company is shaving staff by 7% corporate-wide, 350-370 jobs, for a projected savings going forward of US$30 million-$50 million.

The company also has lowered its earnings guidance for fiscal 2014 from $1.28-$1.38 per share to $1-$1.10, citing lower revenue expectations in the States and “further degradation in the international currency, compliance, and importation environment.”

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said earlier this week he expects the news would “further erode any remaining near-term support behind IGT shares”. Specifically, he noted ongoing weakness in results from participation games, a major segment of the company’s US business.

Janney Montgomery Scott’s Brian McGill echoed that sentiment. “IGT has seen a clear deterioration in its base of premium games going back to fiscal year 2007, as its hit ‘Wheel of Fortune’ game has slowly lost popularity.”

Wheel of Fortune, he noted, has declined from 35,000 units at its peak to roughly 15,000.

Despite the high note struck in the fiscal first quarter— net income up 21% on a 2.1% increase in revenues achieved in the face of what the company termed “market challenges”—analysts see the Reno, Nev.-based manufacturer ceding more of its US-leading market share to re-energized rivals such as Bally Technologies, which has bulked up with the purchase of SHFL Entertainment, and WMS Industries, now under the umbrella of lottery giant Scientific Games. Japan’s Konami Gaming and Australia’s Aristocrat Technologies also are gaining share. Even smaller competitors like Novomatic, Multimedia Games and Australia’s Ainsworth have gotten more aggressive.

“IGT has such a large existing share of [casinos’] floors. Today, there are more choices out there at lower price points with nearly matching performance levels. They can buy fewer IGT games,” said Joel Simkins of Credit Suisse.

 “The macro weakness for the equipment sector is well understood given weak domestic GGR trends and few new major casino openings/expansions for new product sales,” Union Gaming Research said this week in a note to investors. “IGT’s gaming operations segment is more exposed to weak gaming play levels versus competitors given the number of games on variable fee. In our view, the company’s game operations performance is reflective of IGT’s game content issues and having put limited capex in the segment which has led to reduced floor space and yield pressure. The product sales picture the next couple years will be challenging.”

Mr McGill added, “Even if regional markets do begin to improve and grow revenues again, we would not expect IGT to see a material impact in yields. With more competition in the participation segment and the difficult task of trying to replace a hit we expect to see the number of premium games continue to decline going forward.”

So it’s not surprising, especially given the high-profile M&A activity in the US supply sector over the last year, to hear analysts talking about IGT as a prospective acquisition for any number of buyers enticed by the company’s free cash flow ($440 million-plus as of the first quarter) and its low debt ($2.1 billion) relative to EBITDA ($778 million in Q1).

And if analysts are right about the company’s dimming prospects, and with the stock (NYSE: IGT) off some 35% from its 52-week high, the level of interest could be growing.

“Private equity has shown more interest in the suppliers than previously assumed,” said Mr Simkins. “One of the bull case arguments for IGT shares is that it could unlock significant value from this business via a spin or other initiative.”

IGT is more than merely cheap. The company has emerged as a leader in the social gaming space via its 2012 purchase of Double Down Casino—a $500 million deal roundly criticized by Wall Street at the time. The interactive division delivered a 41% increase in revenue in the first quarter to $74.6 million.

“We credit management for making progress with this business in recent periods,” Mr Simkins said. “IGT is one of the leaders in the rapidly growing social gaming business.”

The company also has secured a new multiyear licensing agreement with Sony Pictures for use of the “Wheel of Fortune” brand across all platforms—slots, online games, mobile and free-play social games. It is launching a new interstate progressive jackpot network this year. It also has reached a new agreement with Action Gaming to solidify its 90%-plus share of the US video poker market.

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