Shares of Scientific Games fell 6.5% in trading on Nasdaq yesterday on reports that a trio of big banks have been unable to sell billions in loans to help finance the company’s US$5.1 billion acquisition of slot giant Bally Technologies.
Bloomberg reports that JPMorgan Chase, Bank of America and Deutsche Bank “put off syndicating” $3.19 billion worth of debt, known as a “bridge loan,” after failing to recruit interest from investors by a 3rd October deadline.
The banks have already marketed about $2 billion in separate loans to fund the merger, but the second bridge didn’t catch on as concerns over a global economic slowdown have sent yields on junk bonds higher. If the loans aren’t paid down with a bond sale, SciGames could be facing skyrocketing interest rates.
The bridge includes a $485 million seven-year secured loan that pays interest at 5.75%, a $2.2 billion eight-year unsecured component that pays 7.25%, and a $500 million 10-year unsecured component that pays at least 7.75%, according to sources cited by Bloomberg. The rate on all three loans would increase by 0.5% every 90 days until the acquisition is closed or the debt is repaid with bonds.
SciGames is paying $83.30 per share for Las Vegas-based Bally and assuming $1.8 billion of Bally debt.
The merger, which is expected to be completed this year, is one of several high-profile combinations in 2014 targeting the ailing US machine gaming sector. The largest has been Italian lottery giant GTECH Holdings’ $6.4 billion purchase of IGT. Aristocrat Leisure is buying Video Gaming Technologies, a leading supplier to US Native American markets, for $1.3 billion. Payment processing provider Global Cash Access is buying slot-maker Multimedia Games for $1.2 billion.
Combined, Bally and SciGames would have produced more than $3 billion in revenue and $1.3 billion in cash flow over the 12 months ended 30th June, but the merger has saddled New York City-based SciGames, a leading supplier of lottery products and systems (Nasdaq: SGMS), with debt at eight times EBITDA, according to Moody’s Investors Service. Moody’s expects the ratio to be reduced to 6.5 times through a combination of cost-cutting and pay-downs out of combined free cash flow. But it “will still be considered high,” the ratings agency says.
The cost cuts envision a significant reduction in the merged companies’ non-manufacturing and production workforce, as high as 21%, according to a presentation the two made to investors last month. In all, around $144 million in cuts are expected in the merger’s first year.
SciGames’ workforce doubled to just under 5,000 as a result of last year’s $1.5 billion purchase of US slot-maker WMS Industries. Bally employs nearly 4,000 people, including staff acquired with last year’s $1.3 billion purchase of Las Vegas-based SHFL entertainment, a leading provider of table games and supporting technologies and systems.
