Australian slot machine giant Aristocrat Leisure Limited (ALL) is tipped to spend around AU$100 million (US$71 million) annually on mergers and acquisitions (M&A), with considerably larger activity on the cards, according to ratings agency Fitch.
In a Wednesday report in which it affirmed the Long-Term Issuer Default Ratings of Aristocrat and multiple subsidiaries, Fitch broadly praised the company’s balance sheet and credit metrics, noting that the company has a long history of operating well inside its net 2.5x leverage target.
And it is this financial discipline that opens the door for substantial M&A activity, particularly in the wake of the AU$1.3 billion (US$926 million) war chest left over from Aristocrat’s failed attempt to acquire UK platform provider Playtech PLC.
“Fitch assumes AU$100 million of tuck-in acquisitions annually,” the ratings agency said, adding it “also expects ALL to pursue larger, strategic M&A given its strong excess cash balances from the completed AU$1.3 billion equity raise that was earmarked for Playtech.”
Such M&A activity will predominantly take place in the real-money gaming (RMG) sector, given Aristocrat’s strong financial flexibility and solid portfolio of slot content.
“ALL’s credit profile has headroom for M&A and Fitch expects future acquisitions to be funded in a manner that is consistent with ‘BBB-‘ leverage metrics,” Fitch said, noting the growing importance of digital to the Aristocrat business.
“ALL’s digital business has grown meaningfully through both M&A and heavy investments in new content. ALL’s previous acquisitions of Plarium and Big Fish increased ALL’s digital business from 16% of total revenue in 2017 to 40% at YE 2019. Fitch believes there are limited synergies into Aristocrat’s land-based segment, but its digital products provides healthy diversification to its core slot business (as evidenced during the pandemic).”
While Fitch said it favors the traditional slot business due to the volatility of cash flow in digital, it also “recognizes the benefits digital provides in terms of product diversification and scale.
“In 2020, Digital grew over 30% due to more consumers remaining at home using digital products, which helped to offset the significant declines seen in the legacy slot business.”
Pointing specifically to a new credit facility obtained by Aristocrat to refinance its existing credit facility, to which it has assigned a “BBB-“ rating, Fitch said the company’s gross leverage will decline from 2.0x as of 30 September 2021 to the mid-1x range going forward, “providing meaningful headroom for future strategic M&A.”
RelatedPosts
