Shares of International Game Technology spiked 11% in New York on Friday on news that global lottery giant GTECH and billionaire investor Ron Perelman had joined the list of suitors interested in buying the world’s largest maker of slot machines.
The increase follows the 14% jump in the stock (NYSE: IGT) recorded on 9th June, the highest for the Las Vegas-based company in five years, following a Reuters report on preliminary bids from private-equity titans Apollo Global Management, an owner of Caesars Entertainment, and Carlyle Group.
IGT had US$2.2 billion of debt at the end of March, suggesting an enterprise value approaching $6 billion. The company has hired Morgan Stanley to explore a sale and has indicated it would prefer a private-equity buyer, according to Reuters. Binding bids are due in a few weeks, the wire service said.
“A deal could make more sense for a financial buyer (perhaps someone already licensed in gaming) attracted by IGT’s massive free cash flow generation (estimated at US$300 million-plus in FY2015),” Union Gaming Research said. “In addition, such a buyer likely would have a strong view on how to extract value, fundamentally and strategically. The prospect of a strategic buyer (competitor) is far less likely in our view, primarily due to resultant leverage.”
GTECH, a subsidiary of Italy’s Lottomatica, owns gaming machine and systems-maker Spielo and the slots and systems manufacturer formerly known as Atronic. Mr Perelman controls another major global lottery provider, Scientific Games, which he chairs and which bought WMS Gaming last year and recently installed Gavin Isaacs as CEO. Mr Perelman’s interest in IGT has been expressed through his primary investment vehicle, MacAndrews & Forbes Holdings, which he wholly owns.
IGT, which is estimated to control 70% of the North American machine gaming market, has struggled in recent years as the US market flattened after the recession, dampening new and replacement sales, and re-energized competitors large and small have steadily chipped away at its dominance. The business climate internationally has been similarly challenging.
The most recent quarter saw the company lower its earnings guidance for the balance of fiscal 2014—citing lower revenue expectations in the States and “further degradation in the international currency, compliance, and importation environment”—and announced it was cutting 7% of its workforce.
Its prospects are not expected to improve in a meaningful way, according to analysts.
“A potential buyer would have to consider the weak macro environment [in the US] for equipment manufacturers and company-specific weakness,” said Union Gaming. “The macro environment for slots will continue to be challenging, with few new casino openings/expansions this year and next year not looking much better. Floor space is increasingly competitive, with smaller manufacturers growing their share. A large casino operator noted its purchase of slot product from 11 providers last year, which is nearly double the number in previous years. Additionally, e-tables are gaining floor space across the [US] landscape, further pressuring square footage.”
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