A Good Time to Sell This Gaming Company
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, Scientific Games (NASDAQ: SGMS) has agreed to acquire gaming equipment company WMS Industries (NYSE: WMS) for $26 in cash per share, or around $1.5 billion. The purchase price represented a 60% premium to WMS’ prior trading price of around $16.37 per share. However, if the buyout fails to materialize, WMS’ stock price might fall to below $16 per share. Is this acquisition a good move for both companies?
The Two Leading Gaming Companies
Scientific Games is the leading provider of customized, end-to-end gaming solutions to lottery and gaming companies globally, operating in three main business segments: Printed Products, Lottery Systems and Gaming. In 2011, the majority of its revenue, $503 million, or 57.2% of the total revenue, was generated from the Printed Products segment. The Lottery Systems and the Gaming segment contributed $242.3 million and $133.5 million in revenue, respectively.
WMS Industries is the designer and distributor of games, video and mechanical reel spinning gaming machines and video lottery terminals, operating in 214 tribal jurisdictions, 31 state jurisdictions, and 143 international gaming jurisdictions globally. WMS’ revenue was generated from two main segments: product sales and gaming operations. In 2011, the product sales were $428.3 million, accounting for 62.1% of the total revenue, whereas the Gaming operations contributed $261.4 million, or 37.9% of the total revenue. Trailing twelve months, WMS generated $70 million in net income, $165 million in operating cash flow, and nearly $203 million in EBITDA.
100% Debt-Financing Deal
Scientific Games bought WMS for $1.5 billion, $85 million of debt and $55 million of cash, in September 2012. The purchase price valued WMS at 7.4x trailing EV/EBITDA, or 6x LTM adjusted EBITDA. Including $90 million in anticipated run-rate synergies, the valuation became much cheaper at 4.4x EV multiples. At the current trading price of $9.50 per share, Scientific Games is worth only $807.4 million, much less than the $1.5 billion price tag. The company intended to finance this acquisition by 100% debt. As of September 2012, Scientific Games had $400 million in total stockholders’ equity, $136 million in cash and nearly $1.46 billion in long-term debt. Including the debt financing for this deal, the combined company would have $3.11 billion in total debt.
Potential Synergies in the Combined Company
The deal would create a global leader in lottery & gaming software and hardware. Trailing twelve months, the combined company would have $1.6 billion in revenue and $579 million in EBITDA, excluding $90 million in anticipated synergies. WMS generated 100% of its revenue from Gaming, while Scientific Games generated sales from Instant Tickets (54% of total revenue), Gaming (18%), and Systems (28%). The majority of the combined company's revenue would be generated from Gaming, accounting for 53% of the total revenue, whereas Instant tickets and Systems generated 31% and 16% of the total revenue, respectively. Scientific Games expected that capital expenditure synergies would be $20 million, and the EBITDA synergies might reach $90 million at the end of Year 3. With synergies, combined EBITDA was $669 million. Thus, the net debt/EBITDA for the combined company was around 4.4x.
Lowest Margin and Highest Valuation
Compared to WMS’ peers, including Bally Technologies (NYSE: BYI) and International Game Technology (NYSE: IGT), WMS generated the lowest operating margin at 14%. The operating margin of Bally and International Game were 23% and 26%, respectively. The buyout valuation seems to be the highest compared to the valuations of both Bally and International Game in the market. With the total market capitalization of $1.95 billion, Bally is valued at 7.96x EV/EBITDA. International Game is currently worth $4.05 billion, and it is valued at nearly 7x EV/EBITDA.
As the deal has moved WMS’ share price by 60% to $24.70 per share, I think investors might just sell the shares at the current price and move on. With a 100% debt-financing deal, a burden of patent lawsuits against WMS, and a long pending time, there is a high probability that Scientific Games might withdraw the deal.
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