Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

A Good Time to Sell Scientific Games Corp (SGMS)

Page 1 of 2

Recently, Scientific Games Corp (NASDAQ:SGMS) has agreed to acquire gaming equipment company WMS Industries Inc. (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.

Scientific Games CorpWMS 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.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!