Lions Gate Entertainment Corp. (USA) (LGF), Bally Technologies Inc. (BYI), SHFL entertainment Inc (SHFL): The Top Two High-Return, Small-Cap Stocks

Bally Technologies Inc. (NYSE:BYI) main operation is in the U.S., accounting for around 84% of the company’s revenue while the international region represents as much as 53% of SHFL entertainment Inc (NASDAQ:SHFL)’s sales. The acquisition of SHFL will increase the revenue percentage share of the international market to 24%. Moreover, SHFL will bring to Bally’s a more diversified revenue stream including utility, proprietary table games and electronic table systems. Bally Technologies Inc. (NYSE:BYI) expects to create around $30 million in annual synergies, thanks to economies of scale, a more efficient supply chain, regulatory licensing and other marketing and trade-show costs.

At a recent price of $70.10 per share, Bally is worth around $2.9 billion. The market values Bally at 10.4 times its trailing EBITDA. I personally do not think Bally is paying an expensive price for SHFL entertainment Inc (NASDAQ:SHFL)’s buyout. At $23.25 per share, SHFL entertainment Inc (NASDAQ:SHFL) is valued at around 11.2 times its trailing adjusted EBITDA, including the synergies of $30 million.

This seems to be a good deal for Bally, as it would create “one of the world’s largest end-to-end gaming technology innovators.” according to Bally’s CEO Ramesh Srinivasan. However, what I worry about is the fact that Bally is financing the deal with debt. Including expected synergies, the pro-forma leverage level is quite high, at 4.6 times total debt/adjusted EBITDA. At closing, Bally estimated that the leverage ratio would be around 4, and the company would de-lever at a rapid rate after the deal.

My Foolish take

With their market leading positions, Lions Gate Entertainment Corp. (USA) (NYSE:LGF) and Bally are expected to deliver decent long-term results to patient investors. However, because of Lions Gate’s high valuation and Bally Technologies Inc. (NYSE:BYI) post-acquisition high leverage level, investors should not put a high percentage of their capital into those two stocks.

The article The Top 2 High-Return, Small-Cap Stocks originally appeared on Fool.com and is written by Anh Hoang.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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