Was Scientific Games $5.1 Billion Acquisition of Bally Technologies a Good Deal?

Last Friday, Scientific Games Corporation (SG) revealed that it has entered into a merger agreement with Nevada based gaming company Bally Technologies. As part of the deal, SG will acquire all of Bally’s stock at a 38 percent premium and refinance $1.8 billion of its existing debt, bringing the total cost of the acquisition to $5.1 billion.

The announcement was met by widespread approval by traders, evidenced by both Bally Technologies’ and SG’s stock surging shortly after SG issued its press release.

In what now has become an ongoing trend to consolidate the saturated gaming market, SG has become the third gaming company in as many months to acquire a larger competitor. Back in June, Amaya Gaming entered into a multi-billion dollar arrangement with the Rational Group, which in the short term should facilitate the reentry of leading online poker site PokerStars into the United States.

Then just two weeks ago International Game Technology (IGT), one of the gaming industry’s biggest slot machine providers, was sold to lottery behemoth GTECH for the magnificent sum of $6.4 billion dollars.

Given the ever-increasing competitive nature of the gaming industry, acquisitions are viewed as a strategic way for companies to effectively increase cash-flow and diversify their portfolios. But with most deals of this nature there are also drawbacks, thus raising the question as to whether the sector’s latest blockbuster deal will prove more beneficial to SG in the long run then if they continued on their own.

Growth outlook positive

Bally Technologies is generally viewed by analysts as a growth company. In the past three years, the company has exhibited double digit revenue growth, and is on target repeat this feat in 2014.

Bally’s also took steps of its own to consolidate the industry by purchasing SHFL Entertainment for $1.3 billion in November 2013. With the acquisitions, Bally’s product catalog was expanded to include table games and automatic shufflers and other electronic systems.

Scientific Games too is a profitable company, boasting the fourth largest revenues and highest EBITDA margin in the 12 company gaming sector.

Grouped together, SG and Bally’s should pose a bigger threat to IGT/GTECH than they would individually. To illustrate why, consider that SG generates the lion’s share of its revenues from outside North America, while Bally’s is the exact opposite. With the merger, powerful opportunities for the duo to expand their global reach open up.

A truly diversified portfolio

Perhaps the most immediate benefit of SG aligning with Bally Technologies is that their array of gaming offerings will expand immensely. Consider that many of Bally’s proprietary technologies are based in the mobile, social and interactive spheres. With the financial backing power of Scientific Games, the combo will be able to pitch these cutting edge, high-speed online products to potential buyers at a lower price point.

The acquisition will also allow the duo to further expand into burgeoning markets. And when one factors in that together, Bally’s and SG cover all nine of the industry’s existing product lines, it becomes clear that the forthcoming acquisition will enable them to provide clients with solutions to all their needs. This could prove paramount to Bally’s and SG’s future growth.

A shared vision

Both Bally’s and SG dedicate a large portion of their resources towards new product development and research. The two companies also realize the need to stay relevant in an industry that’s in a constant transitory state.

Furthermore, management teams from Bally’s and SG have worked together in the past, and have forged enduring relationships with one another. This prior experience and synergy will serve the companies well when their research teams are tasked with developing the next “big thing” in gaming.

These days it’s just not enough to manufacturer physical slot terminals and expect to stay afloat.

Debt not as bad as it seems

On paper, taking on an additional $1.8 billion in another company’s debt seems like a losing proposition, especially when that brings your already massive debt up to nearly $8.6 billion. But given Bally’s proven product line, annual returns and estimated EBITDA, the debt ends up being a small price to pay – well, at least as small as billions of dollars can be.

Of course, I’m hard pressed to believe that SG would have even pushed this deal through if it wasn’t for the two industry leaders in the gaming sphere teaming up first. But that’s besides the point.

In either case, the deal feels like a winner, if only because the brick and mortar casino industry is in a state of peril, and consolidation is necessary if companies hope to stay ahead of the steep iGaming curve.