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

Scientific Games Corporation (SG) announced last Friday that it has agreed to merge with Nevada’s Bally Technologies. The deal involves SG buying all of Bally’s stock at a 38 percent premium and refinancing Bally’s existing debt of $1.8 billion, making the acquisition’s total cost $5.1 billion.

The announcement received widespread approval from traders, as demonstrated by the surge in both Bally Technologies’ and SG’s stock shortly after SG released its press statement.

In the latest move of the continuing trend to consolidate the saturated gaming market, SG has become the third gaming company in as many months to purchase a larger rival. In June, Amaya Gaming undertook a multi-billion dollar deal with the Rational Group, a move that should expedite the reentry of top online poker site PokerStars back into the US market in the near term.

Just two weeks ago, International Game Technology (IGT), a leading slot machine provider in the gaming industry, was acquired by lottery giant GTECH for a staggering $6.4 billion.

Considering the escalating competition in the gaming industry, acquisitions are seen as a strategic approach for companies to boost their cash flow and broaden their portfolios. However, such deals usually come with downsides, prompting the question of whether the latest major deal in the sector will provide more long-term benefits to SG than if they had continued independently.

Growth outlook positive

Analysts typically regard Bally Technologies as a growth company. Over the last three years, the company has shown double-digit revenue growth and is set to replicate this success in 2014.

Bally’s also initiated its own industry consolidation efforts by acquiring SHFL Entertainment for $1.3 billion in November 2013. This acquisition broadened Bally’s product range to incorporate table games, automatic shufflers, and other electronic systems.

Scientific Games is also a profitable company, proud to hold the fourth highest revenue and the largest EBITDA margin in the gaming sector, which consists of 12 companies.

When combined, SG and Bally’s pose a more significant threat to IGT/GTECH than they would on their own. This is due to SG’s majority revenues coming from outside North America, contrasting Bally’s which mainly comes from within. Their merger opens up potent opportunities for them to broaden their global influence.

A truly diversified portfolio

The most immediate advantage of SG’s alliance with Bally Technologies is the significant expansion of their gaming offerings. It’s worth noting that a large portion of Bally’s unique technologies are rooted in mobile, social, and interactive domains. With the financial support from Scientific Games, this partnership can offer these advanced, high-speed online products to prospective buyers at a reduced price.

The acquisition will also enable the pair to venture further into emerging markets. Considering that Bally’s and SG collectively encompass all nine existing product lines of the industry, it is evident that the impending acquisition will equip them to cater to all client needs. This could be critical to the future growth of Bally’s and SG.

A shared vision

Bally’s and SG both allocate a significant amount of their resources to research and the development of new products. They also understand the importance of remaining current in an industry that is continually evolving.

Additionally, the management teams from Bally’s and SG have collaborated previously, establishing lasting relationships. This past collaboration and synergy will be beneficial when their research teams are assigned to develop the next big innovation in gaming.

Nowadays, simply manufacturing physical slot terminals is insufficient to remain viable.

Debt not as bad as it seems

On paper, assuming an extra $1.8 billion of another company’s debt may appear as a disadvantageous deal, particularly when it escalates your existing substantial debt to approximately $8.6 billion. However, considering Bally’s established product range, yearly returns, and projected EBITDA, the debt becomes a relatively minor expense – as minor as billions of dollars can be.

Naturally, I find it difficult to believe that SG would have approved this deal if not for the collaboration of the two industry leaders in the gaming world. However, that’s not the main issue.

Regardless of the situation, the deal seems advantageous, particularly due to the current precarious state of the traditional casino industry. Consolidation becomes essential for companies to maintain a leading position amidst the intense competition in the iGaming sector.