Gaming Insider: Analysts split on impact of mergers among gaming manufacturers

26 January 2015

LAS VEGAS -- The past 18 months were a transformative period for Nevada's slot machine industry.

The next 18 months won't contain the fireworks associated with five multibillion-dollar corporate mergers, but the time period could foretell the manufacturing industry's future.

The five transactions placed a large swath of Nevada's gaming equipment manufacturing business into the hands of the lottery industry.

According to Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski, the mergers created larger conglomerates focused heavily on "human capital management and business efficiency enhancement efforts."

While the companies sort through their integration efforts, Wieczynski worries the transition "could serve to the detriment of content and hardware innovation."

To recap, in October 2013, lottery provider Scientific Games Corporation spent $1.5 billion to buy slot machine maker WMS Industries Incorporated. Two months later, gaming equipment manufacturer Bally Technologies, Inc. finalized its $1.3 billion purchase of table game producer SHFL entertainment.

Last November, Scientific Games spent $5.1 billion to acquire Bally. In December, payment processing company Global Cash Access completed its $1.2 billion acquisition of slot machine company Multimedia Games, Inc.

Still awaiting its final approval is the acquisition of slot machine giant IGT - International Game Technology by Italy-based lottery giant GTECH Holdings for $6.4 billion.

Wieczynski figures the slot machine industry consolidation is over. "Although several smaller merger and acquisition opportunities remain in the marketplace today, we believe the majority of landscape-altering (sales) has ended," Wieczynski said.

The transactions opened a window of opportunity for smaller slot machine manufacturers — Konami Gaming, Inc. and Ainsworth Game Technology, among others. The companies can focus on creating products rather than integrating businesses.

However, Wieczynski cautioned there is still a generally negative investment outlook toward the manufacturing sector. "By and large, absent a financially compelling shift in game play mechanics or functionality, we expect casino operators to continue to judiciously deploy slot capital, as has been the case over the past several years," he said.

Other analysts believe the consolidation was good for the slot machine industry.

Global Cash Access provides casinos with ATMs, point-of-sale and debit-card transactions and offers slot machine ticket redemption and jackpot kiosks. Buying Multimedia Games allowed the company to expand its business model and provide different product lines to its casino customers.

Eilers Research founder Todd Eilers told investors Global Cash acquired one of the gaming industry's best emerging slot machine makers, which has been gaining market share over the past four years. "The combined company should produce meaningful free cash flow," Eilers said.

But he didn't see any "strategic" cost savings by the combination of the companies "other than basic corporate overhead and tax advantages."

Macquarie Securities gaming analyst Chad Beynon called Scientific Games "a gaming superpower." The New York City-based lottery company is more than 30 percent owned by New York financier Ronald Perelman.

By acquiring and WMS and Bally — two of the gaming industry's top three slot machine providers — as well as Bally-owned SHFL, Beynon said Scientific Games can diversify its geographic reach, merge business segments, eliminate unnecessary costs and appoint top executives.

The goal is to distribute gaming content across multiple sectors, including casinos, lotteries and interactive platforms.

"We view the combined company as the best play in the space given industry-leading content and innovation, highly recurring cash flow businesses, strong technological solutions and top management led by CEO Gavin Isaacs," Beynon said.

Isaacs, he said, "is the right leader" to make cost-cutting changes quickly and maintain a corporate culture.

Once the GTECH-IGT deal is final, the two lottery companies will control many of the games that make their way onto casino slot machine floors.

By completing the Bally buyout in November, Scientific Games gained a lead on the merged GTECH-IGT business.

"The acquisition positions the company squarely for future growth and diverse opportunities, unique to the industry," Beynon said. "In a market where gaming operators remain (capital expenditure) constrained, we believe Scientific Games will serve as the new one-stop shop as the convergence of gaming continues."

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