Something funny has happened since IGT offered to acquire Everi through a merger in which its shareholders would own 54 percent of the new, U.S.-listed IGT and Everi holders would get 46 percent—both stocks have fallen.
IGT has lost around 20 percent of its market value as the purchase is just part of the company’s reorganization. The other part is splitting off its considerably larger lottery division. Everi has lost around 15 percent of its value. Both are at 52-week lows.
Over time, this reaction should correct. The merger just makes too much strategic sense. The post-merger enterprise value-to-EBITDA ratio of 3.2 to 3.4 times is both manageable and likely to decline as free cash flows and grows. Everi’s fintech products are a natural fit into IGT’s systems business. The companies have experienced and capable management teams. And as we previously mentioned, Mike Rumbolz, as chairman of the merged company, will apply his strategic and people skills to enhance chances of executional success.
On the gaming operator side, Bally’s stock is more than 10 percent below the $15 a share that primary owner Standard General is offering to buy the 71 percent of the company it doesn’t own. It’s worth noting that Bally’s stock was near $20 less than a year ago and ran past $70 three years ago. So much for all of those much-touted plans to grow through digital gaming and a swell new casino in the heart of Chicago. We have one word for investors who bought into the touts at those prices—ouch!
The desultory investor response to these proposed transactions is disappointing, no doubt especially to those who are engineering them.
But they represent a reality that gaming investors have to face: The low valuations of gaming stocks in the face of a maturing industry will induce more merger and acquisition proposals as ways are sought to increase values, and not all deals will evoke shouts of hallelujah.
One solution would be for investors to wake up and give gaming companies the valuations they deserve. It’s ridiculous to see healthy, growing supplier companies selling for five, six and seven times EBITDA, or to see investors price regional casino stocks as though seven times was somehow the standard. Regional casinos sell for a third and more below hotel companies despite being hotels themselves—with money-making casinos attached.
That seems irrational. But reality is reality. As the old Wall Street saying goes, the market can stay irrational longer than you can stay solvent (Having said that, Light & Wonder is trying a neat trick by dual-listing in Australia where gaming valuations are more rational).
And yet, as mentioned, more mergers and acquisitions will be proposed as companies try to find ways to turn embedded value into equity value.
We recently touched on some companies we think can be acquisition targets: AGS, whose growing product line and jurisdictional realms are worth more than five times EBITDA, plus future growth; Inspired Entertainment, which is the by-far leader of virtual gaming, a potentially huge market, and a company growing elsewhere in its product line; Full House Resorts, whose potentially very valuable new properties in Colorado and suburban Chicago are being priced near zero.
There are plenty of other possibilities.
Where does Monarch Casino go with its growing cash horde, two outstanding properties and no apparent growth plan? Or Golden Entertainment, also with plenty of cash to be a buyer? How about all of those cash access-payments companies that could be targets of big suppliers looking to match what IGT will be able to do with Everi’s fintech products? Then there are a passel of online affiliates bleeding money as they compete. Some of them might see the wisdom—or necessity—of merging or selling to an acquisitive competitor like Better Collective.
In other words, we could see a number of deals announced in the coming months and years. And that presents opportunities for alert investors.
