The acquisition of IGT by GTECH plays into a theme we have long espoused: the accelerating pace of globalization and technology convergence in the gaming industry.
This has become evident in events such as the alliance between 888 and Caesars, deals between bwin.party and MGM Resorts and Boyd, and with Amaya acquiring Cadillac Jack and Rational Group.
Much of this has been predictable. Some of the transformation has surprised, such as the explosive emergence of social gaming, especially the free-play part of it now offered by gambling companies like IGT and Caesars.
And some of it has been the empowering nature of the Internet, such as exchange wagering pioneered by Betfair, and now starting its integration into more conventional forms of online gambling, such as account wagering in the US.
Now, we have reached a new stage in which the convergence is extending to mergers resulting in international giants reaching into every distribution channel and technology.
Clearly, the merger of the world’s biggest lottery company with the world’s biggest gaming supplier is the ultimate example. But the Amaya acquisitions, and Bally-SHFL and Scientific Games-WMS mergers, also fit into the new and broader strategic structures.
The questions now are: Who’s next? What’s next? What does this mean for investors?
• Who’s next? With GTECH and Scientific Games merging with slot-dominant companies, Athens-listed Intralot could be the next candidate to seek a similar acquisition.
The world’s second largest lottery company has been expanding assertively in the U.S. in recent years, but not on the slot front like GTECH.
Whether Intralot wants to follow we don’t know. But if it does, there are only so many significant candidates left. One of the most attractive might be Multimedia Games.
MGAM is small, to be sure. But it has popular products, an increasing number of jurisdictional licenses, and a central server system that a lottery company can appreciate.
Aristocrat also might be attractive given its relatively low valuation, systems business, and strength in Austral-Asia, though the guys Down Under have a lot of Aussie pride and might resist being absorbed into a foreign company.
And while the big mergers have been on the supplier side, a major casino operator might want to outright own an experienced online company, with 888 and bwin.party both looking attractive and affordable. Certainly, Genting has shown a willingness to buy internationally.
• What’s next? Merging companies will talk about synergies, compatible cultures, complementary business lines, economies of scale, internationalizing their opportunities.
But combining companies from entirely different industries with sprawling global operations and scattered headquarters for different business segments also brings the risks of being too big and diverse to manage, and of being unresponsive to shareholders and too administratively burdened to innovate.
If they succeed, a whole new era opens and gambling has truly matured into a global industry.
• What does it mean for investors? Given the valuations awarded in the recent acquisitions, we might see permanently higher stock prices, free cash flow generation that drives further growth and returns capital to shareholders, and the attraction of more mainstream investors.
If things don’t work out, today’s consolidations might lead to tomorrow’s restructurings and right-sizings.
