The world of gaming suppliers is suddenly a very active place. Consider recent events:
• Dick Haddrill has stepped down as chairman of the board of Bally to return as its CEO, replacing Ramesh Srinivasan, who was his own chosen successor.
• IGT is reported to be on the sales block, which the company has not denied in any way.
• Gavin Isaacs has been appointed CEO of Scientific Games, in what had been one of the worst-kept secrets in industry history.
The turmoil at the top has led to considerable speculation—Novomatic and GTECH as possible buyers of IGT, for example; and considerable activity as in SGMS stock jumping 11 percent on the day Isaacs was announced.
Nor is activity limited to what might be called the Big Three. On the day IGT stock jumped on buyout speculation, smaller fry like Multimedia Games saw their stocks bump up, too.
And no wonder. As Todd Eilers of Eilers Research pointed out, if IGT can be speculated to be buyable at 7.4 times forward EBITDA, it can be good news for MGAM, an ascending company selling at just 6 times.
Here are some of our observations:
• Bally right now is the best-run, best organized of the major gaming technology companies with a clear and simple strategy, complementary business lines, and a smooth-as-silk integrative leader in Haddrill.
At 7.8 times forward EBITDA, the stock might not be cheap compared to peers, but it could be cheap given its prospects.
• IGT being for sale is a surprise in the sense that the company has for so long been seen as the industry giant and any change seemed remote.
But IGT isn’t such a giant, anymore, as North American ship share has fallen to around 30 percent and its gaming operations franchise continues to erode.
Its market cap of $4.9 billion isn’t all that much greater than GTECH at $4.6 billion, and its $700 million in trailing EBITDA is half of that of GTECH.
And, as was pointed by several analysts, IGT generates $350 million in free cash flow, which can be very attractive to private investment groups. An enterprise value-to-EBITDA of around seven times makes it affordable.
So, IGT is a big bite for anyone given its sheer size, but it is affordable, and is still the industry’s franchise company.
• Scientific Games is the most interesting prospect of them all.
SGMS is all over the place with different business lines and headquarters everywhere.
If Isaacs can bring a clear and single vision to the company, as Haddrill has done at Bally, the $10 stock will go to $20 and can go up from there if he executes on that vision.
The risk is that even as capable an executive as Isaacs can find SGMS a morass. If so, the solution might be to right-size the company into a simpler model.
• The Aussies, Austrians, Japanese and Brazilians.
International companies are increasingly aggressive in the U.S., and they are increasingly successful as they have deep pockets to finance their invasions.
The slot floor manager of one prominent Indian casino in California recently observed that he purchased 375 machines in the past year from 21 suppliers and none of them was IGT.
Certainly, Aristocrat has reinvigorated its content thanks to the addition of game designers such as Joe Kaminkow. Ainsworth, likewise, is getting kudos for its latest content.
Aruze and Konami from Japan have been making inroads for several years. Now Novomatic from Austria and Ortiz from Brazil have set up North American headquarters in South Florida.
And GTECH has been restructured to be a single company headquartered in the US as opposed to Italy, where it is still listed on the Milan stock exchange.
In other words, there is a lot of fluidity in the supplier space, and how it flows is very uncertain, but that it is dynamic is certain.