U.K.-based holding company NewCo will list on NYSE
The recent wave of industry consolidation continued last week with the announcement of yet another blockbuster deal involving the supply sector.
In mid-July, International Game Technology, the world’s largest slot machine manufacturer and by far the market leader in game sales, announced that it has entered into a definitive merger agreement with casino and VLT supplier and lottery industry giant GTECH S.p.A., under which GTECH will acquire IGT for a total of $6.4 billion.
It is the third major consolidation move in the past year, and one that creates a diversified, end-to-end gaming supplier along the lines of Scientific Games, another longtime lottery giant which last year acquired top-5 slot manufacturer WMS Gaming.
The IGT/GTECH deal creates another industry behemoth, which will strive to maintain IGT’s spot at the top of the slot market in competition with Scientific Games and Bally Technologies, which was the lead company in last year’s other mega-merger when it acquired table game supplier SHFL entertainment.
Consolidation on the supply side of the business has been the story of the year in the industry. Just a week before the IGT announcement, another of the top-five slot manufacturers, Australia’s Aristocrat Leisure Ltd., announced that it is acquiring Tennessee-based Video Game Technologies, one of the top suppliers in the Class II Indian gaming market.
Analysts say the consolidation may not be over yet, with a supply sector that consists of a collection of smaller niche companies, Class II suppliers entering Class III markets, and international companies looking to enter the North American market.
But for IGT and GTECH, the deal makes sense from a strategic standpoint. “We are extremely pleased to reach a definitive merger agreement with GTECH as a result of our exploration of strategic alternatives to increase shareholder value,” said IGT CEO Patti Hart in a statement. “This outstanding combination of two global leaders redefines the future of the gaming industry. Together we are uniquely positioned to provide the industry’s broadest and most innovative portfolio of best-in-class products, solutions and services.”
Of the $6.4 billion acquisition price, $4.7 billion will be a combination of cash and stock, along with the assumption of $1.7 billion in debt by a new entity: IGT and GTECH will combine under a newly formed holding company organized in the United Kingdom, called NewCo.
The new company will do business as GTECH plc. IGT will be a subsidiary and brand of the merged company.
IGT shareholders will receive an aggregate value of $18.25 per IGT share in a combination of $13.69 in cash plus 0.1819 ordinary shares of NewCo for each share of IGT common stock. GTECH shareholders will exchange each of their existing GTECH shares for one newly issued NewCo share.
The transaction is expected to close during the second quarter of 2015, subject to anti-trust clearances, regulatory approvals and approval of shareholders of both companies. The deal was approved unanimously by the directors of each company.
“The new company combines best-in-class content, operator capabilities, and interactive solutions, joining IGT’s leading game library and manufacturing and operating capabilities with GTECH’s gaming operations, lottery technology and services,” the statement said. “The merger drives competitive scale across multiple businesses, geographies and product lines and is expected to achieve over $280 million in synergies.”
In a conference call with investors after the statement was released, Hart and IGT Chief Financial Officer John Vandemore said those synergies will be realized through elimination of duplicative manufacturing efforts, combining R&D efforts, consolidating slot platforms, and eliminating duplicative corporate support activities over a three-year period.
In an exclusive interview with former IGT Chairman Chuck Mathewson agreed that the combination of IGT and GTECH made sense.
“There are so many synergies between the two companies,” he said. “They’ll be able to build a company that will serve all aspects of the gaming world.”
Mathewson and corporate activist Jason Ader last year forced IGT to add a board member representing their group, and to consider shareholder value at all points. He believes that this deal does that.
“This should be good for all the shareholders,” he said
End-to-End Supplier
On the conference call, Hart said the combination of IGT and GTECH will create “the global leader in end-to-end gaming.”
“The combination really creates leadership across virtually all segments of gaming, including the position we’ve enjoyed at IGT for some time as the No. 1 gaming equipment supplier,” Hart said, “and adding the success our friends at GTECH bring to that as the No. 1 lottery business, (a position) GTECH has worked hard over many, many years to establish.
“In addition to that, our top-tier social gaming business through DoubleDown and the combination of our interactive real-money wagering businesses also provides a market leadership position for the company.
“As we looked at the business, one of the things we found to be most attractive was the global scale that comes from diversity—diversity in products and diversity in our geographic mix, which provides a much more balanced portfolio for the company, for our customers and for our shareholders.”
“This transaction is transformational for our business,” said GTECH CEO Marco Sala. “With limited overlap in products and customers, the combined company will enjoy leading positions across all segments of the gaming landscape. It will increase our global scale and with a full suite of offerings and robust customer relationships across the client spectrum, and the new company will be uniquely positioned to take advantage of the ongoing convergence across global gaming market segments.
“Our expertise across these segments and greater ability to invest in R&D will improve player experiences and benefit our government and business clients. The transaction will significantly enhance our cash flow and financial strength, and provide clear and achievable cost and revenue synergies.”
The transaction has been unanimously approved by the boards of directors of both companies and represents a 46 percent premium to the closing price of IGT’s common stock on June 6, the last trading day prior to initial reports that IGT was exploring a potential sale.
The combined entity would have over $6 billion in revenues and over $2 billion in EBITDA based on the last 12 trailing months.
The transaction will include an election mechanism for IGT shareholders to elect all-stock, all-cash, or mixed consideration subject to proration in accordance with the terms of the merger agreement.
While the new holding company, NewCo, will have its corporate headquarters in the United Kingdom, it will maintain operating headquarters in each of Las Vegas, Providence, Rhode Island, and Rome. NewCo will apply for listing solely on the New York Stock Exchange. IGT’s shares will cease trading on the NYSE and GTECH’s shares will cease trading on the Borsa Italiana. It is expected that NewCo will operate under the name GTECH plc.
As a result of the transaction, it is anticipated that existing IGT and GTECH shareholders will own approximately 20 percent and 80 percent, respectively, of NewCo ordinary shares, and the De Agostini family, currently majority shareholders of GTECH, is expected to hold approximately 47 percen
t of NewCo’s outstanding ordinary shares.
GTECH expects to finance the cash portion of the consideration through a combination of cash on hand and new financing.
Upon the closing of the transaction, the initial board of directors of NewCo will be comprised of 13 directors including Sala, who will serve as the CEO of NewCo; five directors to be appointed by IGT from IGT’s existing board of directors, including Phil Satre, IGT’s chairman, who will serve as chairman of NewCo; Hart, who will serve as vice chairwoman; and seven directors to be appointed by GTECH, one of whom will serve as a vice chairman.
On the conference call, Hart said issues like realignment of headquarters, R&D teams and executive teams will be addressed within the coming months.
“We feel strongly that the combination of our R&D efforts further strengthens our effort from an R&D perspective, and allows us the opportunity to continue to create innovation that I think is desired and necessary for the industry,” Hart said.
“At the end of the day, we find ourselves as the industry leader with more than $6 billion in revenue and $2 billion in EBITDA.”
Hart said the IGT/GTECH combination is one of the most complementary of all the recent mega-mergers. “When you look at the companies and put them together, there is very, very little overlap in products, customers or markets that we serve,” she said. “We see this fits together in a way where 1 and 1 does equal more than 2.
“From the lottery operations business, GTECH has a storied history in this part of the business from instant ticketing, system solutions and full operations of lottery infrastructure. From an iGaming perspective, also, GTECH and IGT have been very focused, GTECH bringing a more robust application set when you look at casino, bingo and sports betting offerings.”
Even where there is overlap, she said—referring to the casino game and VLT supply business—she says it is “complementary” overlap, which invites the consolidation of efforts.
“They’re tough competitors,” she said. “Their product and our product has been in the market competing, so I actually do think this is an opportunity to think of it as true consolidation, with a great upside benefit of product extensions on both sides. They have their new Sphinx product, which has been very successful, and is taking spaces on the casino floor which quite frankly I want to own!”
Hart also said she looks forward to combining efforts on the social gaming front, where the IGT DoubleDown Casino on Facebook has been a great revenue source, and bringing that and other IGT products to a “more diversified geographic mix.”
“One of the things we’re going to have to do at IGT is start thinking about international differently,” Hart said. “We always thought about Italy as international; now we have to think about that as a home country for IGT as well. And then IGT, which has been concentrated for many years the U.S. and Canada, will think about our international businesses as a much more balanced portfolio from a geographic and product perspective.”
As for the larger issue of supply sector consolidation, Hart said the trend is good for the overall industry.
“As we see with the Bally/SHFL combination, the Sci Games/WMS combination, and the pending combination of Aristocrat and VGT, I think it’s clear to everyone that the industry can benefit from some reduced costs, and consolidation is one way to get there,” she said.
“There are no pure suppliers anymore. As industries mature, people who have historically been in niche spaces find an opportunity to look at adjacent markets to grow, and that’s what’s happening… In an industry as mature as our industry is, it’s tough over time to find a lot of fragmented suppliers that are niche-oriented. We’re great believers in making our contribution to creating an industry that is as healthy for our customers as it can possibly be, and we felt there was a great opportunity to do that with this transaction.”
She added that the chance for a transaction of this magnitude and synergy is rare. “We do think the industry can be stronger and we can better participate in that industry with fewer, stronger suppliers than are in the industry today. And the opportunity to combine our company with a company like GTECH doesn’t present itself every day.
“We were looking for strategic value for our shareholders, and I don’t think there is anything that’s more strategic than this transaction, with its amazing amounts of synergies with little overlap.
“This is the CEO’s dream strategic transaction.”
When asked what he thought of the $6 billion price tag for IGT, Mathewson said it was good, but not even close to what it had been under his leadership.
“For a time, we had a market cap of $15 billion,” he said. “And that was when the market was much lower, so it was even greater than that.”
