Gaming supplier Scientific Game Corporation might pursue and initial public offering for its growing interactive division, SG Digital, according to a report last week from brokerage firm Telsey Advisory Group LLC.
“The strongest growing business is in its interactive segment, which caters to online gaming,” wrote Telsey analyst Brian McGill. “The high growth has come from the non-real money segment. It is possible the company could look to monetize this business through a sale or an IPO longer term.”
In September 2016, Scientific Games designated the company’s wholly owned interactive social gaming subsidiaries as unrestricted subsidiaries under its debt agreements. As of a March 1 filing this year, the social gaming businesses of the group were still classified as “unrestricted,” according to a report in GGRAsia. According to the March 1 filing, “Social gaming subsidiaries are not guarantors under our credit agreement and indentures and are not obligated to comply with many of the covenants set forth in those agreements.”
Last year, Scientific Games acquired social game developer Spicerack Media Ltd. and online/social game developer Red7Mobile Ltd.
For last year’s fourth quarter, Scientific Games grew social casino revenue 28 percent year-on-year to US$95.5 million, reporting an average 2.5 million active daily users for its social gaming products.
“The company offers its social interactive business through a number of products,” wrote Telsey’s McGill, “including 88 Fortunes, Blazing 7s, Golf Fish Slots, Jackpot Party, and Quick Hit Slots. We think the company is well positioned in this segment, due to it having the content to offer players. It has a solid background in slots, unlike some of the other major competitors, and we think it will be able to take share.”
McGill also noted the overall company’s efforts to reduce debt.
“After the acquisitions by Scientific Games, debt peaked at over US$8 billion with just US$1 billion of EBITDA initially. The story was that the company was going to generate enough free cash flow to begin to pay down debt and reduce the leverage. The company struggled with this for the first year, as the company was not able to make a meaningful reduction in debt or leverage. However, with the better results through revenue growth and cost cutting, the company has been able to begin to produce free cash flow.”
“At the end of 2017, the company had 6.6X net debt to EBITDA, which was down from 7.4X at the end of 2016. Going forward, we expect the company will generate US$648 million of cash flow from operations and with capital expenditure of US$320 million, it should allow for free cash flow of US$328 million.”
