Scientific Games has announced it will divest its founding business, lottery supply, as well as its sports betting division to concentrate on being a content supplier for online and internet casinos and social gaming.
In a press release, the company said it’s “evaluating strategic alternatives” to divest the two businesses, including an initial public offering or a merger with a special purpose acquisition company (SPAC), an outright sale or a strategic combination with another business.
Scientific Games’ lottery business traces back to the company’s founding in 1973. The company produced the first secure instant lottery ticket in 1974, and lotteries remained central to the company’s identity after the 2014 merger brought the former Bally Technologies, WMS Gaming and Shuffle Master businesses together. The newly merged company took the name of the lottery business. Scientific Games provides tickets and systems to lotteries in 50 countries worldwide, and is the world’s largest supplier of instant games.
The company’s sports betting business is a much more recent development, created after the 2018 acquisition of Don Best Sports led the company to launch its OpenSports platform the following year. The business is currently part of the SG Digital division.
In announcing the impending divestiture of the two businesses, Jamie Odell, executive chairman of Scientific Games, said, “When I joined the board in September 2020, I told stakeholders that we were focused on rapidly deleveraging the balance sheet, unlocking the value of the company’s products and technologies and creating a flexible, nimble company positioned to deliver above-market returns to investors.
“Today, we have announced major initiatives aimed at achieving each of these key objectives, recognizing significant value in each of the businesses and positioning the company for sustainable growth, all as a result of the dedicated work of our teams.”
In a later conference call, Odell said, “We have concluded that our lottery and sports betting businesses will be better positioned for the future as independent businesses with their own capital structures and investment strategies. We therefore intend to divest those businesses.”
Barry Cottle, president and CEO of Scientific Games, said the move “reflects key steps to optimize our portfolio and strengthen our balance sheet by significantly delivering while also targeting investments in our largest growth opportunities.
“These steps will accelerate our path to become a content-led growth company focused on leading in both land-based and digital markets. Our company will be positioned to build great games that define the future of gaming, supported by platforms that power the best operators in the world.
“We believe these steps will enable us to capitalize on the high growth potential of each of our businesses, including their expanding digital content offerings and platforms, unlocking value for shareholders, customers, and employees. Each of our businesses will be better positioned to partner with their respective customers and to deliver long-term growth and profitability. At the conclusion of this process, the new company will consist of leading gaming, iGaming and SciPlay businesses, all of which have great momentum and will collectively deliver great value.”
Cottle said the aim is to move forward as an omni-channel content supplier for gaming. “We will capitalize on the increasing convergence of these businesses, as players look to play their favorite games wherever and whenever they want to play,” he said “As the leading cross-platform global game company, we are uniquely positioned to take advantage of the incredible industry transition that is underway.
“Given this significant opportunity, we are targeting our digital businesses to be comparable in size to the land-based gaming business within three years. I’m confident that, with these steps, we are well positioned for future growth prospects.”
Scientific Games’ announcement noted that there are no assurances that the company’s exploration of divestiture of lottery and sports betting business will result in actual transactions, and that the company will not comment further on the effort “unless and until it determines that further disclosure is appropriate or required based on the then-current facts and circumstances.”
Initial reactions to the plan from Wall Street were positive.
“We have refined our pro forma estimates from our first blush version following the announcement,” wrote David Katz of Jeffries in an investor note. “We believe the sports betting platform should have high desirability in the current environment and should trade for between 12X and 14X LTM revenue, given the strong growth prospects of the business currently.
“We further believe that the lottery business could fetch 10X-12X trailing EBITDA, well-support by the publicly traded global comps that trade at 12X-plus…
“The new version of SGMS has compelling attributes in our view, which suggest there could be further upside. First, the gaming business has the potential to execute more effectively. The gaming operations business in particular has seen decline in its installed base over the past several years since the combination of SGMS with WMS and Bally in this segment.
“While the product cycle is lengthy and recovery could be gradual, we expect the business to improve, irrespective of the moderate fundamental environment for slots. Secondly, we believe the opportunities in iGaming and social gaming would be rapid growers in the near term at least, based on the operating environment supported by management’s stated intention to grow this segment by 50 percent CAGR the next three years.”
Deutsche Bank group analysts Carlo Santarelli and Steven Pizzella said should the firm succeed in its efforts; the divestment exercise would leave it with “essentially” three areas of business. “These business lines, in aggregate, generated roughly US$1 billion of 2019 adjusted earnings before interest, taxation, depreciation and amortization,” they wrote.
J.P. Morgan analyst Joseph Greff wrote the divestment will help bring the company’s debt down to levels comparable with competitors.
“Simplistically assuming just disposition of the lottery business (without making assumptions about sports betting, which is embedded in the digital segment),” Greff wrote, “incorporating our in-print 2022 EBITDA estimates, our 8.0X multiple for the segment, and 100 percent of gross proceeds going to debt pay-down, we estimate net leverage just below 4.0X in 2022, down from 9.6X at 1Q21-end and 6.4X at year-end 2019.”
On the conference call, Scientific Games Executive Vice President and Chief Financial Officer Michael Eklund said there’s no timeline for the divestment of the businesses.
“At this point the market is going to determine the timing, the value, the final structure of the deal,” Eklund said. “We are very well advanced in the process. It’s been a thoughtful, detailed planning process we’ve gone through with all the teams. … We think we can move pretty quickly and maximize value while we’re going through this.”
