The consolidation of the gaming industry’s supply sector came to a new crossroads late last week with the announcement of yet another mega-merger of suppliers.
In a deal that many will say creates a new 800-pound gorilla of the supply sector, Scientific Games—the lottery industry giant which is still absorbing the recently acquired top-five slot manufacturer WMS Industries—will acquire Bally Technologies, the world’s oldest slot manufacturer and leader in casino systems, a company fresh off its own mega-deal in acquiring table supplier SHFL entertainment.
Scientific Games will acquire all outstanding Bally shares for around $3.3 billion, and assume $1.8 billion in Bally net debt, making the deal worth a total of $5.1 billion.
It is the latest strategic deal in what has developed into a contest to see who can create the most diverse range of offerings in the supply sector, coming only weeks after the other lottery industry giant, GTECH S.p.A., closed a deal to acquire leading slot manufacturer International Game Technology for a total of $6.4 billion.
That was already the fourth big deal in a year that has seen more mergers and acquisitions in the supply sector that any time in history. In addition to the Scientific Games/WMS, Bally/SHFL and GTECH/IGT deals, Aristocrat Leisure Ltd. acquired the leading Class II supplier Video Game Technologies in a deal announced last month.
With its purchase last year of WMS, Scientific Games became one of the industry’s most diverse gaming suppliers, adding major slot supplier to its role as a major player in worldwide lotteries since it introduced the instant lottery ticket in 1974. That diversity played a major role in the strategic deal this year combining GTECH, another longtime worldwide lottery leader, with IGT.
By acquiring Bally—whose purchase of SHFL had already transformed it into the most diverse end-to-end supplier of slot games, table games, utility products and systems in the history of the industry—Scientific Games has every corner of the industry covered.
The deal also brings Scientific Games President and CEO Gavin Isaacs full-circle in the supply sector. Isaacs was chief operating officer of Bally before taking the reins as CEO of SHFL entertainment after Ramesh Srinivasan was elevated to Bally CEO. When Bally purchased SHFL, he left the company, and was snatched up by Scientific Games in short order. Now, he returns to lead all three former companies.
“The acquisition of Bally provides us with a unique opportunity to combine two exceptional companies with long track records of creating leading-edge games and gaming technology products for players and delivering innovative solutions to our customers,” Isaacs said in a statement announcing the deal. “With leading gaming, lottery, and interactive content, world-class systems capabilities and table game offerings, we believe that the combined company will be uniquely positioned as a strategic partner for gaming and lottery operators, offering a highly diversified suite of value-enhancing products and services across multiple worldwide distribution channels and platforms.”
In a conference call with investors after the announcement, Isaacs called the deal “a marriage made in heaven, and obviously for me, a dream come true.”
In the statement, Isaacs said his own experience with the former companies convinced him of the value of merging. “Having worked side-by-side with the talented teams at Bally and more recently Scientific Games, I am confident this combination brings together best-of-breed cultures and is occurring at a truly opportune time as both companies are committed to bringing the highest value products and services to customers,” Isaacs said. “The combined company will feature world-class research and development capabilities, an expanded base of recurring revenues and greater worldwide penetration in key geographies, including the Australasia region.
“In addition to the strategic value of the transaction to our customers, we expect to create significant shareholder value as the transaction is expected to deliver immediate earnings and cash flow accretion and will allow us to meaningfully reduce our leverage over the next three to four years. Reflecting both organizations’ recent post-merger integration successes, we have identified and expect to realize $220 million in annual cost synergies and $25 million of annual capital expenditure savings by the end of the second year following the closing of the transaction.”
“The combination with Scientific Games will benefit our customers and shareholders,” said Bally CEO Richard Haddrill. “Increased scale, geographic diversity and product development capabilities will create a new runway of growth opportunities through new products and a comprehensive portfolio of customer-focused solutions. This transaction delivers immediate value to our shareholders, and the highest share price in our history. We look forward to working with our new colleagues at Scientific Games to execute a detailed integration plan to realize customer satisfaction and additional value.”
Under the merger agreement, Scientific Games will acquire all of the outstanding Bally common stock for $83.30 in cash per share, which represents a 38 percent premium to Bally’s closing stock price on July 31. The transaction was unanimously approved by the boards of directors of the two companies.
On the conference call, Isaacs said all of the current brands of Scientific Games, Bally, WMS, Williams Interactive and SHFL will be retained, and it is likely that separate sales teams will handle each brand—although overall, he called the emerging company “one-stop shopping” for a complete range of gaming products.
Isaacs said the deal will immediately add to earnings per share, with combine revenues of over $3 billion—60 percent of which is recurring revenue from gaming operations. EBIDTA and coming synergies from the earlier acquisitions will total $1.36 billion, he estimated, and overall EBITDA should exceed $1 billion annually.
Debt will total $8.582 billion. Financing has been lined up through Merrill Lynch, JP Morgan and Deutsche Bank. Macquarie Capital served as lead financial advisor and Groton Partners served as co-financial advisor to Bally and Skadden, Arps, Slate, Meagher & Flom LLP served as the legal advisor to Bally.
The deal is expected to close in early 2015, subject to shareholder and regulatory approvals. It was unanimously approved by the boards of both companies.
Isaacs said the brands represented by WMS and Bally would not go away.
“These are some of the most iconic brands in the world,” he says. “They have tremendous customer loyalty and player acceptance. We will continue those brands and even add more.”
Isaacs said he isn’t concerned about any monopoly issues that my be raised by the Federal Trade Commission.
“There is tremendous competition in this segment of the industry,” he said. “Even after this deal, there are still a dozen companies operating in this space.”
While Isaacs didn’t know what the combined WMS/Bally market share would be, he said it still would not equal that of IGT alone.
Union Gaming Group said the combination of Scientific Games and Bally Technologies makes sense.
“The new combined company creates another massive global lottery and equipment company with a lar
ge presence across multiple equipment segments,” the group wrote in a note to investors. “We think the deal should close in a timely fashion given both entities are licensed in over 300 jurisdictions and don’t expect any major FTC concerns given the increasing number of competitors in the space (Ainsworth, Aruze, Multimedia Games, Konami).”
