WEEKLY FEATURE: Aristocrat Steps Up

Aristocrat Leisure Ltd. wraps up a month of acquisitions and partnership deals aimed at keeping up with powerful competition with the purchase of VGT, a leading Class II manufacturer. Aristocrat is trying to keep pace in a rapidly changing gaming technology sector as consolidation is well under way.

Recurring Revenue, CMS targeted

In reaction to a year of mega-mergers and partnership deals marking a consolidation trend in the slot supply sector, Australian slot machine giant Aristocrat Leisure, Ltd. is stepping up its competitive position.

Faced with competition including new behemoths Scientific Games, which has incorporated WMS, and Bally Technologies, which has absorbed SHFL entertainment—and tuck-in acquisitions by several competitors seeking to create diverse product libraries and multi-channel capabilities—Aristocrat is aggressively making deals to diversify and improve its product lineup.

First, the company is making major moves to improve its Oasis 360 casino management system, which has been named the most widely used CMS in consecutive Goldman Sachs surveys. Two weeks ago, the company announced its plan to acquire Paltronics, Inc., which has been a partner to the slot-maker in deploying its linked progressive controllers to run Aristocrat’s successful wide-area networks such as Hyperlink.

Paltronics also adds venue-wide progressive bonusing capabilities to Oasis, putting it on par with the networked bonuses being offered by industry systems leader Bally and others. Paltronics also brings picture-in-picture capabilities to Oasis, giving Aristocrat the ability to work with customers on enterprise-wide promotional bonuses.

Last week, Oasis 360 got another boost with Aristocrat’s announcement of an exclusive licensing and development agreement with renowned casino loyalty solution developer House Advantage. Under the deal, Aristocrat will be the exclusive licensee and sales distributor for House Advantage’s gaming product suite in the North American market.

The company will embed House Advantage software—mainly, the highly regarded HALo suite of software products—into Oasis, and Aristocrat and House Advantage will work jointly to develop new casino promotional software and loyalty solutions.

“Leading casinos across North America are successfully using House Advantage’s elite software, which provides casinos of all sizes with a scalable, competitive, unique, innovative solution for building patron loyalty,” said Aristocrat Chief Product Officer Rich Schneider.

“This agreement reflects our commitment to bringing best-in-breed software solutions to our loyal Oasis 360 clients, and we are thrilled to bring these solutions to our company, to our existing Oasis 360 customers and to other customers across North America.”

The agreement brings House Advantage’s industry-leading loyalty marketing systems to Aristocrat, including:

•  HALo CORE, a multi-platform loyalty marketing solution and its Advanced Marketing tools;

•  HALo Promotions driven by HALo Kiosk and HALo Web; and,

•  HALo Mobile Enrollment and Age Verification.

Aristocrat’s aggressive self-improvement campaign culminated with perhaps its most bold action yet designed to achieve CEO and Managing Director Jamie Odell’s long-stated goal of increasing recurring revenue from leased games. Aristocrat announced that it has agreed to acquire Tennessee-based Class II supplier Video Gaming Technologies for $1.28 billion in an all-cash deal the slot-maker says will give it operational revenue to fuel further expansion around the world.

Privately owned VGT is one of the leading suppliers of games for Class II Indian casinos in North America, dealing exclusively in leased machines and systems for a solid base of recurring revenue. The supplier currently has an installed base of approximately 20,200 leased machines and 610 employees.

VGT has the most widely used Class II platform in North America, consisting of both mechanical and video Class II gaming machines. The majority of VGT’s installed base is in the Oklahoma tribal gaming market, which accounts for approximately 50 percent of the total installed base of Class II gaming machines in the U.S. The supplier also has expanded into the Washington and California markets.

VGT has long-term relationships with the major tribal casino operators in its key regions of operation, many extending more than 10 years from the time that VGT released its first Class II gaming product in 2002.

For the year ending December 2013, VGT generated revenue of US$236 million, adjusted EBITDA of US$157 million, adjusted EBIT of US$119 million and adjusted operating cash flow less cap-ex of US$110 million.

The VGT acquisition places Aristocrat on a par with Bally, IGT and others in the Native American gaming market. “With the turnaround in our Class III business well established, we are now strongly positioned to undertake this transformational acquisition,” said Odell.

“The strategic and financial benefits are compelling for Aristocrat shareholders. VGT has a complementary product offering and provides a unique opportunity to accelerate our growth in the U.S. recurring revenue segment, which has for some time been an important strategic objective of Aristocrat.

“This combination also offers exciting growth opportunities for VGT by leveraging premium Aristocrat games and systems products, as well as national distribution opportunities for VGT’s Class II products. The strong accretion and free cash flows expected from this transaction will not only transform the scale of our gaming operations business today, but will also preserve Aristocrat’s options to pursue acquisitions in the future in key growth segments—including digital.

“We look forward to supporting the continued success of VGT’s customers and building on the long-term relationships which VGT has established.”

Jon Yarbrough, founder, CEO and principal owner of VGT, added, “I am very proud of the success we’ve achieved in the past 23 years. The hard work and support of VGT’s associates, and of course the loyalty of our customers, have positioned VGT to be a leader in Class II gaming. Aristocrat is an ideal partner for us, given our shared values of quality product development, excellent customer service and commitment to responsible gaming.

“VGT’s customers will continue to benefit from our best-in-class service offering, and now they can also look forward to a partner with the development capability and scale to develop exciting new titles, ultimately delivering even stronger returns on the casino floor.”

Aristocrat will fund the acquisition—and refinance existing debt—through two new debt facilities worth $1.3 billion and A$100 million ($93.44 million) respectively, as well as an underwritten institutional share placement of A$375 million.  The $1.28 billion price is nearly half of Aristocrat’s market value at the close of trading July 4.

Aristocrat, which earned net profit of A$107.2 million last year—up nearly 17 percent year-on-year—predicts the acquisition will land the company a leading position in the Native American gaming market. Indian casinos currently account for 5 percent of North American sales; company officials say that figure will jump to 31 percent with the acquisition.

Analysts gave the acquisition high marks. “We like the move by Aristocrat as it expands the company’s North America presence, increases is gaming operations business and adds a key product offering,” Eilers Research founder Todd Eilers told investors. “In addition, we believe there are both revenue and cost synergy opportunities.”