Recently, Scientific Games Corp (NASDAQ:SGMS) has agreed to acquire gaming equipment company WMS Industries Inc. (NYSE:WMS) for $26 in cash per share, or around $1.5 billion. The purchase price represented a 60% premium to WMS’ prior trading price of around $16.37 per share. However, if the buyout fails to materialize, WMS’ stock price might fall to below $16 per share. Is this acquisition a good move for both companies?
The Two Leading Gaming Companies
Scientific Games is the leading provider of customized, end-to-end gaming solutions to lottery and gaming companies globally, operating in three main business segments: Printed Products, Lottery Systems and Gaming. In 2011, the majority of its revenue, $503 million, or 57.2% of the total revenue, was generated from the Printed Products segment. The Lottery Systems and the Gaming segment contributed $242.3 million and $133.5 million in revenue, respectively.
100% Debt-Financing Deal
Scientific Games bought WMS for $1.5 billion, $85 million of debt and $55 million of cash, in September 2012. The purchase price valued WMS at 7.4x trailing EV/EBITDA, or 6x LTM adjusted EBITDA. Including $90 million in anticipated run-rate synergies, the valuation became much cheaper at 4.4x EV multiples. At the current trading price of $9.50 per share, Scientific Games is worth only $807.4 million, much less than the $1.5 billion price tag. The company intended to finance this acquisition by 100% debt. As of September 2012, Scientific Games had $400 million in total stockholders’ equity, $136 million in cash and nearly $1.46 billion in long-term debt. Including the debt financing for this deal, the combined company would have $3.11 billion in total debt.
Potential Synergies in the Combined Company
The deal would create a global leader in lottery & gaming software and hardware. Trailing twelve months, the combined company would have $1.6 billion in revenue and $579 million in EBITDA, excluding $90 million in anticipated synergies. WMS generated 100% of its revenue from Gaming, while Scientific Games generated sales from Instant Tickets (54% of total revenue), Gaming (18%), and Systems (28%). The majority of the combined company’s revenue would be generated from Gaming, accounting for 53% of the total revenue, whereas Instant tickets and Systems generated 31% and 16% of the total revenue, respectively. Scientific Games expected that capital expenditure synergies would be $20 million, and the EBITDA synergies might reach $90 million at the end of Year 3. With synergies, combined EBITDA was $669 million. Thus, the net debt/EBITDA for the combined company was around 4.4x.
Lowest Margin and Highest Valuation
Compared to WMS’ peers, including Bally Technologies Inc. (NYSE:BYI) and International Game Technology (NYSE:IGT), WMS generated the lowest operating margin at 14%. The operating margin of Bally and International Game were 23% and 26%, respectively. The buyout valuation seems to be the highest compared to the valuations of both Bally and International Game in the market. With the total market capitalization of $1.95 billion, Bally is valued at 7.96x EV/EBITDA. International Game is currently worth $4.05 billion, and it is valued at nearly 7x EV/EBITDA.
Looking Forward
As the deal has moved WMS’ share price by 60% to $24.70 per share, I think investors might just sell the shares at the current price and move on. With a 100% debt-financing deal, a burden of patent lawsuits against WMS, and a long pending time, there is a high probability that Scientific Games might withdraw the deal.
The article A Good Time to Sell This Gaming Company originally appeared on Fool.com and is written by Anh HOANG.
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