More M&A

The supply side will never be the same after the tsunami of mergers and acquisitions over the past six months

The pressure for consolidation among gaming technology companies has been building for a long time as more and more players entered the space.

Where once, there were a handful of slot machine companies on casino floors, there are now more than two score. Pechanga casino in California, as an example, recently counted products from 21 manufacturers on its floor.

That meant lots of companies having to bear the costs of manufacturing, maintenance, distribution, new game development, licensing and compliance, all for relatively small revenues.

And those costs kept growing as it took ever-snazzier games to compete in an arms race environment forcing them to open design studios, sign expensive licensing deals, and continually develop new technology.

But they resisted selling, in part because some saw iGaming as a new revenue source. In part because they wanted to be among the survivors who could share their expenses among a higher revenue base.

Start Your Engines

Then the dam burst into a flood of multibillion-dollar deals that radically change the landscape for the industry, and for investors.

The motivations aren’t just to rationalize costs and gain economies of scale.

In some cases, the reasons are strategic. When Bally bought SHFL, it added table games to its lineup to offer one-stop shopping for casinos, to increase its amount of recurring revenue, and to strengthen its overseas presence.

When Scientific Games (SGMS) bought Bally, CEO Gavin Isaacs touted the recurring revenue that Bally brings, saying 66 percent of SGMS revenue will now be recurring.

But the mergers also are motivated by two mega-trends transforming the industry—technological revolution and globalization.

The former can be expressed as convergence of technology. A Bally game, for example, now will be played on a slot machine, a computer, a mobile device or free in an online social casino—or will become a new lottery game.

The latter is a result of legalized gambling spreading throughout the world, itself facilitated by converging technology.

Amaya now offers online poker throughout the world, and soon will do so in partnership with brick-and-mortar casinos. The virtual is touching the tangible. Indeed, they are intertwining.

Transformative Trend

The CEOs of the acquiring companies in the blockbuster deals say they are transformative. They are.

No one, for example, would have thought that Amaya would emerge from a tiny startup 10 years ago into a $2.7 billion market cap behemoth developing iGaming software, manufacturing slot machines, and running the world’s dominant online poker networks.

Indeed, Toronto-listed Amaya (AYA) says the combined company could generate up to $640 million this year, assuming they had merged from January 1.

That is almost seven times AYA’s total revenue of just two fiscal years ago, and more than 20 times its 2012 EBITDA.

To see how things have changed in just months, look at the size in revenues of the merging companies before and after.

Before mergers:
Amaya$73 million
SHFL$259 million
WMS$697 million
Scientific Games$941 million
Bally$997 million
IGT$2.65 billion
GTECH$3.1 billion

After mergers:
Amaya$1.3 billion
Scientific Games$3 billion
GTECH$6 billion

And look at the size of the deals:
Amaya buying Rational Gaming for $4.9 billion.
Sci Games buying Bally for $5.1 billion.
GTECH buying IGT for $6.4 billion.

International conglomerates have been created that cover every line of business—internet, land-based slots, and in the case of GTECH and SGMS, lotteries, and for SGMS, table games.

These companies can cross-sell, be one-stop shops, sell globally, and wield enormous purchasing power.

Debt Loaded

They also have piled up lots of debt to finance these transactions. And, while they promise to be able to cut costs and generate cash flow enough to bring down debt, many investors appear to be taking a wait-and-see attitude.

Indeed, the price of the buyers Scientific Games and GTECH slipped after the announcements, partly in reaction to second-quarter earnings that showed the mergers are not an immediate panacea.

One reason for the concern is that suppliers historically have had little or no debt.

Now, Scientific Games, for example, will have a debt-to-EBITDA ratio of 6.3 times. And, though it promises to focus on reducing that ratio, that was the same statement made by Bally after it bought SHFL entertainment.

Some analysts suggest the deleveraging, as they call it, won’t be that easy.

Meanwhile, blockbusters aren’t the only deals.

Other companies are participating, too.

• JCM is buying slot printer maker FutureLogic, giving that company deep pockets in its battles against TransAct Technologies.

• Aristocrat is buying Video Game Technologies for $1.2 billion, removing another independent Class II slot-maker, much as AYA earlier acquired Cadillac Jack.

• Global Cash Access bought compliance specialist NEWave in its quest to find differentiators in the commoditized cash access world.


Future Logical

So what happens now?

Some observers have said the consolidation is complete. That might not prove true.

The fact is that globalization and technological change continue, and even accelerate. That suggests more deals to come, and maybe companies rising as unpredictably as Amaya.

And companies could join the industry from outside, like Facebook.

The most obvious place to look for future mergers is at the remaining big slot and lottery companies.

Intralot, the world’s second largest lottery company after GTECH, has no slots partner, as SGMS now has with WMS and Bally, and GTECH has with IGT, Spielo and the former Atronic.

Aristocrat, though it bought VGT in a big deal, is the largest publicly trade slot company without a lottery partner.

Of course, Intralot might not feel it needs a slot partner in its business model. And Aussie pride might prevent Aristocrat from selling to a foreign company.

But how about a merger of Aristocrat and Ainsworth, both founded by 90-year-old Len Ainsworth, who still owns a chunk of the former and is chairman of the latter?

Then there is privately owned Austrian giant Novomatic, though it historically has grown on its own.

And the Japanese have suppliers that could decide now is the time to buy, whether Konami, or pachinko companies such as Universal (Aruze) and SegaSammy.

The simple need to grow to compete with the new behemoths might encourage more mergers.


Market Approach

Interestingly, even the blockbuster deals might not be quite as intimidating for smaller companies as they at first seem.

The combined GTECH-IGT will have lower market share than did IGT alone some years ago when it approached 70 percent in the U.S.

And it could decline further. The latest Eilers-Fantini Quarterly Slot Survey showed that North American operators intend to budget just 23 percent of their slot machine purchases for IGT this year. That figure is just 18 percent factoring out Oregon, which is replacing its VLT inventory.

How all of the current mergers play out will be determined by the skill of executives to meld cultures, streamline operations, and create focus, unity and team spirit in sprawling, disparate operations.

But one thing is certain. These mergers aren’t the end of rapid change in the gaming technology industry. They may be just the beginning.