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Scientific Games to Acquire WMS

Combination will create global lottery and casino powerhouse

Scientific Games to Acquire WMS

Scientific Games Corporation, the lottery industry giant that provides central computer systems and instant tickets to state and provincial lotteries across North America, has agreed to acquire Chicago-based slot manufacturer WMS Industries, and its casino-slot subsidiary WMS Gaming.

In a deal that was unanimously approved by the boards of both companies, Scientific Games will buy WMS for $25 in cash per common share, in a deal worth around $1.5 billion. Manufacturing, software and customer services of the two companies will be consolidated to create operational efficiencies and save money.

The acquisition price is more than 55 percent higher than the closing price of WMS the day before the transaction was announced. Scientific Games is paying about seven times WMS’ earnings before interest, taxes, depreciation and amortization. That compares with the median of about 8.6 times for 26 similar deals, according to Bloomberg.

Scientific Games will assume $85 million of WMS debt and cash on hand of $55 million. The deal will immediately be accretive to Scientific Games’ earnings per share and free cash flow.

Coming Together

The transaction represents a recent trend of consolidation between the lottery and casino industries, and a further merging of production of gaming machines for the video lottery and slot markets. Other examples in the past few years have been the absorption of slot-maker Atronic by lottery supplier Spielo and the acquisition of Georgia-based Cadillac Jack by Canada’s Amaya Gaming Group.

Despite ups and downs, WMS Gaming has maintained its position as the world’s third-largest slot manufacturer by sales volume, behind only IGT and Bally. The company has joined other slot-makers in branching out to internet, mobile and social gaming outlets with its games. New York-based Scientific Games has long been a leader in the North American lottery industry, and has provided central server systems for several European lotteries as well.

According to a joint press release from the companies, Scientific Games and WMS will “draw on each organization’s core strengths to broaden offerings, bring gaming products to new sectors and geographies, accelerate key growth initiatives and offer enhanced capabilities, systems, field service and content.”

Scientific Games’ experience in server-based gaming “should help accelerate WMS’ international development initiatives,” said the release. “The addition of WMS’ gaming business will also diversify Scientific Games’ global business assets. Furthermore, Scientific Games and WMS are both known for their product innovation and creative content, and will offer an expansive combined portfolio to customers. The combined company will be well positioned to capitalize on government-sponsored gaming utilizing Scientific Games’ established global platform and experience in providing lottery and gaming systems, products and services to governments.”

Interactive Platform

The combined i-lottery/i-gaming platform and content will give the merged company a strong interactive portfolio. WMS has a well-developed i-gaming platform, including social and mobile gaming, while Scientific Games has an advanced platform for i-lottery, sports book and loyalty/rewards. Scientific Games officials predict significant opportunities to cross-sell these products to the companies’ respective customers.

“The acquisition of WMS is transformational for Scientific Games, enabling us to offer a complete portfolio of lottery and gaming products and services to both new and existing customers around the world,” said A. Lorne Weil, Scientific Games’ chairman and chief executive officer. “We expect to combine our game content, technology, operational capabilities and respective geographic footprints to create an enterprise poised to capitalize on significant growth opportunities around the globe.”

“This combination will diversify Scientific Games’ revenue base, expand margins and propel future growth opportunities,” added Scientific Games CFO Jeffrey S. Lipkin. “Importantly, as we realize efficiencies from our increased size and scope, we should be able to deliver meaningful value to shareholders through the deal’s immediate earnings per share accretion, significantly improved free cash flow and anticipated synergies.”

Brian R. Gamache, chairman and CEO of WMS, commented, “The combination of Scientific Games and WMS yields tremendous benefits to our customers, shareholders and employees. We view this transaction as the next logical and strategic step in offering continued innovation in gaming. Shareholders will enjoy a meaningful premium for their shares and employees will have expanded career opportunities as part of a larger, broader and more diverse organization. We are delighted with this transaction, and look forward to working with our new colleagues at Scientific Games.”

Tax Benefits

Scientific Games expects to achieve synergies through revenue growth, shared costs and larger scale, as well as by monetizing its significant U.S. tax attributes. The combined company will also be able to efficiently utilize shared manufacturing, engineering, software, field maintenance and customer service to drive growth and cost savings.

The acquisition, which is subject to the approvals of WMS shareholders and gaming regulatory authorities and other customary closing conditions, is expected to be completed by the end of 2013. Scientific Games has obtained committed financing for the transaction, and the transaction is not subject to a financing contingency.

On news of the transaction, Scientific Games shares rose 17 percent to $10.41, and WMS shares jumped 55 percent to $25.40. Analysts were positive on the merger.

“The majority of WMS revenue is generated domestically, and the merger should leverage Scientific Games’ (SGMS) international footprint,” wrote Bill Lerner of Union Gaming. “Conversely, the majority of revenues and cash flow for Scientific Games are from international operations. On a pro forma basis, the combined entities will generate 53 percent of revenue from gaming, 31 percent from instant tickets, and 16 percent from systems. The management of SGMS believes there are significant opportunities for EBITDA synergies starting with $50 million in year 1, $75 million in year 2, and $90 million in year 3.

“We think the deal makes sense and it was a good time for SGMS to pull the trigger, given WMS was likely close to making the turn. However, SGMS certainly paid a hefty premium. The deal should expand WMS’ international business and diversify Scientific Games’ revenue mix.”

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