Whenever a huge merger or acquisition occurs among slot suppliers, there’s a tendency in the industry to speculate whether or not the deal is indicative of a larger trend toward consolidation.
When two big deals occur within a year, the urge to look at the bigger picture is irresistible.
The two biggest news items from the slot sector during 2013 were, of course, merger deals. Early in the year, lottery industry giant Scientific Games announced it was acquiring one of the big-five slot manufacturers, WMS Industries. The New York-based firm was steeped in lottery history, from introducing the first instant lottery ticket in 1974 to securing system and ticket deals with many of North America’s largest state and provincial lotteries, as well as lotteries in Europe.
Along with the former GTECH Corporation, Scientific Games has been credited for practically creating the government-sponsored lottery industry in North America. Now, the company was following GTECH into the casino supply business. But while GTECH bought into a conglomerate of small suppliers including the former Atronic and Spielo (along with Italian lottery giant Lottomatica), Scientific Games was merging with one of the top slot-makers in the business.
In the middle of the summer, as the Scientific Games/WMS deal was being finalized, the year’s second big M&A announcement came: Bally Technologies, the industry’s second-largest slot manufacturer and top slot systems provider, would acquire SHFL entertainment, the industry’s top supplier of proprietary table games.
It was the last piece of the puzzle for Bally—acquiring SHFL, which began life as Shuffle Master on the strength of its introduction of the ubiquitous automated shuffler, transformed Bally into the most diverse casino supplier on the planet.
Both deals made a lot of sense for the four companies involved, and created two companies that are much more prominent in the industry than before.
Analysts say that as far as mergers of large suppliers go, these two deals are probably the last such mega-mergers, at least for the foreseeable future. However, that doesn’t mean supplier consolidation is over. A combination of international slot-makers moving into North America and former Class II suppliers and amusement companies targeting the Class III casino market has translated into a slot supply sector that is more crowded than ever.
“We still have a lot of emerging players in the equipment space,” comments analyst Todd Eilers, head of Eilers Research, LLC. “If the larger companies are looking at growth, with the North American market being flat or slightly up, the thought is that there needs to be fewer competitors. You’re likely to see more emerging players, and that bodes well for more M&A from a domestic standpoint.”
The Big Deals
The competition among emerging players got a lot tougher with last year’s two big acquisitions, which were universally praised by analysts.
“If you look at these two mergers, each really fulfilled a strategic purpose,” says gaming stock analyst Frank Fantini, CEO of Fantini Research. “Bally accomplished some very important things. No. 1, they dramatically increased their international exposure. Bally for a long, long time has had the need to increase internationally in their head, but has had a challenge doing it. Now, they almost automatically have doubled their exposure internationally, and have a lot more feet in a lot more doors in casinos worldwide.”
Neil Davidson, senior vice president and chief financial officer for Bally Technologies, notes that the SHFL acquisition instantly moved international sales from 16 percent of overall revenues to 25 percent.
“We now have more of a focus on international business, and we are even focusing more on product development for international markets,” Davidson says. “Prior to the acquisition, we did good when looking into international markets; I wouldn’t say we did great. But now, we’re looking forward to a broader international footprint.”
“For Bally, the international business itself was not all that large,” says Eilers. “So the acquisition makes sense from a strategic standpoint.”
Fantini says another point of logic to the Bally/SHFL combination is the addition of a completely separate product line for Bally that is completely complementary to its current products.
“SHFL in no way cannibalizes or competes with Bally products,” Fantini says. “But now, Bally has got the leading table game company in the world; plus, it’s got the electronic table games. As you know, electronic table games are increasingly important as casinos either try to cut costs as in the United States, or try to overcome the caps on live table games as you see in Macau.”
He adds that this complementary product line is replete with that most desirable commodity among suppliers: recurring revenue. “Bally dramatically increased the amount of recurring revenue they have, because so much of SHFL’s business is on lease,” says Fantini. “Every month, those checks are going to be coming in to Bally. So this was a very strategic purchase on Bally’s part.”
“When we were looking at this deal and considering whether we were going to put it together, what we realized very quickly was that the two companies are very complementary,” recalls Davidson. “Both companies’ history of innovation and the people were very similar. From a financial aspect, you look at both companies and SHFL has done a tremendous job of increasing their recurring revenue. About 50 percent of their revenue was from recurring sources, as well as ours.
“We were pretty excited about that, and then you layer on top the fact that both of our companies were generating combined free cash flow, and overall, we’ve got a great opportunity to scale up with this recurring revenue and cash flow generation.”
“I love the Bally-SHFL combination,” says Bill Lerner, principal of Las Vegas-based Union Gaming Group, “but what I think is intriguing about it is that Bally is able to immediately get into the electronic table business. SHFL is able to deploy its slots with dramatically greater and deeper distribution. I think both parties have the opportunity to move content and intellectual property back and forth, on one another’s products.
“Broadening the depth of distribution there vis-à-vis SHFL’s relationships will be helpful. It also gets into the social gaming business. Bally was initially licensing content into that, or at least contemplating doing that. Now, they’ll be competing with Double Down and others, because SHFL has organically developed that business.”
As with the Bally/SHFL deal, the combination of Scientific Games and WMS provided key benefits to each company. “Historically, Scientific Games is basically an auto-tote company that bought a lottery company,” comments Fantini. “They’ve tried through their fixed-odds betting terminals and elsewhere to get into the machine business, but now with this purchase, in one fell swoop, they have become one of the worldwide leaders in slot machines and related products.”
Eilers adds that while WMS had experienced a recent downturn in ship share, the company had turned a corner with its most recent new products.
“A lot of the data we were seeing earlier this year showed that some of their new platforms were definitely an improvement and were gaining some traction,” Eilers says. “So I think the timing from Scientific Games’ standpoint was pretty favorable for them.”
The best thing Scientific Games gets in the deal, he says, is access to WMS content. “WMS, even on a downswing, has great content,” he says. “Scientific Games has a lot of distribution capabilities, but on the game side, never had great content. It helps their existing business in the U.K., and allows them to go after new VLT opportunities with WMS in their back pocket—which makes them a more viable candidate to win new deals on the video lottery side going forward.”
WMS also gives Scientific Games an immediate inroad into interactive gaming, adds Eilers. “On the interactive side, WMS is really taking off with its social product,” he says. “Scientific Games can leverage that, and use a lot of that expertise for their lottery customers as well. I think you will see, in addition to content, an improvement in Scientific Games’ interactive offering as well.”
From the WMS side, the benefit is the flip side of the benefit to Scientific Games: more distribution for that formidable content. “WMS, quite simply, gets international distribution vis-à-vis Scientific Games’ network that they simply didn’t have,” says Lerner.
“One of the things that struck us and excited us from our first look at WMS was how complementary our businesses and capabilities are,” says William Huntley, executive vice president and chief executive of gaming at Scientific Games. “We have a global footprint of customers in approximately 50 countries and our customers are largely government agencies. WMS is one of the top gaming machine designers and manufacturers in the world. Collectively we are well positioned to blanket the world with a complete range of gaming products. The potential is very exciting.”
Coming Together
There is a consensus that the next consolidation in the slot business will not involve large companies like last year’s two big transactions, but will involve any of a variety of smaller companies.
At least, some say, future deals will involve acquisition of a smaller company by a larger one, either as a tuck-in buy to fulfill some need of the larger company, or as a function of the convergence of brick-and-mortar and interactive technologies.
“We don’t have neat little separate silos anymore, with slot machines over here, and internet gaming over there, internet software and platforms over there,” says Fantini. “They’re all kind of converged, and if you’re looking for a broader reason for all of these acquisitions, convergence is one of them.”
One recent example, he notes, is Canada’s Amaya Gaming Group, which recently completed a spate of acquisitions culminating with the purchase of slot-maker Cadillac Jack.
“I think Amaya is a case of a small company that just decided that it was going to become like a mini-conglomerate,” notes Fantini. “They have put together a company that has slot machines, internet platforms, internet technology, software technology… The CEO of Amaya had a vision for this company that integrates all of these converging technologies.”
“I think you will continue to see some acquisitions along those lines,” adds Eilers, “whether it be land-based suppliers acquiring interactive companies or the other way around.”
“One motivation you can see for consolidation is to converge all of our technologies, like IGT has already done.,” Fantini says. “Social gaming is another example of that. We saw where Caesars bought Playtika and is doing very well with it. IGT bought Double Down and is doing very well with it.
“One of the questions for a long time is who has the advantage moving forward on the internet. Is it internet companies like Zynga and Facebook? Or is it brick-and-mortar companies that happen to have huge game libraries and gaming licenses in jurisdictions throughout the world, with deep experience with dealing in regulated environments?
“So far, IGT, at least on social gaming side, seems to be absolutely correct. That experience and knowledge and connection with brick-and-mortar casinos is helping them tremendously. And they have a library. They don’t have to go out and create games from scratch or buy them from somebody; they have the richest library in the world.”
“As the social casino gaming space continues to grow,” adds Eilers, “and as more U.S. markets open up on the real-money internet gaming side, I think you’ll continue to see a push in the direction of convergence between the land-based equipment sector and the interactive sector.”
Staying Alive
If convergence of land-based and interactive technologies is one aspect that will drive future mergers and acquisitions, another aspect is simple survival in a North American market that continues to gather new players.
From growing companies like Multimedia Games, Aruze and Cadillac Jack to international companies like Novomatic, Casino Technology, Ainsworth and others moving into the market, North America is becoming a crowded place for slot suppliers.
“Part of consolidation is simply the question of how many competitors you can have in a single space,” says Fantini. “Several years ago, it was very popular to think that there had to be consolidation among the gaming suppliers because there were basically four of them. You had IGT, Bally, WMS and Aristocrat in North America. And IGT had 65-70 percent market share.”
Many thought the other three would consolidate simply to mitigate all of the R&D, licensing, manufacturing and other costs going into the fight for the 35 percent market share that was not held by IGT, he says.
“Well, IGT doesn’t have 65 percent anymore, but what we do have is we now have a whole bunch of other companies that have come into this space,” Fantini notes. “Ainsworth, Aruze, Multimedia Games, Incredible Technologies, all of these Class II companies that now want to become Class III companies—the field is even more crowded than it was before, and it’s even more fractured, because now instead of four companies dominating North America, you’ve really got five or six, because Konami belongs in that mix, and Multimedia Games is growing rapidly.”
With Aruze on the rise and companies like Novomatic trying to capture market share in North America, Fantini says smaller companies will find it more difficult to compete without combining resources.
“After a while, you have to say wait a minute—not all of them can succeed,” he says. “Some of them are going to have to go by the wayside or be bought out by someone. And some of these new competitors have deep pockets. Novomatic is a big company. Aruze is a big company. If they so choose, they can pour huge amounts of resources into North America.”
Who’s Next?
Given the challenges of today’s crowded slot market, combined with the need of companies to diversify into interactive technologies, analysts say that while further consolidation is sure to occur, it’s difficult to identify the companies that may be on the hunt or may, in fact, be acquisition targets.
However, there are a few companies that are on the lists of several analysts as a potential M&A player. One such company is Austin, Texas-based Multimedia Games, both as a potential target and as a company on the hunt to strengthen through acquisition.
Union’s Lerner says Multimedia could be one of the companies looking to respond to the recent Scientific Games and Bally acquisitions.
“If I’m on the public side of this whole story—the investor/Wall Street side—you’ve got to be looking at MGAM as the company that makes sense within this context for someone who wants to scale,” Lerner says. “Essentially what you have is four companies that are now two, that are fundamentally more competitive. So, if I’m Aristocrat or MGAM, from a competitive perspective it’s something to note, and I want to do something to be more competitive.”
Fantini says MGAM also frequently pops up as a buyout target, but in that respect, the company’s own success may be a barrier. “Normally when you talk about who’s buying and who’s being sold, the name Multimedia Games pops up,” Fantini says, “because we all know they’ve got some good products; they’ve got TournEvent and High Rise and other products. And now, they increasingly have licenses throughout the country. The difficulty with buying MGAM is that their stock price is up. They’re expensive now; they’re not the bargain they were a few years ago.”
As far as moves based on convergence of technologies, Fantini identifies some of the big European internet companies as potential acquisition targets. “As these industries converge, will some of the big internet companies get bought out by bricks-and-mortar?” he says. “Will some of the big bricks-and-mortar companies get bought out by the internet companies?
“888 Holdings, for example, has a very successful poker platform. It would not surprise me to see a bricks-and-mortar company buy 888 Holdings. Likewise, you’ve got companies like Betfair and bwin.party that are very strong in their particular online space. They may want to complement that with bricks and mortar. Certainly in the United States, what we’re seeing is that legislatures are saying initially that you can be an internet company in our state if you have one of our licenses. We saw PokerStars try to buy Atlantic Club (in Atlantic City) for that reason. But there may be some motivation for some of those other companies to buy some bricks-and-mortar properties in the United States.”
Among suppliers, though, there is a consensus that future consolidation will not involve the large slot-makers, unless it involves very targeted buys. “Looking at the big players, Konami traditionally does not do any sort of large deals,” comments
Eilers. “I get the sense that probably not much is going to happen with them.
“I look at Aristocrat, and they recently have hired a bunch of high-profile executives to beef up their game content. So, I would be surprised if they went out and bought someone; it looks like they’re looking to drive growth internally. IGT is just focused on the interactive side. They view that as their growth area. If there were any M&A in that case, it would be on the interactive side.”
Bally’s Davidson predicts the likely M&A action going forward will involve the small, emerging slot-makers, at least in the near term.
“I don’t know if you’ll see any of the larger guys swooping in and snatching up smaller guys,” Davidson says. “It makes more sense in my head for some of those guys to band together to create more compelling content.
“It’s a pretty big feat, and you’ve seen some go bust. It’s not easy to be a small guy.”
