GTECH has bought a pricey ticket out of Italy. The Rome-based lottery group is buying International Game Technology (IGT), a Las Vegas-based maker of one-armed bandits, for $4.7-billion (U.S.) in cash and stock. The purchase price looks rich, given IGT’s challenges. The buyer’s promises on cost cuts and revenue boosts also appear bold. But GTECH slashes its reliance on a sluggish home market.
This deal, an unusual example of a big outbound M&A from southern Europe, shows how the tables have turned between these two professional gamblers. Until mid-2012, IGT played with a much bigger stack of chips than GTECH, at least in market capitalization terms.
But IGT’s luck ran thin and activists began circling. In March, it cut earnings guidance, complaining of headaches overseas and “sharp declines” in North American gambling revenues. An ensuing restructuring plan culled 7 per cent of staff. In June Reuters revealed IGT was seeking a buyer, with investors Apollo, Carlyle and Ron Perelman vying with GTECH.
The purchase price of $6.4-billion including debt is equivalent to 8.7 times trailing EBITDA. This looks expensive, given IGT’s predicament, and given that rival Scientific Games bought WMS last year for just six times. It’s mitigated by GTECH’s targeted $280-million in annual synergies, but $50-million are of the less-certain revenue variety. Even the remaining $230-million looks punchy. The direct overlap between the two businesses is limited, and when news of a prospective deal first emerged last month, analysts pencilled in much lower figures.
On the other hand, GTECH and the controlling family behind De Agostini reduce their exposure to a stagnant home market. Domestic sales at the group – formerly known as Lottomatica, and still in charge of Italy’s huge national lottery – will fall from 57 per cent of revenue to 36 per cent. There may be tax benefits too: that is presumably why the new holding company will be incorporated in Britain and become “U.K. tax resident.”
The market’s initial reaction was welcoming: GTECH shares rose as much as 5.5 per cent. But big bets in M&A are not like flutters on scratchcards and slot machines. It will take years to find out whether this has really paid off.
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