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US – Slot sector consolidation is overdue

By - 12 August 2014

Fitch Ratings has described the consolidation of the slot supplier industry as being long overdue, adding that there will be huge benefits for those involved.

Duplicative costs including research and development (R&D) have helped prime the industry for consolidation and we believe merger and acquisition activity in the sector underscores demand for slot suppliers’ content in a slow growth environment.

Fitch stated: “Scientific Games recently announced that it would purchase supplier Bally Technologies, Inc (Bally). Scientific Games purchased top four US slot supplier WMS in 2013. The Bally buy follows GTech’s announced acquisition of International Gaming Technology (IGT). Both businesses stand to benefit from the expansion of online gaming and other quickly evolving channels, which include social gaming. The Scientific Games’ merger further consolidates the already oligopolistic slot supplier industry to create an almost equal sized competitor to IGT, the incumbent market share leader, and offers tangible cost synergies.

“Scientific Games estimates $220m in cost synergies from the merger, which we think is achievable,” Fitch added. “Scientific Games says $33m will come from cost of goods sold, $43m will be generated via R&D with $144m from sales, general, and administrative (SG&A) costs. The SG&A target is less than one-half of Bally’s annualized SG&A costs ($88m for quarter ended March 31, 2014) and the R&D estimate is justifiable based on how much IGT spends on R&D relative to its roughly $2bn slots-related revenue base.”

In addition to cost synergies, Fitch believes a marriage of slots and lottery business will enable Scientific Games and GTech to leverage Bally’s and IGT’s slot content, respectively, across their lottery business.

“This is especially important because of the proliferation of online gaming, which lottery operators have an opportunity to participate in. Scientific Games, along with 888, is the main online gaming vendor for the state of Delaware,” Fitch explained. “As casino operators remain content with somewhat older gaming floors, the slot machine replacement cycle has not been able to fully recover post-recession. We believe new casino openings in the US will also be far and few between relative to the rapid ascent of regional casinos in the 1990s and early 2000s.”

Fitch expects the fundamentals for the slot segment to remain soft longer term as more of the casino floor is allocated towards table games and regional casino markets continue to be beleaguered by the more frugal U. consumer. Slots represented about 73 per cent of positions across Caesars Entertainment Corp’s portfolio of 30 casinos in 2013 compared to 78 per cent in 2007 on the same-store basis. Fitch believes that the younger generations’ preference for table games will continue to drive this trend and expects slots to account for roughly 75 per cent of the US regional casinos’ revenues over the next 10 to 20 years relative to about 85 per cent currently.

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