Speculation mounts that Texas Pacific and Apollo Management are eyeing the slot manufacturer
Talk has surfaced over a potential private equity deal for gaming equipment manufacturer International Game Technology.
Bloomberg News reported in May that Apollo Management and Texas Pacific Group—the same two private equity giants that cut the $17.1 billion deal for Harrah’s Entertainment expected to close by year’s end—were interested in acquiring the Reno-headquartered gaming manufacturer.
Deutsche Bank gaming analyst Bill Lerner discussed the speculation in a note to investors.
“While we don’t have any knowledge that IGT is engaged in discussions with PE [private equity] we wouldn’t rule out the possibility that a deal could materialize. There is no better time than now in our view as earnings inflect positively from here due the confluence of expansion and replacement cycles, leading to roughly $2.50+ in EPS in approximately two-years’ time,” the note said.
Lerner notes that IGT is undergoing structural change via material growth in its recurring game operations segment. This would be particularly attractive to a potential buyer as the result is higher highs and higher lows in free cash flow, the note said.
One concern is that IGT is licensed in approximately 250 unique gaming jurisdictions around the world, so a private equity buyer would need approval from each gaming jurisdiction separately, a process that would represent about 15 times the effort of anything we’ve seen during casino consolidation. “The result would be a phenomenally long close and therefore greater than typical deal risk in our view,” Lerner said.
IGT has had recent good news in Asia, with reports that its latest Type 5.0 pachislot called “Three Kingdom Wars” has achieved the No.1 ranking in Japan recently. Lerner noted this ranking is strategically fortuitous because 60 percent of Japan’s 1.9 million pachislot machines are slated to be replaced in June and July, with the balance scheduled for replacement by the end of September.
“In our view Japan represents the most notable source of upside for the next two quarters,” Lerner’s note stated while adding that IGT may have an opportunity to capture a bigger chunk of the installed base than previously believed.
IGT also recently has reached an arrangement with China LotSynergy for access into the exploding VLT market in mainland China.
“While this would capture a potentially transformational opportunity for IGT via the China Welfare Lottery’s parlor development initiative alone, IGT is seemingly positioning itself to similarly capitalize on a VLT oppor-tunity with the China Sports Lottery should the CSL receive approvals,” Lerner’s note stated.