Analyst says price to buy WMS Industries too high
A Wall Street analyst told investors this week that a lottery equipment manufacturer is paying too much in its
$1.5 billion buyout of slot machine developer WMS Industries.
Deutsche Bank gaming analyst Kelly Knybel took a negative view of the deal announced last week. New York-based Scientific Games Corp. said it will pay $26 per share for WMS, a roughly 59 percent premium above the company Jan. 31 closing price.
Knybel's is a minority viewpoint. Most analysts expressed support for the transaction.
Knybel cited concerns about the merger, which is one of the gaming industry's largest consolidation agreements in recent years.
"Said simply, we have a largely negative view of the deal," Knybel told investors. "Our view stems from our belief that the limited positives we can identify, namely the two business' non-competitive business lines, both companies' deep trademark and intellectual property portfolios, and considerable geographic and product diversity post the acquisition, are outweighed by the risks we find associated with the deal."
Knybel said both Scientific Games and WMS have a "difficult fundamental outlook" and it's "tough to identify synergies" between the companies. He said the merged companies would have a lack of cross-selling opportunities between the lottery and slot machine industries in the near term.
Knybel said the smaller Scientific Games has "limited financial transparency."
WMS is headquartered in Waukegan, Ill., but maintains a large sales a manufacturing office in Las Vegas. The company employs 140 workers in Las Vegas and 25 in Reno.
WMS is considered the No. 3 slot machine manufacturer behind International Game Technology and Bally Technologies.
Scientific Games will assume $85 million of WMS debt. The transaction needs multiple regulatory approvals, including Nevada's, and the transaction isn't expected to close until the end of the year.
Knybel said the Scientific Games' business model is challenged because of competition in the lottery business and structural changes in the online lottery sector.
He downgraded Scientific Games from a price target of $7 per share to $6 per share. Scientific Games closed Wednesday at $9.01 a share, up 50 cents, or 5.88 percent, on the Nasdaq Global Select Market.
Scientific Games is 38 percent owned by New York billionaire Ron Perelman, a business takeover tycoon ranked No. 26 on the Forbes 400 with a net worth of
$12 billion. Perelman, 70, has been a director in Scientific Games since 2003.
Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871.
Follow @howardstutz on Twitter.
PROFITS DROP FOR WMS
WMS Industries said Wednesday a decline in second-quarter earnings was partly due to costs incurred during the process that led to last week's announced merger agreement with Scientific Games Corp.
WMS said its net income for the quarter ended Dec. 31 was $4.3 million, or 8 cents per share, down from net income of $16.1 million, or 29 cents per share, a year earlier.
The 2012 second quarter benefited from a pretax gain related to the settlement of litigation.
Revenues declined 64 percent to $57.5 million from $162.2 million.
Increased costs for research and development and online marketing expenses to support the company's interactive gaming division contributed to the drop in quarterly results.
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