Lottery company Scientific Games acquires slot manufacturer WMS

A move into the casino side of the gaming manufacturing sector by one of the lottery industry's largest equipment providers was praised Thursday as a shrewd business move by Wall Street.

One analyst, however, was cautious about the task New York-based Scientific Games Corp. faces in acquiring slot machine giant WMS Industries for $1.5 billion.

Scientific Games agreed to pay WMS stockholders $26 per share - 59 percent above Wednesday's closing price - and assume roughly $85 million of WMS debt.

"While the deal makes considerable sense for WMS given current industry headwinds and company specific struggles, we find the rich premium and pro forma outlook to be somewhat daunting for Scientific Games," Deutsche Bank gaming analyst Carlo Santarelli told investors.

The buyout, which is pending WMS shareholder and regulatory approval, is expected to close by the end of the year.

Nevada gaming regulators also will have to sign off on the transaction. Scientific Games is not currently licensed in Nevada.

WMS is considered the third-largest slot machine manufacturer behind International Game Technology and Bally Technologies. The company has branched out into the social gaming and interactive gaming platforms.

Union Gaming Group managing director Bill Lerner thought the transaction could boost investor interest in the gaming manufacturing sector.

"We haven't seen any deals recently in the equipment space other than small tuck-in acquisitions," Lerner said. "The deal makes sense and it was a good time for Scientific Games to pull the trigger."

WMS is headquartered in suburban Waukegan, Ill., but maintains a large sales and manufacturing office in Las Vegas. The company employs 140 people in Las Vegas and 25 workers in Reno.

"The combination of Scientific Games and WMS yields tremendous benefits to our customers, shareholders and employees," WMS Chairman and CEO Brian Gamache said in a statement. "We view this transaction as the next logical and strategic step in offering continued innovation in gaming."

The deal was announced before the markets opened Thursday.

Shares of WMS closed at $24.75 on the New York Stock Exchange, up $8.38 or 51.19 percent. Shares of Scientific Games, which are traded on the Nasdaq Global Select, closed at $8.89, down 4 cents or 0.45 percent.

Eilers Research gaming analyst Todd Eilers said Scientific Games, which manufactures instant lottery tickets, lottery and video gaming systems and provides server-based gaming systems to states and government-run lotteries, has been looking to acquire a traditional slot machine vendor.

"There are clearly synergies in the VLT, government sponsored gaming, and interactive sectors," Eilers said. "The multiple that Scientific Games paid is fair considering competitor valuations and WMS's recent struggles in the market. At the end of the day, we view this as a good strategic move for Scientific Games at reasonable price."

Scientific Games is the smaller of the two companies, with a market capitalization of $756 million. In its third quarter, the company reported revenues of $227.5 million and a net loss of $27.1 million.

WMS has a market capitalization of $1.36 billion. The company which is scheduled to announce second quarter earnings next week, reported revenues of $159.1 million in the first quarter and net income of $9.3 million.

Wells Fargo Securities gaming analyst Cameron McKnight said consolidation among gaming equipment manufacturers has been rumored and discussed for the past eight years.

"The acquisition makes sense for Scientific Games as it does not have a casino slot business at present, and we believe it has been evaluating entry into the casino market for some time," McKnight told investors.

Scientific Games Chairman A. Lorne Weil called the acquisition "transformational" for the lottery company and will open up new business markets.

"We expect to combine our game content, technology, operational capabilities and respective geographic footprints to create an enterprise poised to capitalize on significant growth opportunities around the globe," Weil said in a statement.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871. Follow @howardstutz on Twitter.