Gtech Plays to Win

With budget deficits everywhere, lotteries are a quick way to boost revenues. This has been a boon for Gtech (NYSE: GTK  ) , a full-service provider (design, installation, operation and maintenance) of lottery systems. And it's no longer a states issue; governments across the world are turning to lotteries, and yes, to Gtech.

The good news is that a typical lotto contract is long-term -- lasting usually more than five years -- which means a recurring revenue stream for Gtech.

The bad news? Well, the lottery market is only so big and will, at some point, reach saturation. The dilemma becomes what to do with the cash flow? Share buybacks and dividends are popular suggestions.

Acquisitions are another option, which is exactly what Gtech has been doing. Earlier this year, the company bought debt-and-credit card processor PolCard (located in, well, Poland) for $60 million. There was also the purchase of Interlott Technologies, a developer of instant ticketing machines. That one ran $85 million.

Then, last Friday, Gtech purchased Spielo Manufacturing, maker of video lottery terminals. This time, the price tag was much more significant: $150 million, with a $35 million earnout if management hits certain milestones.

Still, at about 6.4 times trailing 12 months EBITDA, the price tag looks reasonable. But, most important, of course, is what happens going forward. The video lottery market is growing at a rapid clip, and Gtech has 35% of the US market, and Spielo, another 14%. So, the acquisition looks like a pretty good bet.

And don't expect this deal to be the last for Gtech. Interestingly, also last Friday, another lotto systems company, Scientific Games (Nasdaq: SGMS  ) , completed its acquisition of IGT Online Entertainment Systems, a subsidiary of International Game Technology (NYSE: IGT  ) for $143 million.

And none other than Ronald Perleman, a renowned dealmaker, recently bought a $194 million stake in Scientific Games. Clearly, this is an industry in play.

We don't advocate the lottery for investment purposes, but feel free to take us to task on our Gamblin' Fools discussion board. Tom Taulli is the author of six books on investing, such as the StreetSmart Guide to Short Selling (McGraw-Hill), and Investing in IPOs (Bloomberg Press). You can reach him at tom@taulli.com.