Consolidation in Gaming Equipment Continues With IGT Buyout

GTECH's buyout of International Game Technology Inc is just the latest in a long line of gaming equipment buyouts.

Jul 16, 2014 at 2:03PM

You may not notice it the next time you go into a casino, but the number of companies building slot machines, table games, and other gaming equipment is shrinking. Last year, Scientific Games (NASDAQ:SGMS) bought WMS, a maker of slot machines, and Bally Technologies (NYSE:BYI) acquired SHFL Entertainment, a leading shuffle machine and table game company.

On Wednesday, we learned that International Game Technology Inc (NYSE:IGT) is being scooped up by GTECH S.p.A., a maker of lottery and other gaming technologies.

Las Vegas Strip Image

Las Vegas Strip casinos have been in a long consolidation phase, but now game makers are too. Source: Wikimedia Commons.

The deal
In total, GTECH is paying $6.4 billion for IGT, of which $1.7 billion is net debt and $4.7 billion will be either cash or stock. The plan is for IGT shareholders to get $18.25 per share in value, including $13.69 per share in cash and 0.1819 shares of NewCo, the newly formed holding company that GTECH's shares will convert to. But there is a collar that could reduce the number of shares of NewCo to as few as 0.1582 per IGT share if the price of GTECH rises to $28.84. 

IGT shareholders will also have the option to elect all cash or all stock as compensation.

What it means
Since this is the third major merger or acquisition in gaming equipment in the past year, it's certainly notable for the industry. Notice that each of these acquisitions in some way expand company offerings horizontally in the gaming space.

Scientific Games was a lottery product maker and got into slot machines. Bally Technologies was primarily slot machines and acquired table games and shuffle products in the SHFL Entertainment acquisition. And now GTECH is adding slot machines and interactive and social games to its stable.

Las Vegas Image Tmf Owned

The Palazzo and Wynn in Las Vegas. Source: Wikimedia Commons.

The importance of having a wide variety of offerings has to do with the way that gaming is regulated and how sales are made to casinos. Games themselves are regulated separately from the casino, so a casino can't just put out any new slot machine they want, and game makers are selling to a limited number of very large buyers. Having that breadth and scale as well as the ability to include back-office capabilities is valuable to casinos.

But this also has a lot to do with online gaming. Each one of these acquired companies has an online gaming license in Nevada, allowing them to sell games to casinos as online gaming is approved. This is the next big growth market for game makers, and scale is extremely important online, so consolidation makes sense.

Foolish bottom line
For consumers, the consolidation in gaming may actually be a good thing, especially if online gaming is approved nationwide. These three companies will be able to build scale that's necessary, especially in online power, where thousands of players are needed to fill a gaming platform.

On the physical game and lottery side, this just gives them more negotiating power with buyers. It'll be an incremental advantage, but it's been worth the premium for acquiring companies. IGT's buyout showed that again today.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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