Scientific Games Will Soon Put a Bow on Its $609 Million Acquisition

Scientific Games' pursuit of Canada's NYX should culminate in the very near future.

Eric Volkman
Eric Volkman
Dec 1, 2017 at 9:00AM
Consumer Goods

At the rate it's going, lottery and gaming technology specialist Scientific Games (NASDAQ:SGMS) will soon become a larger company. After signing a deal valued at CA$775 ($609 million) to acquire digital gaming specialist NYX Gaming Group in September, Scientific Games has been busy snapping up the company's shares.

It now has a good chunk of NYX, so the deal will almost certainly close before long. Here's a brief look at the arrangement, and its cost to the acquirer.

Scientific Games ad

Image source: Scientific Games.

Scientific approach

In September, Scientific Games and NYX agreed that the former would acquire the latter for CA$2.40 ($1.89) per share. The deal includes the assumption of NYX's debt. It is subject to approval from NYX shareholders in a vote scheduled to take place on Dec. 20.

That poll is largely academic, since the two have agreed that "should NYX shareholders not approve the acquisition at a vote ... or the deal not move forward for other reasons, Scientific Games will make a contractual takeover offer to NYX shareholders for the same share price."

Regardless, Scientific Games isn't taking any chances, and it's not wasting any time snapping up shares. Since the agreement was signed, it's affected a set of purchases from various shareholders that appear to give it around 41% of the Canadian operator.

Although Scientific Games hasn't divulged its strategy, it seems the company aims to build as much of a stake as possible in advance of that shareholder vote. Of course, the more shares it owns -- and presumably votes "yes" in the poll -- the better the chances for the deal to be affected.

Building an early stake gives it a shot at saving a little money, too -- in an earlier round of stock purchasing that gave it almost 11% of the company, it paid prices ranging from CA$2.22 to CA$2.35 ($1.74 to $1.85) per share.

I can't imagine that the buyout won't go through in the end. Besides the anchor stake, Scientific Games also has a compelling price going for it; the offered CA$2.40 per share was more than double what NYX stock was trading at before the agreement was announced.

In the original press release heralding the deal, Scientific Games claimed that it will make the company "a stronger industry leader offering one of the broadest end-to-end portfolios of engaging content, innovative technologies, and digital products and services across gaming and lottery."

It expects the NYX acquisition will be accretive in the first year it's in the portfolio. I'm not sure I'd be so optimistic. After all, the Canadian company has been unprofitable of late, with more net losses than profits across the last five reported quarters.

Gambling on borrowed money

Leaving questions of fundamentals and deal financing aside for the moment, NYX looks like a fine choice for an acquisition by Scientific Games. The north-of-the-border operator's product range includes such offerings as OpenGaming System, a platform that allows users to access a wide variety of gaming content from developers throughout the world. As such, it fits in well with Scientific Games' offerings.

But like its apparent owner-to-be, NYX is burdened by a heavy debt load, which will be assumed by Scientific Games. NYX's long-term debt amounted to nearly CA$400 million ($314 million) in its most recently reported quarter. That amount dwarfed both the company's cash pile (nearly CA$36 million, or $28 million), and is more than double its latest annual revenue figure.

Even though Scientific Games has been reducing its own debt pile lately, it's also well in hock. Its latest reported long-term borrowings amount is over $8 billion, which is proportionally scarier than NYX's figure. (The U.S. company had $223 million in cash on its books, while fiscal 2016 revenue was $2.9 billion.) Interest expense on that debt is a key reason why the company habitually posts bottom-line losses. 

In spite of those uncomfortable numbers, Scientific Games' stock has been on a tear this year because of consistent revenue growth and a plethora of new products. The shares also saw a nice pop after the NYX deal was announced; investors clearly like when this company goes into expansion mode.

But I would urge caution, particularly in the wake of this deal. Scientific Games said it's financing the acquisition with a mix of cash on hand and debt. Yet it doesn't have a lot of the former, so it'll need to lean on the latter to fuel the purchase.

Even though the company's been doing well lately and NYX looks like a good fit, it's not encouraging that the debt stack is about to grow -- albeit modestly. Hopefully, the company will find a way to reverse that dynamic before long.