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Why Scientific Games Stock Dropped 15.6% on Thursday

By Travis Hoium – Oct 28, 2021 at 6:24PM

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The sale of a division isn't going over well with investors today.

What happened 

Shares of gambling industry supplier Scientific Games (LNW -1.65%) fell as much as 15.6% in trading on Thursday after announcing the sale of part of its business. Shares closed the day down 8%. 

So what

Brookfield Business Partners has agreed to buy Scientific Games' lottery business for $6.05 billion, which includes $5.825 billion in cash and up to $225 million in earn-outs based on earnings before interest, taxes, depreciation, and amortization (EBITDA) targets in 2022 and 2023. The deal is expected to close in the second quarter of 2022. 

Smartphone with a gambling game sitting on a poker table surrounded by poker chips and die.

Image source: Getty Images.

This is another unwinding of Scientific Games' business following the September announcement that it was selling the sports betting business OpenBet for $1.2 billion to Endeavor Group.

Scientific Games spent years acquiring its way to a leading position in the gambling and lottery market, but took on about $9 billion in debt to do so. Now, it's unwinding some of the company in order to pay off debt and hopefully return to profitability. 

SGMS Revenue (TTM) Chart

SGMS Revenue (TTM) data by YCharts

Investors may be concerned today that after these sales there won't be enough left to justify the company's valuation. 

Now what

Today's move needs to be put into a little bit of perspective. In the last year, Scientific Games stock is up 158%, and that's even after today's drop. So, investors had gotten more bullish on the business even before these sales took place. Management is going all-in on wanting to be a "cross-platform global game company," and that's likely to mean more digital offerings as online gambling grows. It's a risky strategy, but an improved balance sheet and slimmed down business may make it possible for Scientific Games to become a growth stock in gambling once again. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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