When titans wed; Cupidity at Revel

Just when you thought the manufacturing sector had engaged in enough consolidation that it would take a pause to pay down debt (or at least burp) comes a mega-consolidation. International Game Technology‘s two biggest rivals will become one. Ronald Perelman‘s Scientific Games is scarfing up Bally Technologies for $3.3 billion plus $1.8 billion in debt assumption. That’s a lot of nickels. The $83.30/share acquisition price is a 38% premium to where the stock was trading and should be a big enough markup to scare off other would-be buyers … although, to be realistic, who is left out there who could swing such a deal? SGMS stock jumped 17% on the news, reversing a yearlong slump.

“The deal expands Scientific Games’ portfolio to include leading casino management systems and table products, including automatic shufflers, proprietary table games and electronic table systems,” according to the Wall Street Journal. As one exec put it, Scientific becomes a one-stop shop. Selling points of the deal include a projected $220 million in savings generated by a Scientific/Bally’s synergy.  Scientific CEO Gavin Isaacs (right) comes out the big winner in the deal, with Bally’s Richard Haddrill (below) and current Chairman David Robbins relegated to the board. Both companies’ board unanimously approved the transaction — a paltry word for such a mega-deal, one hatched in a mere three weeks and in deepest secrecy, with J.P. Morgan bankers helping play matchmaker.

Scientific also gets whatever’s left of SHFL Entertainment and Dragonplay Ltd., Bally acquisitions from the last two years. Dragonplay will help Scientific beef up its online presence. In terms of market capitalization, the deal is a guppy devouring a whale, but the two companies’ revenue base is relatively equivalent. The marriage of Scientific and Bally is very bad news for IGT CEO Patti Hart. Stifel Nicolaus Capital Markets analyst Steven Wieczynski says the merged companies “will effectively be able to compete with Gtech/IGT in every aspect.” They will also enjoy market-share parity of 35% each. “While there has been a tremendous amount of consolidation in the gaming equipment space recently, we didn’t see this combination coming together so quickly,” Wieczynski added.

The merger is unlikely to meet with any resistance from the Nevada Gaming Commission. However, the Federal Trade Commission
ought to take a long, hard look at the antitrust implications, especially since it effectively reduces the domestic industry to two players. (Isaacs counters that IGT is still much larger.) Scientific, don’t forget, is still digesting WMS Industries, which it bought almost a year ago.

And what’s left for the small players? “In our view, this deal could mark the culmination of substantially all the mega-deals in the space. While there are still a handful of relevant domestic-international players, they may have to start thinking about future options,” wrote Credit Suisse analyst Joel Simkins.

* Five key executives at Revel are getting ready to scamper off with $340,000 in court-approved bonuses for selling the resort. The bonuses are indexed to sale-price targets. If the lowest target is met, execs stand to collect $250K each and so on. The price targets are being kept confidential because potential buyers “may try to game the sale based on what they see,” according to Revel attorney John Cunningham. As for the identities of the soon-to-be-rich executives, Cunningham said they were under wraps to “protect employees’ morale, particularly those not included” — which is damn near everybody. I should think the mere news of this get-rich-quick scheme is worse for morale than anything short of closing the resort outright.