As M&A activity surges to record levels, Scientific Games and International Game Technology (IGT) are using the frenzied seller’s market to rationalize their product offerings and de-lever their balance sheets. The 2013 purchase of WMS Industries, Inc. by Scientific Games kicked off a series of transactions involving SHFL Entertainment, among others, that consolidated much of the casino gaming equipment industry in the hands of two lottery operators; GTECH, formerly Lottomatica SpA, and Scientific Games. These two companies are now leaning into M&A to divest what have become non-core assets and to maximize their competitive advantages in a rapidly evolving gaming industry.
Consolidation of the gaming equipment industry diversified the businesses of Scientific Games and IGT but also left them highly levered. Covid-19 and its silencing of casino floors turned digitization into an existential requirement. In the last year, IGT sold its legacy Italian B2C gaming machine and sports betting businesses, while Scientific Games announced plans to divest its lottery and sports betting arms. Changes are occurring that see companies prepare for a future were we purchase lottery tickets online, and even land-based casino operations require complementary digital peripherals like cashless payment. Corporate boards across gaming are monetizing non-core assets and refocusing strategies on areas with the highest perceived growth potential, including scalable land-based and virtual products.
The suddenness with which the pandemic upended the ordinary course of business has emphasized the cost of delay and, in many cases, has created a strong preference among corporate boards for quickly acquiring capabilities over internally developing them. Scientific Games and IGT are focusing on casino equipment and systems, as well as online and social gaming. These former lottery competitors are using the current opportunity to pay down their legacy debt while investing in the future, by securing maximal value for non-core assets. If M&A is viewed as a good way to redeploy assets and retool focus, then liquidity options have never been more plentiful. In September 2021, Scientific Games announced the sale of its OpenBet sports wagering business to Endeavor Group Holdings, Inc. which itself IPO-ed only earlier this year. Two months prior, it had announced the divestiture of its lottery business, which it stated could take the form of an IPO, straight private equity or strategic sale, or combination with a special purpose acquisition company (SPAC).
Indeed, hundreds of existing SPACs are still searching for targets. Regardless of how it happens, Scientific Games successfully exiting lottery will reshuffle the deck and foreshadow further near-term changes within gaming. In no more than two decades, the company will have transitioned from racing systems, to lottery, to casino and online gaming. Risks to the current M&A boom have come into view in the form of inflationary pressures that may pause the era of cheap money; changes to the capital gain tax regime that may shrink seller proceeds; and assertive regulators that restrict options for companies in particularly concentrated or sensitive markets. Goldilocks conditions to transform one’s business continue for now; however, many foreign markets that typically lag the US have only just begun participating in the M&A boom this year.
The experience of Scientific Games and IGT shows the necessity of constant change, even when that means shuffling out your legacy business for something new. The experience of Covid-19 shows the costs of delaying such change generally, as well as the penalties of slow-rolling new technologies specifically. As gaming M&A shuffles the deck ever faster, an increasing number of players are pulling up a seat.
Constantine (Gus) Petropoulos is a corporate partner in Hughes Hubbard’s New York office. From 2011 to 2014, Gus advised Scientific Games on acquisitions, JVs & commercial transactions, including investments in online, lottery and casino.