Description
IGT is a lottery and slot machine supplier that’s been previously written-up on VIC. In February, IGT announced it was splitting the business and the slot machine operator would merge with EVRI. There is a really nice write-up and comment section on EVRI originally posted by regency435 on February 5th before the merger was announced and I’d recommend it and regency’s last post on his thoughts on EVRI post-merger.
The Lottery business is a $1.1Bn EBITDA business (I’m not adding back stock-based compensation like management to nor adjusting for amortizing service revenues) that manages lotteries for 92 customers worldwide, including 37 of 48 U.S. lotteries with a #1 market position in a recession resilient market.
IGT shareholders will continue to own the lottery business and receive 103.4mm shares of EVRI in the merger. EVRI will borrow $3.7bn of debt to refinance existing EVRI debt and distribute $2.2Bn in net proceeds to the Lottery business.
The spin-off will be taxable for taxable accounts and there will be some tax leakage at the corporate level – management estimates $100m. Pro-forma for the transaction, I believe at current prices you are creating IGT at 6.1x EBITDA, which seems quite low for #1 market share operator of a stable, recession resilient business that’s a cash cow. Further there is a 43% shareholder in the, De Agostina SpA that should ensure alignment with shareholders and the spin-off itself is evidence of trying to unlock value for shareholders.
M&A and public company comp analysis suggests the lottery business should trade in the ~9x range, representing substantial upside. Historically, the Company has traded at a lower multiple in part due to being combined with the slot operation.
2022 was a tough year for the lottery business as it came off it’s post COVID highs, but the business appears to have stabilized with SSS returning to positive territory in 2023.
I think there are two likely downside scenarios – a normalization of EBITDA margins to pre-COVID levels or the loss of their contract with Italy – I believe Italy represents ~$200mm of EBITDA. Both result in similar EBITDA levels, and result in a $16 downside case at current EVRI stock prices.
As discussed in regency’s write-up, I think there is also considerable upside in EVRI providing additional upside to the IGT ownership. Based on comps, M&A, and historical valuation, I believe the combined EVRI should have ~50% - ~180% upside. That said, it will be a fairly levered business and downside is meaningful as well.
Combining the Lottery and EVRI upside / downside, analysis, I get to a compelling conclusion that the outcomes are skewed towards the upside.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Completion of spin-off / merger