Gtech will pay $18.25 for each share for Las Vegas-based IGT, or $13.69 in cash plus 0.1819 shares in a newly formed holding company, the Italian company said in a statement today. That’s about 18 percent more than IGT’s last closing price of $15.50. The total transaction value is about $6.4 billion including about $1.75 billion in existing IGT debt, Gtech said.
The deal makes Italy-based Gtech a much larger player in the 317 billion-euro ($430 billion) global gambling business at a time when the industry is grappling with slower growth, competition from Web gaming and consolidation. Gtech itself is the product of a merger with Lottomatica, operator of Italy’s state lottery, in 2006. The transaction is Gtech’s biggest ever, according to data compiled by Bloomberg.
“This is a transaction that we firmly believe will transform the gaming industry,” Gtech Chief Executive Officer Marco Sala, who will also be CEO of the joint company, said on a conference call. “We will have a library of games that will surpass that of any other company in the industry.”
IGT shares jumped 8.5 percent to $16.82 at 9:39 a.m. in New York. Gtech rose 4 percent to 19.18 euros in Milan.
The new holding company will be based in the U.K. and have operating headquarters in Las Vegas, Rome and Providence, Rhode Island, Gtech said in the statement. It will delist from Milan’s bourse after the deal closes and apply for listing solely on the New York Stock Exchange, it said.
“Gtech has been trying to increase its share of the U.S. slot machine business, and this does that in a significant way,” Todd Eilers, director of research at Eilers Research LLC in Anaheim Hills, California, said in a phone interview. “Given the sluggish growth in its domestic market and the increased competition, it was probably the best decision for IGT.”
The new company would have more than $6 billion in revenue and more than $2 billion in earnings before interest, taxes, depreciation and amortization, assuming a currency exchange rate of $1.36 per euro, according to the statement. The company is expecting to add sales in social gambling, which brings players together on platforms such as Facebook Inc. and on mobile devices, Sala said.
The acquisition is subject to the approval of shareholders of both companies and is expected to be completed in the first or second quarter of 2015, according to the statement. Current Gtech shareholders will own about 80 percent of the new company while IGT shareholders will own the rest, according to the statement.
The deal has been approved by the boards of both companies and is subject to antitrust and other regulatory approvals.
“The integration process should be long and challenging and should be an opportunity for competitors to pick up share in the next 18 months or so,” Robert Shore, a U.S.-based analyst at Union Gaming Group, said in an e-mail. Still, the deal gives “a lot of synergies with distribution and content.”
Gtech will finance the cash portion of the acquisition through a combination of cash on hand and new financing, it said. The company said it has binding commitments of $10.7 billion from Credit Suisse Group AG, Barclays Plc and Citigroup Inc.
The deal will leave the joint company with net debt at 4.5 times to 4.9 times Ebitda, which may be reduced by 0.5 times to 0.6 times after cost savings kick in, Gtech Chief Financial Officer Alberto Fornaro said on the call.
That debt level may not be enough to sustain an investment-grade rating, he said. Gtech is currently rated Baa3, the lowest investment grade, at Moody’s Investors Service, and BBB, the second-lowest investment grade, at Standard & Poor’s.
Still, the dividend level will be in line with recent years or higher following the transaction, Fornaro said.
Morgan Stanley is advising IGT on the deal and Credit Suisse is advising Gtech, according to the statement.
IGT pioneered a number of innovations in the slot machine industry, including video poker and devices that paid in paper vouchers rather than coins. Its Wheel of Fortune game was one of the most successful of all time.
IGT’s revenue fell 27 percent between 2007 and 2009, as the global recession clipped casino and consumer spending on slot machines. IGT Chief Executive Officer Patti Hart agreed to pay as much as $500 million in 2012 to purchase Double Down Interactive LLC, a maker of slot machine-like games for Facebook.com.
Investor Jason Ader initiated a proxy fight in 2013 that led to one nominee from his group being elected to IGT’s board. Ader argued that IGT had drifted under Hart’s leadership, focusing too much on social media and neglecting opportunities for slot machine sales in Asia. IGT and Hart disputed his claims.
IGT has seen its share of slot machines sold in North America fall from more than 60 percent in 2003 to 41 percent last year as rivals such as Scientific Games Corp. and Konami Corp. (KNM) increased sales, according to Eilers. The company also lost key personnel, he said.
Eilers projects the installed based of slot machines in North America to increase about 1.2 percent over the next eight years, down from approximately 5 percent in the mid-2000s.
Scientific Games bought rival slot machine maker WMS Industries Inc. for $1.5 billion last year, while Bally Technologies Inc. acquired SHFL Entertainment Inc., a maker of card shuffling devices, for $1.3 billion.
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