Fitch: Slot Supplier Industry Consolidation Long Overdue

NEW YORK--()--Industry consolidation of major slot suppliers is arguably overdue, according to Fitch Ratings.

Duplicative costs including research and development (R&D) have helped prime the industry for consolidation and we believe merger and acquisition activity in the sector underscores demand for slot suppliers' content in a slow growth environment.

Scientific Games recently announced that it would purchase supplier Bally Technologies, Inc (Bally). Scientific Games purchased top four U.S. slot supplier WMS in 2013. The Bally buy follows GTech's announced acquisition of International Gaming Technology (IGT). Both businesses stand to benefit from the expansion of online gaming and other quickly evolving channels, which include social gaming.

The Scientific Games' merger further consolidates the already oligopolistic slot supplier industry to create an almost equal sized competitor to IGT, the incumbent market share leader, and offers tangible cost synergies.

Scientific Games estimates $220 million in cost synergies from the merger, which we think is achievable. Scientific Games says $33 million will come from cost of goods sold, $43 million will be generated via R&D with $144 million from sales, general, and administrative (SG&A) costs. The SG&A target is less than one-half of Bally's annualized SG&A costs ($88 million for quarter ended March 31, 2014) and the R&D estimate is justifiable based on how much IGT spends on R&D relative to its roughly $2 billion slots-related revenue base.

In addition to cost synergies, we believe a marriage of slots and lottery business will enable Scientific Games and GTech to leverage Bally's and IGT's slot content, respectively, across their lottery business. This is especially important because of the proliferation of online gaming, which lottery operators have an opportunity to participate in. Scientific Games, along with 888, is the main online gaming vendor for the state of Delaware.

As casino operators remain content with somewhat older gaming floors, the slot machine replacement cycle has not been able to fully recover post-recession. We believe new casino openings in the U.S. will also be far and few between relative to the rapid ascent of regional casinos in the 1990s and early 2000s.

Fitch expects the fundamentals for the slot segment to remain soft longer term as more of the casino floor is allocated towards table games and regional casino markets continue to be beleaguered by the more frugal U.S. consumer. Slots represented about 73% of positions across Caesars Entertainment Corp's portfolio of 30 casinos in 2013 compared to 78% in 2007 on the same-store basis. Fitch believes that the younger generations' preference for table games will continue to drive this trend and expects slots to account for roughly 75% of the U.S. regional casinos' revenues over the next 10-20 years relative to about 85% currently.

Fitch discussed the demographics shift and the regional casino headwinds in a recent report "U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)" dated July 21, 2014, which is available on our website www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751939

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+1 212 908 9179
Corporates
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Contacts

Fitch Ratings
Alex Bumazhny, CFA
Director
+1 212 908 9179
Corporates
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com