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Scientific Games (SGMS) Chief Financial Officer Michael Eklund recently disclosed that the gaming content and technology company was “very well advanced in the process” of divesting its sports betting and legacy lottery businesses. Considering all of the excitement around—and capital pouring into—the sports betting category, it might seem like an odd time for a company that has invested heavily in the space (see: $625 million to acquire NYX Gaming Group, the purchase of Don Best Sports Corp. and SportCast) to exit. But Craig-Hallum Capital Group senior research analyst Ryan Sigdahl believes SGMS is looking at the business opportunistically. He says the company is sitting on “two great assets,” and selling them off while they are in high demand is a smart and efficient way to “simplify [the business], deleverage and maximize value for shareholders.”
Our Take: To be clear, SGMS did not choose their casino gaming business over sports betting and the lottery because it thinks it will grow faster or be comparatively better (though COVID-19 has been a boon to the digital gaming industry and the lotto business is low growth). The decision to part with “sports betting is really [the company being] opportunistic from a market multiple standpoint. And they are selling the lottery [business] because it packs the biggest punch from a deleveraging standpoint. There are also less synergies with that business than there are with gaming, social and online,” Sigdahl said. For the record, Scientific Games did not respond to our request for comment.
The Craig-Hallum Capital analyst suggested Scientific Games could expect to rake in “north of $5 billion” for its lottery business and somewhere between $750 million and $1 billion for the sports betting operation. On the sports betting front he pointed to the closest comp, Kambi, which has a $1.4 billion valuation. Using the same 7x sales multiple would give SGMS a valuation just shy of $1 billion. Of course, if a bidding war were to erupt, the company might be able to fetch as much as $1.5 billion for the asset. For informational purposes, Eilers & Krejcik Gaming partner Chris Grove said Scientific Games’ “core casino supply business probably trades somewhere between [lottery and sports betting].”
The sale of the two businesses will support ambitions to cut down on the company’s debt load quickly. SGMS is currently “9x net levered on a trailing basis (they have $9.2 billion in long-term debt),” Sigdahl explained. “[But] with these divestitures and with improvements in the core businesses that are left, [the company] should be below 4x leverage (a multiple more in line with the competition).”
There are several ways Scientific Games could go about unloading its sports betting and lottery businesses. One option would be to spin off the two verticals and take them public via an IPO or SPAC merger. In theory, a public listing as a standalone sports betting company would bring its “value more in line with what [it is] worth, versus it being a small sliver of Scientific Games overall,” Sigdahl said. The research analyst noted public investors have been “very receptive [to standalone sports betting businesses] and are looking for new ways to play the investment theme.” Grove echoed those thoughts, adding that the market’s interest in sports betting companies is likely among the reasons why SGMS is preparing to part with the business.
SGMS could also choose to sell the assets to a strategic buyer. For FanDuel (which is currently transitioning from IGT to Scientific Games’ sports betting tech) and most other operators, the chance to acquire “the best tech in the market and vertically integrate it—similar to what DraftKings is in the process of doing with SBTech”—would be an attractive one, Sigdahl said. The gaming analyst reminded that the SGMS platform “worked during the Super Bowl when their main competitor, Kambi, crashed.”
Moving forward, SGMS should have a streamlined, gaming-focused business (which will include traditional brick-and-mortar casinos, slots, online, real-money iGaming and a social casino). Grove says that is more than enough for the company to withstand the loss of its sports betting and lottery operations. “The retail casino industry is large, and Scientific will remain a cornerstone supplier for that industry,” he said. For what it’s worth, SGMS shares hit a 52-week high in the wake of the divestiture news ($80.81). The share price has since steadily declined closing at $69.63 on July 13.