SMGS - Scientific games

[yadayada]

Anybody looked into this one?

http://seekingalpha.com/article/2377935-scientific-games-this-equity-stub-has-significant-upside-in-the-making

 

and a VIC write up as well. Insiders are buying, could be trading at 2x earnings after the merger with all synergies kicking in. Obviously some risk as well due to debt ofcourse.

[yadayada]

it seems like a stub play. Could there be an interesting opportunnity in Bally tech? SGMS announced that they will pay 83$ per share for this company. Yet it is trading at 76$. a 9% spread.

[Laxputs]

Seems interesting and a lot of work. SGMS 150 page 10-K is daunting and we need to read Bally's too. Massive debt load and on surface value SGMS is an unattractive company. Bally on surface value shows growth and fcf and adequate interest coverage and it's the larger company. So SGMS will acquire Bally and likely realize some synergies. Seems like the biggest catalyst for SGMS is that ttm ebitda for Bally is 348 and interest of 42, versus 253 and 167 for SGMS.  With the greatly increased ebitda that SGMS will now have access to and reduce its debt burden, plus the synergies (without mentioning sales growth potential simply from offering more products from one company or debt restructuring), SGMS should get a large rerating?

 

That is my superficial first impression. SGMS seems like a company I would not want to touch until the deal with Bally is written in stone and there is no way out for Bally.

 

 

[Wilson-TPC]

Looks SUPER interesting. No immediate take... still researching.

[Laxputs]

Even if SGMS realizes all of its ~100m expected synergies from WMS and even if SGMS and BYI achieve their 220mm synergies in the acquisition, post acquisition the company will trade around 7 EV/EBITDA and will have EBITDA/Interest Expense of only 2.3x. That's before m-capex. To me, that seems to offer such small room for error, no?

 

If they realize their synergies and have no hiccups (apparently the industry is in a downward trend), they can perhaps start putting around 350mm towards paying off their 8.5b in debt-- make a 4% debt payment.  Debt structure hasn't been released so if the rates aren't fixed, an uptick in interest rates can't be good here.

 

I also think it's interesting the SA authour uses a multiple of FCF for his valuation. I think with this much debt, industry standard is EV/EBITDA, no? It will take them some time to whittle away at the debt load.

 

The bull case is definitely there. Achieve synergies, grow sales marginally, interest rates stay low, industry doesn't deteriorate further, pay off some debt, have more fcf next year, pay off more debt, repeat, until it does get a rerating on FCF. That rerating could definitely be massive; multiples of today's share price no doubt.

 

I like the ridiculous upside. I would like to understand the margin of safety. Does seem like in 5 years this company will have either lost shareholders a lot of money or quintupled their investment. My prima facie thoughts.

 

[yadayada]

yeah there is too much risk. This would be a small position at best. And I don't feel like putting in a lot of work in a small position like this. You would have to study lottery ticket industry, gaming machine industry etc. And if it goes right you get like 5x your money with seemingly a lot of risk. Are better deals out there. But it is an interesting one to keep on the watch list for in a few years. Maybe if they execute well it is still cheap. I like Lynch's quote here, just wait for the turn around, plenty of time to still get in.

 

Especially if there is a lot of negative emotion surrounding the name, there might be a lag in recognition of the value.

[tombgrt]

Look at Intralot as an alternative. Fewer things have to go right to get a multi-bagger. Packer also had some remarks on SMGS and competitors in the last post. ;)

[walkie518]

interested to reopening this one for discussion prior to earnings as the bond games should hit bottom line

 

stock has gotten cut in half while underlying fundamentals appear to be otherwise improving

 

sales up 18% over the last 4 yrs, neg GAAP net income driven largely by depreciation of owned equipment (likely accelerated?), but last K shows +$500m of cash from ops

 

sgms has the best betting platform?

 

debt is a large burden but interest expense has come down from $610m to $580m runrate despite raising more capital

 

slight increase in share count y/y but not material dilution relative to increase in sales

 

openbet could be a hidden gem unappreciated by the market...anyone have a feel for valuation here?  Is $500-700m a fair number? 

 

[walkie518]

20% lower than last post...no one biting here?

 

no one interested in the company anymore?  looks like insiders bought at far higher prices recently, cash flow appears fairly good despite negative GAAP NI (depreciation)...