MGAM - Multimedia Games

[Packer16]

A really cheap gaming machine developer/operator.  It is selling at 1.6x times EBITDA and 4.0x FCF.  Its larger competitors IGT, BYI and WMS are trading at anywhere from 5.2x EBITDA (23x FCF) (WMS) to 7x (12x FCF) (BYI) and 9x (15x FCF) (IGT).  Baupost is very big holder at prices much higher (est $7 - $10) than the current price.  

 

These firms both sell and lease (with a % of the take) to its customers.  The revenue model includes recurring operating revenue share from installed machines and in some cases selling machines (a smaller portion of sales).  This is akin to a leasing model with a profit share.  The % of leasing/software sales as a % of total is 40% (WMS), 55% (IGT), 65% (BYI) and 75% (MGAM).  Clearly the leasing revenues provide a nice recurring stream of revenues versus one-time sales.  What is unusual is MGAM has the highest % leased and the lowest by far EBITDA and FCF multiple.

 

In addition, MGAM is installing more machines and are replacing 3rd party machines (which they have historically provided) with their own machines.   

 

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[Ravi]

The capex of $35-$45MM, is this something they need  every year to bring new products to replace the old products to survive. Is this capex adding any incremental cash flow? What is their moat? Looks like their tournevent is fun product. I just watched their video.

[Packer16]

There is required cap-ex (estimate to be $33 to $37m in 2011) associated with a small amount of growth and replacement of 3rd party machines so it should go down once the third party machines are removed from the pool.  Another adjustment is you need is to add back the LT & ST Rcv as a non-operating asset because they will receive this cash before the end of the contracts.  The development contracts run from 4 to 8 years.  From the current round of renewals it sounds like renewals are 3 to 4 years.  The market may be worried that in the renewals of the larger pools of machines in 2013 that they may loose floor space.  For the 2010 renewals they did lose floor space from 50% to 25% but that is undestandable given MGAM's large percentage with 5 competitors.  With the larger pools thier floor space is about 35 and 16%.   

 

The moat is pretty much state approvals and there only I think 5 players in this space including MGAM.  There is a short thesis (IGT comes in and wipes MGAM out of their position) on Value Investors Club which did not play out as MGAM has developed thier own content.  I believe the company was shopped around last year for sale after the previous CEO left but bids were not high enough for the shareholders.  Given their cash flows, I think they would be a good acquisition target. 

 

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