International Game Technology (IGT) (~$3.5B market cap) is a gaming supplier, the result of a 2015 merger of IGT and Gtech that is currently being unwound. The historical IGT business is a video gaming terminal (slot machine) business, it is being spun in Q3 2025, merged immediately with smaller peer Everi Holdings (EVRI) in a reverse morris trust and the combined IGT/Everi will then be acquired by Apollo Global. The end result is a $4.05B cash payment, before taxes and expenses (estimated at $400MM), to RemainCo (the IGT name is going with the slot machine business) which will be a global lottery management business (itself the creation of a merger between Italian Lottomatica with U.S. based lottery operator Gtech in 2006). The lottery business (think scratch offs, draw games, multi-state lotteries) is generally a good one, it grows at GDP+, has infrastructure like characteristics, reasonable capex requirements, high barriers to entry and stable competition.
Assuming the deal with Apollo closes, the market is assigning a low valuation to RemainCo:
There are only a few lottery competitors, closest peer Scientific Games (now Light & Wonder, ticker LNW)
sold their lottery business in 2022 to Brookfield for about 11x EBITDA, Intralot (Greek based) trades for 9.5x, La Fancaise des Jeux trades for 9x and The Lottery Corporation (2022 spin from Tabcorp in Australia) trades for 16x. Proforma RemainCo is trading well below all of these at ~5x EBITDA.
One reason spinoffs sometimes work is they create pure plays that generally trade a premium to a conglomerate. Occasionally there are some downsides to breaking a company up, here while RemainCo should trade at a premium to the slot machine segment, my guess is it's currently being discounted because of revenue concentration (in addition to the Apollo deal obscuring value) that becomes more apparent when you split the business up.
The Italy Lotto makes up nearly 40% of RemainCo's revenue, unlike the U.S. (where RemainCo will have contracts with 37 of the 48 states/territories that have lotteries), Italy runs its lottery at the federal level via two contracts (roughly equal in size). One of those contracts (Italian Gioco del Lotto game) is expiring this year and the bidding process is competitive. Lottoitalia (a joint venture that IGT owns 61.5%) has run the contract since the 1990s, good time to mention that IGT is controlled by an Italian family via their De Agostini holding company (~42% ownership, ~60% of the vote) who are the original owners of Lottomatica and generally seem to be doing right by shareholders. One potential reason for raising a lot of liquidity this year is the Italian lotto contracts feature an upfront payment by the winning bidder, reported to be at least $1B but likely will end up being more. IGT accounts for the upfront fee as an asset that is then amortized straight line over the 9 years of the contract (they do remove the upfront amortization in their adjusted EBITDA metric). The request for proposal was issued a couple weeks ago with a March 17th deadline, a reported other bidder is a consortium led by Flutter Entertainment (FLUT), which admittedly is a formidable, well financed competitor (but lottery is currently a negligible piece of their business). My guess is IGT/RemainCo will do what it takes to win the contract, even if it means overpaying on the upfront fee.
But if they don't, the stock still seems pretty cheap to me:
By removing the $1B upfront fee and ~$250MM in EBITDA (my guess, hoping that's overly conservative), it would only take EV/EBITDA up to 5.5x. The stock would probably fall a fair amount, but the potential for shareholder returns via a buyback would increase and potentially offset some of that decline. They've publicly stated their plan is to paydown $2B in debt, uses for the remainder of the Apollo funds hinge on the Italian Lotto bid, but they've stated some will go to shareholders in form of a buyback or special dividend.
Incumbents are hard to beat, especially ones so deeply entrenched, I think the Apollo transaction and Italian Lotto RFP fears are obscuring a really good business that should trade at a more normal 8x EBITDA (discount to its peers for being controlled) when all the dust settles. As always, appreciate feedback, especially if you're on the ground in Italy, please share any thoughts on the RFP process.
Disclosure: I own IGT Jan '27 LEAPs
What is the reason that think your discount to peers for being controlled is a more accurate one than the market is implying?
ReplyDeleteI mean I guess in your post you’re saying because the market is being a little lazy and/or scared, but I’d be worried they were just being more knowledgeable about Italian stuff, or other regional differences in general that means this does deserve to trade at a discount to peers.
You're probably right, the market is a competitive place, I'm probably missing something.
DeleteNice write-up, this seems interesting. Potential for a ~30% shareholder return plus owning the business at <6 EV/EBITDA. Whether owning the RemainCo is worth it at that level depends on their capital allocation imo. If they have solid dividends + buybacks the return should be good and most likely the multiple will rerate. Seems low-risk with good upside potential.
ReplyDeleteAre there any other contracts they could lose?
Although it seems like adjusted EBITDA doesn't seem to account for net income attributable to non-controlling interests? Also I don't like including SBC there. That would reduce EBITDA by ~$180MM.
DeleteTheir tax rate is also quite high at 33%, compared to FDJ for example.
Then also considering their interest expenses cash flow generation won't be that impressive. As a whole probably still pretty cheap though, but less so than I initially thought.
Also, hope I'm not being stupid here but aren't the upfront license costs actually not subtracted from adj. EBITDA either? Cash flow takes another hit when accounting for CapEx.
DeleteGood catch on SBC, I'm not used to looking at companies with a lot of SBC, so that was a clear miss by me. I believe the upfront amortization is being removed from the Adj EBITDA metric, but I still think they convert quite a bit of EBITDA to cash flow.
DeleteThanks for the idea. One thought on valuation:
ReplyDeleteIf you are valuing the company by capitalizing earnings or EBTIDA with a multiple, you are implicitly putting a value on the cash flow into perpetuity, when in reality the upfront payment only gives them rights for nine years. To be fair we need to add in the PV of a $1B+ upfront payment every nine years and add it to EV, or alternatively work it into cash flow.
It reminds me of satellite companies. Investors value them on EBITDA but you have to replace the satellites every 15 years, so while they look cheap the stocks never work because investors are doing bad math.
Having said all of that, your math points to a really cheap stock without the Italy contract, so it may not matter. And I agree it will be hard to unseat them. I haven't worked thru the numbers yet but it sounds like the SBC puts a decent sized dent in the valuation.
Thanks again.
The upfront fee is subtracted out of their EBITDA numbers, but I agree, its a little tricky to value, probably deserves more than a back of the envelope EBITDA multiple valuation.
DeleteAny thoughts on the large payment to minority that shows up on CF? How should we factor this minority interests properly in the EV?
ReplyDeleteYeah, let me take the feedback back and think about it. The minority interests is almost entirely related to the two JVs that have the two Italy Lotto contracts, so it's not as cheap as it looks on the surface, but the downside has a higher ceiling if they lose the Italy Lotto contract this year.
DeleteIt looks like IGT owns low 60% of the 2 contracts. I would take out 40% (or more e.g. 50% for conservative sake) of Italy business value. This means the minority interest would 16% to 20% of the EV (said another way, the true EBITDA going to IGT shareholder is ~80% of reported EBITDA assuming margin are the same across geography).
DeleteSo the 920m EBITDA you show above is really 736m, which is 6.9x of the adjusted EV. The comps I saw trade at 7~9x (OPAP, Intralot, FDJ, Pollard). IGT should trade at a discount still given their contract length seems to be on the shorter side if you look at what FDJ and the AU lottery corp is getting. Furthermore, this valuation implies also that the market is pretty much pricing in IGT losing the contract. Although the probability of losing is likely lower, Flutter is serious about Italy market (bought Sisal and then Snaitech) which means it could over-bid for "strategic value".
I still like IGT and like you own the name via option. This is a super stable and counter cyclical business - share price is way more volatile than the nature of the business which creates opportunity. The mgmt team is willing to transact for shareholder value. I am just frustrated with the JV structure and the upcoming contract renewal capex need (likely a 7~10 year cycle with capex running from 200m to 400m and then coming back down to 200m).
Thanks MDC, interesting idea. Why Jan '27 LEAPs over common here ? Thanks.
ReplyDeleteThey're available, most of the stuff I buy don't have two year LEAPs. Plus I think we could see an inflection after the transaction closes, possible big special dividend or share buyback, as always, I want a little extra juice if I'm right.
DeleteAny concerns about the impact of potentially losing the Italian contract? Flutter has deep pockets and has shown an interest in Italy with the Playtech/Snaitech acquisition. Also, what do you think timing is on that (to maybe jump/hedge that binary risk? Back in 2016 it took a month after the bids deadline for them to announce a winner (IGT) but I think they may have been the only bidder.
ReplyDelete