International Game Technology (NYSE: IGT) was one of Thursday’s best-performing gaming stocks as the shares surged following a report that Apollo Global Management (NYSE: APO) is considering a bid for the company’s global gaming division.
On the news, shares of IGT surged 10.45% today on volume that was more than triple the daily average, extending the stock’s year-to-date gain to 46.38%. A Bloomberg article says Apollo is “among” parties interested in IGT’s global gaming unit, but other potential suitors weren’t identified.
Citing unidentified sources with knowledge of the matter, the article noted IGT could command $4 billion to $5 billion, including debt, in a transaction involving the unit, which includes its slot machine business.
Even the low end of that range would represent a coup for the seller because it closed today with a market capitalization of $6.02 billion, indicating the investment community hasn’t appropriately valued IGT’s global gaming arm.
Sale Could Put Focus on IGT Lottery Biz
IGT announced in June that it’s mulling strategic alternatives for its global gaming and PlayDigital units — moves that could clear up the broader investment thesis and spotlight the profitable lottery arm. At that time, the company said there was no hard timeline for engaging in transactions.
The lottery business accounts for 75% of pro-forma earnings and is a major earnings before interest, taxes, depreciation, and amortization (EBITDA) driver and undervalued relative to competing assets. Analysts argue that when lottery assets are attached to conglomerate-like gaming companies, which is the case with IGT, they don’t get the credit they deserve from investors.
By parting with its global gaming and PlayDigital units, IGT would likely streamline its investment thesis, potentially making the shares more appealing to a broader swath of market participants.
Possible buyers for PlayDigital haven’t been mentioned. In June, IGT cautioned that it may ultimately keep PlayDigital and the global gaming unit in-house or spin those businesses out rather than sell them to other companies.
Apollo Interest Practical
Apollo’s potential interest in IGT’s global gaming arm, though not yet confirmed, is reasonable because the private equity behemoth owns other gaming assets and has been tied to a slew of industry consolidation rumors in recent years.
Additionally, even at the aforementioned $4 billion to $5 billion price range, a buyer would be getting IGT’s slot machine unit at an attractive valuation and discount to where Aristocrat Leisure currently trades. That Australian company is the dominant name in the high-end slot category and a direct rival to IGIT.
Apollo has slot machine experience as it previously was the largest shareholder in PlayAGS (NYSE: AGS). The private equity firm is also the operator of the Venetian on the Las Vegas Strip.