IGT Downgraded as Strategic Review Turns Sluggish

Posted on: January 4, 2024, 01:28h. 

Last updated on: January 5, 2024, 01:07h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of International Game Technology (NYSE: IGT) slumped Thursday after the stock was downgraded by Jefferies.

Reno casino gambler Megabucks slot jackpot Nevada
The IGT Megabucks slot machine. The manufacturer’s stock was downgraded amid concerns a strategic review is moving too slowly. (Image: Atlantis Reno)

The research firm lowered its rating on the gaming device manufacturer to “hold” from “buy,” while trimming its price target to $29 from $36. That new forecast implies upside of 15.3% from current levels. Jefferies told clients that the strategic review announced by IGT last June is unlikely to bear near-term fruit.

At that time, the gaming company said it would explore strategic alternatives for its global gaming and PlayDigital units. Those options could include sales, mergers, or spin-offs of the businesses, or retaining the segments and boosting investment in those entities. The London-based company believes evaluating alternatives for those units can unlock shareholder value.

The announcement sparked a rally in IGT shares, contributing to an impressive run over the next several months. The stock retreated during the fourth quarter, and that slide has carried over into 2024, as the shares are off 9.58% over the past week. IGT is now 26.32% below its 52-week high, exceeding the definition of a bear market.

IGT Sale, Spin-Off Unlikely Anytime Soon

While IGT has retained Deutsche Bank, Macquarie Capital, and Mediobanca as financial advisors, indicating it plans to potentially make moves with the global gaming and PlayDigital units, Jefferies told clients not to expect clarity on those fronts over the near term.

Since the announcement of the strategic review, speculation has surfaced regarding potential suitors for the IGT assets. For example, reports emerged last September that Apollo Global Management (NYSE: APO) could make an offer for IGT’s global gaming arm.

Such a transaction could yield a price tag of $4 billion to $5 billion, which is impressive relative to IGT’s current market capitalization of $5.23 billion. That price range also represents a discount to the valuation assigned to slot machine rival Aristocrat Leisure. But as of yet, no formal offer for IGT’s slot unit has been made public.

Jefferies added that IGT faces some overhangs in its Italy lottery business, and that it expects other gaming equities will outperform the Wheel of Fortune manufacturer this year.

Why IGT Transactions Matter

IGT is potentially incentivized to divest its global gaming and PlayDigital units in some form, because that would allow the company to focus on its lucrative lottery business. That’s a segment that arguably doesn’t get the credit it deserves from the investment community.

The lottery business accounts for 75% of pro-forma earnings and is a major earnings before interest, taxes, depreciation, and amortization (EBITDA) driver, 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 appreciation they should from market participants.

Data confirm domestic lottery sales are soaring this year. The lottery has historically been one segment of the gaming industry that proves sturdy when consumers dial back discretionary spending.