International Gaming Technology
Executive Summary: IGT, controlled by the De Agostini family (42% shareholder), is a global gaming company with two divisions: lottery and gaming, and is currently trading at 6.3x 2024 EV/EBITDA. Apollo’s acquisition of the gaming division will net IGT $3.6bn and recreate IGT as the global #1 lottery B2B service pureplay with a dominant 75-90% market share in the US and Italy, along with avg 30 years tenures for its top 10 customers. While uncertainty around the 2025 Italian lottery contract renewal has pressured the stock, we believe this selloff is overdone, and our analysis underwrites a long in IGT shares with 92% upside versus 23% downside over a 1-year horizon.
Investment Thesis:
1. IGT controlling shareholder and management team has changed corporate direction
· Before 2020, IGT was empire building. IGT was created through the acquisition of GTECH (US lottery business) by Lottomatica (Italy lottery and gaming business) in 2006 for $4.8 bn, and the acquisition of IGT (US gaming equipment business) in 2014 for $6.4 bn. 2019 net debt to EBITDA was at 6.0x v.s <2.0x expected going forward.
· After 2020, IGT began divesting noncore assets, selling Lottomatica (Italy B2C business) for ~€1 bn (5x EBITDA) to Apollo in 2020 and selling its Italian commercial payment business for €700 mn (15x EBITDA) in 2022.
· In 2023, IGT management team initiated a strategic review of its gaming business due to a significant conglomerate discount in its stock compared to lottery and gaming peers
2. Announced IGT gaming business sale to Apollo will re-create IGT - No.1 global lottery pureplay
· In February 2024, IGT announced a spin-off of its gaming business, which would merge with Everi.
· In July 2024, Apollo announced to acquire Everi and IGT’s gaming business which would provide ITG $3.6 bn est. net proceeds, which was more advantageous compared to the $2.2 bn alternative. Proceeds from the $3.6 billion Apollo sale are expected to reduce gross debt by $2 billion, fund the Italian contract, and provide returns to shareholders.
· The deal is expected to close in early 2025. Everi trading at a 7.5% spread to the Apollo sale price, confirming low risk in the deal closing.
· The breakup is logical. The lottery business is more stable, while the gaming business has higher growth potential but is cyclical. The lottery is also the bigger business accounting for 60% of FY23 revenue and 70% of EBITDA.
3. IGT lottery is a high quality business trading 7.2x 2024 EBIT, significant discount to peers average of 11.5x
· IGT has a 75% share of the US lottery market (servicing 37 of 48 US states ) and a 90% share of the Italy market.
· The US lottery market grew from $79 billion in 2019 to $101 bn in 2023, while the Italy market grew from €19 bn to €22 bn over the same period. Industry growth is projected at 4-6% per year, while IGT will grow less due to lower online lottery contributions.
· IGT provides facility management (lottery system installment, retail terminal hardware and maintenance, payment processing services, etc), lottery operations outsourcing, ticket printing (with a 10% global market share), and iLottery services (No. 2 in the US) to national and local governments and regulated commercial operators.
· IGT’s lottery business has a 35% EBIT margin and serves ~92 customers globally, with the top 10 contracts accounting for 70% of revenue and 80% of gross profit. These contracts typically last 5-10 years and have multiple renewal options, with an average duration of 14 years. Customer relationships average 30 years.
· No record of IGT losing contract has been found in the public domain via desktop research, highlighting the high switching costs and customer stickiness
4. Uncertainty around 2025 renewal of Italian lottery contract has created this investment opportunity
· The Italian contract requires an upfront investment of €1 bn (paid in three installments over three years starting 2025) but offers a 6% royalty fee, translating into €400 million in revenue and €200 million in net income.
· Flutter-owned Sisal announced its intention to bid for the contract in late 2023. Flutter is more US focused with less business exposure in lottery. However, Flutter in 2024 Sep announced to acquire Snaitech, another major Italian online gambling company, which signals its strong intention for the Italy market (attractive online gambling market growth story as online is just 20% of overall gambling market v.s. other mature market at 60%). Flutter bid is serious and Italy Lotto contract provides Flutter strategic angle to outbid IGT given that there is online advertisement restriction in Italy market and Lotto contract would give Flutter the needed retail presence and cross selling opportunities to convert offline customers to online players. Note that the thesis here is that the market has priced IGT with less than 20% chance winning the contract, which is overdone. IGT has serviced the contract for 30 years, giving it considerable advantage.
· The IGT share price decline since Sisal’s announcement could be the key reason this opportunity existed today as investors shy away from uncertainty.
· The contract renewal is one of the largest risks and likely will always be for IGT given the nature of a B2B business
· Note that Italy business is conducted via a JV where IGT holds 62% of equity.
5. Current share price offers 92% upside / 23% downside + catalysts rich 2025
· Apollo sale transaction (expected early 2025 close) and Italy contract renewal (contract expiry 2024 Nov). The upside is driven by EBIT multiple re-rate to peers average post these 2 events.
· Private market transactions of lottery assets: Brookfield’s $5.8 billion purchase of Scientific Games’ lottery business at 11x EBITDA in Jan 2022 and Aristocrat’s acquisition of Neogames at 15x EBITDA in May 2023.
IGT Lottery Segment I/S
FY21 lottery sales were exceptionally high due to Covid affecting consumer spending. Same-store-growth has returned to +2% in 2023 and is guided to be flat in 2024.
Scenario Analysis
Comp Table
US and Italy Historical Lottery Sales
