Scientific Games Corp (NASDAQ:SGMS), a global leader in providing customized, end-to-end gaming solutions to lottery and gaming organizations agreed to acquire its competitors, WMS Industries Inc. (NYSE:WMS) for $1.5 billion.
According to the press statement from Scientific Games, the board of directors of both companies unanimously approved the transaction, which would allow the combined company to provide an extensive range of products and services to the gaming industry worldwide.
Under the terms of the agreement, Scientific Games Corp (NASDAQ:SGMS) will purchase all of the outstanding shares of WMS Industries Inc. (NYSE:WMS) for $26 per share in cash including its $85 million debt and $55 million cash on hand, as of September 30, 2012.
According to the Scientific Games, the consideration represents an EBITDA multiple of 6.0x of WMS' Adjusted EBITDA of $246 million for the trailing 12-month period ended September 30, excluding synergies it expects to achieve.
The purchase price for the shares of WMS Industries is 60 percent higher than the closing price of the stock on Wednesday at $16.37 per share. The stock value of WMS surged by more than 50 percent to $24.98 per share after the announcement of the transaction on Thursday.
In a statement, Lorne Weil, chairman and chief executive officer of Scientific Games Corp (NASDAQ:SGMS) said the company’s acquisition of WMS will enable it to offer a complete portfolio of lottery and products & services to both new and existing customers worldwide.
"We expect to combine our game content, technology, operational capabilities and respective geographic footprints to create an enterprise poised to capitalize on significant growth opportunities around the globe," Weil said.
On the other hand, Brian R. Gamache, Chairman and Chief Executive Officer of WMS Industries said: "We view this transaction as the next logical and strategic step in offering continued innovation in gaming. Shareholders will enjoy a meaningful premium for their shares and employees will have expanded career opportunities as part of a larger, broader and more diverse organization."
The transaction is subject to the approval of WMS shareholders and regulators in the gaming industry as well as other customary closing conditions. Both companies expect to close the deal by the end of this year.
In a research note, analysts at Deutsche Bank Market Research commented that deal is positive as both companies were combined in non-competitive business lines with significant trademark portfolios and content libraries, which can cross-pollinate. However, they think the key issues in the combined entity are free cash flow and leverage. According to the analysts, the inability of SGMS to generate meaningful cash flow and deleverage the business will serve as its primary headwind over time.
“Given the limited free cash flow of WMS Industries Inc. (NYSE:WMS) stemming from the investment requirements of the gaming operations business and what we anticipate will be more than 4.5x net debt to EBITDA leverage on a pro forma basis, we find multiple expansion of the combined entity to be unlikely," The analysts wrote.
On the other hand, analysts at Wells Fargo Equity Research believe the transaction makes sense for SGMS because the company does not have a casino slot business. They emphasized that SGMS anticipates savings of $110 million cash flow on annualized rate.