Wells Fargo Securities, LLC, a subsidiary company of Wells Fargo & Co. dealing with investment banking and various other financial services, released a report on New York-based gaming operator Scientific Games Corp.’s acquisition of Bally Technologies and the likely benefits the deal might bring to the two companies.
Scientific Games, which specializes in the manufacturing of different kinds of lottery and gaming equipment and their distribution, obtained the Las Vegas-based company in November 2014. It paid the amount of $5.1 billion for its new acquisition. According to Wells Fargo’s analysts, this has already resulted in certain synergies.
The group of gaming and financial experts, led by Cameron McKnight, stated in its report that Scientific Games really needs the “quick realisation of synergies” so as to be able increase its profits and thus, decrease its financial leverage.
The analysts also pointed out that the company has already started to develop its synergy program. According to them, certain decisions will be made sometime in the first quarter of 2015 concerning Scientific Games’ headquarters, employees, and production facilities. And these are expected to bring positive effects to the gaming provider.
Scientific Games commented that the acquisition of Bally Technologies will probably bring cost savings amounting to $235 million. According to Wells Fargo, 80% of this substantial sum might be realized by the end of the year.
The synergies related to the company’s headcount were roughly estimated at $130 million. Analysts claimed that they believe these are “tangible”. However, they were not able to provide forecasts about the synergies concerning various other things. These are expected to amount to $105 million.
Yet, Well Fargo’s experts reduced Scientific Technologies’ grade from ‘Outperform’ to simply ‘Market Perform’. In other words, the gaming manufacturer’s stocks were given a neutral assessment, which means that they are still likely to provide certain return. The company’s valuation range, however, was kept between $12 and $13.
The analysts pointed out that if Scientific Games manages to accomplish its synergy targets and a stabilization in gaming equipment industry is seen, the price might be increased to $20 per share.
However, the 7x net leverage of the company might lead to decrease in the price to $7 per share, provided that something goes wrong and the above-mentioned goals are not fulfilled.
Wells Fargo concluded its report by addressing investors not to be overhasty and wait until the investment case is completed and the fundamental analysis is announced. This is likely to happen in the second half of 2015.
