Fitch: US Gaming Suppliers Still Nursing M&A Hangover
Weak industry fundamentals and intensified competition from smaller participants have left a few suppliers with heavy debt burdens, along with thin cash flows intended to pay down debt. While increasing leverage, others partially funded M&A with equity or produce more compelling products and, therefore, are better positioned.
Fitch believes industry fundamentals will remain weak. Suppliers churn profits by selling slot machines to ever-more thrifty casino operators looking to replace older ones while also selling to new casinos, which are becoming increasingly rare. Revenue generation also includes leasing more premium games to casinos, whereby the supplier keeps about 20% of the revenue generated. This participation slot machine footprint has been under pressure as operators loathe sharing revenues, which hurt margins. We do not see anything on the horizon that would likely reverse these trends.
Legacy first-tier suppliers had enjoyed an oligopoly for years. The smaller Aristocrat Leisure (ALL) is now on the verge of first-tier status, which it earned by taking share from the legacy suppliers, making matters worse for legacy first-tier suppliers. ALL's market share in slot sales and premium participation increased to 17% from 13% and to 20% from 14%respectively, from 2014 to the first half of 2016, according to Eilers & Krejcik Gaming. Based on Fitch's observations during this year's Global Gaming Expo, the industry's tradeshow, ALL is now poised to continue taking share, although at a decelerating pace, based on Fitch's observations. In addition to ALL, smaller suppliers such as Everi Holdings (EVRI) and AGS are making a big push to capture share.
Industry consolidation has come with diversification benefits, which has been fortunate for some suppliers. For example, International Game Technology gained access to the stable lottery systems business and a dominant position in the Italian gaming market. Scientific Games (SGMS) has faster growing instant ticket and table games. Most suppliers have decent exposure to the healthier social casino gaming business, which we believe is cannibalizing land-based gaming.
Some suppliers are stuck with strenuous credit profiles, despite lauded diversification and synergy benefits. SGMS's leverage will remain in the mid - to high-7.0x range for the foreseeable future, according to Fitch's projections. This could make SGMS's refinancing of $3.2 billion in notes difficult upon maturity in 2022. EVRI's leverage profile is a bit healthier at about 6.0x, but its ramp-up in slots research and development, along with its costly debt, are pressuring the company's FCF. Other suppliers, including IGT and ALL, took on less debt and are notably healthier.