International Game Technology (IGT) recently announced that it is set to acquire online social gaming company Double Down Interactive LLC for approximately $500.0 million. The acquisition will be funded through a combination of $250.0 million in cash and $85.0 million in retention payments over the next two years. In addition to these, IGT will also shell out a maximum of $165.0 million in cash, based on its performance over the next three years.
Seattle, Washington-based Double Down is famous for its online casino game on Facebook. The game has been ranked among the top four social games in 2011 by Facebook. As per figures from AppData.com, Double Down Casino currently has more than 4.7 million monthly active users. IGT expects the acquisition to be accretive to its fiscal 2012 adjusted earnings per share. The transaction is expected to be completed by the second quarter of this fiscal year.
CasinoStyle Social Gaming- A Brief Overview
According to market research firm eMarketer, the U.S. social gaming market is expected to be worth $2.18 billion in 2012, doubling by 2014. Generally, most of the social games are free to play and generate revenue primarily through the in-game sale of virtual goods in exchange for virtual currency.
In the case of Facebook, which is currently the world’s largest social network with more than 800 million global users, players use their Facebook credits to buy virtual goods. Facebook keeps a certain percentage of revenue and delivers the remaining to the game developer. Advertising is also an important source of revenue for social game developers as well as Facebook.
This is also true in case of casino style games, where gamers play for virtual currency or Facebook Credits, which they can never cash in, owing to the prohibitions under the U.S. gambling laws. Despite this disadvantage, casino style gaming is considered the fastest growing segment of the social gaming market given the addictive nature of the games.
The games are also in vogue with the social game developers due to the low costs involved in their development. This has attracted many big developers such as Zynga Inc. (ZNGA), Electronic Arts Inc. (EA), Caesars Entertainment Corp. (acquired another popular developer Playtika for $80.0 million in 2011) and Wooga in the casino style social gaming arena.
However, the comparatively low entry barriers continue to attract new entrants, which will increase competition going forward. We believe that the sector will continue to see high competition and a significant amount of consolidation going forward.
IGT-Double Down: A Winning Combination
Although Double Down is a lesser-known company compared to some other big names in the sector, the company has achieved success in building a strong customer base within a very short span of time. This has primarily been driven by Double Down’s broad and expanding portfolio, which includes blackjack games, slots, slot tournaments, video poker and roulette.
IGT is a comparatively new entrant in the social gaming market. We believe that Double Down’s strong product portfolio and customer base will provide it a competitive edge over the other established players of the business going forward.
We believe that the IGT-Double Down combination will boost the company’s online presence, driving top-line growth going forward. Moreover, the acquisition will also expand its gaming portfolio beyond the casino floor to Facebook that in turn will lower IGT’s dependence on physical product sales going forward.
Our Take
The casino sector continues to face macroeconomic concerns due to high unemployment levels. This has forced many casino operators to reduce their costs in an attempt to preserve their liquidity, subsequently resulting in a slower machine replacement cycle. This trend appears to be hurting IGT’s growth.
In order to boost its dwindling growth, IGT is expanding its presence in the online and social gaming market. In 2011, the company acquired Stockholm-based Entraction Holding AB in order to supplement its position in the legalized interactive gaming market. We believe that the addition of poker, bingo, casino and sports betting will boost IGT’s interactive gaming portfolio going forward.
The company recently ventured into the cloud computing arena through its IGT Cloud. With the IGT Cloud services, we expect IGT to gain traction in the casino gaming industry, as it would likely be well accepted by new casino properties, thereby improving the company’s top line going forward.
We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
To read this article on Zacks.com click here.
Zacks Investment Research
