A leading manufacturer, designer and developer of gaming machines and systems products, International Game Technology (IGT), through its wholly owned Swedish subsidiary Eagle One AB, is set to purchase all the outstanding shares of the Stockholm-based Entraction Holding AB for a cash consideration of approximately $115.0 million (approximately $11.11 per share).

The acceptance period of the cash tender offer is valid till June 7, 2011. IGT is expected to use cash from its balance sheet for the acquisition. The acquisition, subject to customary conditions for Swedish public companies and certain regulatory approvals, is expected to close in fiscal 2011.

Entraction offers complete software systems for online gaming and operates one of the largest open poker networks in the world. In the quarter ended March 31, 2011, Entraction posted revenues of $98.8 million and the number of registered players at the end of the quarter were approximately 4.0 million.

Social gaming is one of the fastest growing segments in the gaming market with revenues projected to exceed $1 billion in 2011. IGT has been focusing on developing its interactive gaming portfolio in order to drive its revenue growth over the long term.

Although the company reported modest revenue growth of 1.1% in the second quarter, ended March 31, 2011,  as lower replacement sales, declining installed base and very few new openings were the headwinds over the last 12 months.

The acquisition of Entraction is expected to boost IGT’s position in the legalized interactive gaming market. Moreover, addition of poker, bingo, casino, and sports betting will boost IGT’s interactive gaming portfolio going forward.

However, IGT’s decision of using cash for the acquisition may hurt its financial flexibility in the near term. As of March 31, 2011, cash and investments (including restricted cash) were $373.4 million versus $253.6 million as of December 31, 2010.


We believe that international expansion, an innovative product pipeline, lower debt obligations (over the last two years IGT reduced contractual debt obligations by nearly $600.0 million), focus on reducing dependency on the domestic machine replacement cycle and strong growth from the interactive business will drive significant upside over the long term.

However, sluggish macroeconomic conditions, lack of visibility on replacement sales, very few new openings and increasing competition particularly from Scientific Games Corp. (SGMS) will keep the stock range bound in the near term.

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.

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