Scientific Games Corporation (SGMS) announced the completion of the sale of its Racing and Venue Management businesses (Scientific Games Racing) to Sportech, a U.K.-based gaming company.
Under the agreement, Scientific Games received $59 million upfront (approximately $33 million in cash and approximately 39.7 shares of Sportech stock, valued at approximately $26 million, based on the closing price of Sportech’s stock on October 4, 2010). This represents approximately 20.0% of Sportech’s shares outstanding.
Scientific Games will also receive $10 million in deferred cash consideration payable on September 30, 2013, and an additional $8 million if the racing unit meets certain performance targets over the next three years.
The companies have also entered into a number of ancillary agreements that are expected to deliver additional value as part of an ongoing strategic relationship.
Scientific Games is a global IT systems and services company that provides instant ticket and online lottery products, systems and services to lottery authorities and gaming markets worldwide.
In the fourth quarter of 2010, Scientific Games will begin recording its pro rata share of Sportech’s net income (loss) as equity in earnings of joint ventures. The sale will result in non-cash, pre-tax gain of approximately $1.5 million to $2.5 million in the third quarter 2010 and $0.5 million to $1.5 million in the fourth quarter 2010 related to the “held for sale” accounting treatment.
The transaction will also result in non-cash, pre-tax gain of approximately $2.0 million to $3.0 million related to reclassifying the Accumulated Foreign Currency Translation Adjustment from Accumulated Other Comprehensive Income to Net Income, and a non-cash charge of approximately $1.1 million related to the acceleration of stock-based awards in connection with the transaction in the fourth quarter of 2010.
The racing-related business has been a drag on earnings for awhile. Thus, to improve the long-term profitability of the racing-related business, management had earlier consolidated operations in North America and Germany and now has completely divested the division.
Therefore, we expect the divesture to enhance the company’s growth position and be accretive to margins, EPS and cash flow. The planned divestiture will also increase the company’s focus on its core business (global lottery and gaming), which will help it drive sustainable growth.
The agreement will enable Scientific Games to take part in the combined businesses of Sportech and Scientific Games Racing through an equity interest in Sportech. Upon the closing of the transaction, both the companies plan to enter into a number of ancillary agreements.
The purchase of the racing unit from Scientific Games will enable Sportech to become a leading betting company with a multi-sport, multi-channel gaming business. The online gaming software provider Playtech also entered into a deal with Sportech to offer e-gaming solutions for a 10% stake in the newly formed group, according to sources.
Upon closing of the deal, Sportech’s board of directors appointed Brooks Pierce, president of Scientific Games Racing, to the Sportech board as an executive director. In addition, Sportech’s board of directors appointed Lorne Weil, chairman of Scientific Games to the Sportech board as a non-executive director.
We maintain our long-term Neutral rating on Scientific Games. Currently, the stock has a Zacks rank of #3, implying a short-term Hold rating on the stock.
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