Smiles abound with Scientific Games-WMS merger closed

The marriage between lottery provider Scientific Games Corp. and slot machine manufacturer WMS Industries is still in the honeymoon phase.

The $1.5 billion merger, in which the smaller New York-based lottery company acquired the casino industry’s third-largest manufacturer, was completed Oct. 18. Scientific Games, which was licensed in Nevada in September, thinks the combined company could result in pretax earnings of as much as $600 million this year.

Analysts are starting to warm up to the new business.

“After reviewing our first stab at formulating a combined Scientific Games-WMS model and reflecting on third-quarter results, we have grown increasingly more positive on the story,” Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski told investors Nov. 8, the day after the lottery company announced earnings for the quarter ended Sept. 30.

“Our renewed enthusiasm aside, we believe investors will likely require some time to evaluate the combined entity’s performance,” Wieczynski said.

The third quarter marked Scientific Games’ last reporting period that didn’t include WMS. But company officials made mention of the company’s newest partner.

“We are now well underway in executing on our comprehensive integration plans and remain confident in our ability to deliver on the expected synergies,” Scientific Games Chief Financial Officer Jeffrey Lipkin said in a statement. “We expect the combined company to benefit from the strength of both companies’ innovative content and offerings, visible and recurring revenue streams and a solid capital structure.”

The merger is expected to result in $100 million of cost savings.

State lottery players who use systems operated by Scientific Games and casino customers who favor WMS-branded slot machines will benefit from the transaction.

During September’s Global Gaming Expo in Las Vegas, WMS unveiled slot machine titles such as “Beetlejuice” and “Iron Man” to go with the company’s games themed after Monopoly, “Willy Wonka and the Chocolate Factory” and the “Wizard of Oz.”

Over time, WMS’ slot machine titles are expected to find their way into Scientific Games’ lottery business. Also, Scientific Games’ systems business will be integrated into WMS’ slot machine operations.

That’s good news for WMS’ 145-person sales and service headquarters in Las Vegas. Scientific Games officials have said they would like to increase the company’s presence in Las Vegas. The company will separately operate two divisions, gaming and lottery.

Before the WMS deal, Scientific Games was primarily a lottery service provider to several U.S. states and countries around the world. Lipkin said in September that overall lottery sales worldwide were $275 billion annually, with $65 billion coming from the United States.

“We like gaming and it’s a great industry,” Scientific Games board member and financier Ronald Perelman said in September.

The 70-year-old Perelman, who owns 38 percent of the company, is ranked 27th on the Forbes 400 List of American billionaires with a net worth of $14 billion.

Analysts said WMS is gaining additional favor on casino floors because the company’s new cabinet designs have allowed for newer and increased game content.

Since WMS is no longer reporting results on its own, Scientific Games said it will release a Securities and Exchange Commission filing on the slot machine company’s earnings from the last quarter during December.

Wells Fargo Securities gaming analyst Barry Jonas said casino slot floor managers have expressed positive feelings on the company’s new game designs.

“We believe (the Scientific Games filing) should reflect our positive channel checks,” Jonas said.

During October, Scientific Games launched new lottery contracts internationally in Panama and the Dominican Republic and domestically in New Jersey. In 2014, the company will begin a contract to provide lottery services to Greece.

Eilers Research founder Todd Eilers said the new lottery business, combined with WMS, puts Scientific Games on a revenue growth trajectory. Eilers called the WMS deal “a transformational event with improving underlying business fundamentals and significant cost and revenue synergies.”

Marriages can start off rocky.

But Scientific Games Chairman Lorne Weil said the relationship has been smooth sailing in the early weeks.

“Closing the WMS acquisition marks a new chapter for all of us,” Weil said. “We are uniting two companies with highly complementary businesses and excellent management and operating talent to create a leading lottery and gaming company with a comprehensive portfolio of products and services for customers around the world.”