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Scientific Games Wins Nevada Approval

IGT SGMS BYI

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Scientific Games Corp (SGMS - Analyst Report) recently announced that the Nevada Gaming Commission has unanimously approved the takeover of WMS Industries , thus removing a major hurdle.  In May, WMS shareholders approved the acquisition, which is expected to close by the end of 2013.

Early this year, Scientific Games agreed to acquire WMS for $26.00 per share (approximately for $1.5 billion). WMS Industries provides video gaming machines to the casino industry. The company’s online interactive business also develops games for the causal, social and mobile segments.

Recently, the company announced the organizational structure for the combined entity. Post-merger, Scientific Games chairman and chief executive officer (CEO) A. Lorne Weil will continue in his current position. Management also announced that the company will operate into two industry groups, namely Gaming and Lottery.

Gaming will primarily comprise the core WMS gaming business; Scientific Games' server-based gaming business; Gaming-related systems businesses of both Scientific Games and WMS; and Williams Interactive. The Lottery business will comprise legacy Printed Products and Lottery Systems.

Scientific Games’ acquisition of WMS Industries will likely diversify the former’s product portfolio and expand its global footprint. Moreover, the current deal will also diversify Scientific Games’ revenue stream from lottery-based products and cross sell WMS Industries’ interactive gaming products and casino-based games.

We believe that the company’s diversified product offerings, international development activities, recurring revenue business model and strong growth from the Internet-based business will drive the stock over the long term.

Further, the domestic lottery industry is undergoing a transition, which involves increasing involvement of private vendors in state lottery management, higher prize payouts and introduction of tiered pricing for national jackpot games to add impetus to the sagging U.S. lottery industry. We believe that Scientific Games is well positioned to benefit from these transitions, going forward.

However, we believe that these measures will take some time before they start contributing to the overall results. Moreover, increasing investments for product development are expected to hurt profitability in the near term.

Moreover, the company’s acquisition strategy is expected to provide Scientific Games a significant competitive edge over rivals like GTECH, International Game Technology (IGT - Analyst Report), Bally Technologies (BYI - Snapshot Report) and Lottomatica going forward.

The sluggish macroeconomic condition in important international markets is however the primary headwind for Scientific Games going forward. Increasing investments for product development is also expected to hurt profitability in the near term.

Currently, Scientific Games has a Zacks Rank #3 (Hold).

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