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Share price of International Game Technology (IGT - Analyst Report) surged 14.39% ($1.80) to close at $14.31 on Jun 9, following reports that the company is planning to go private. Per Reuters, IGT management has appointed Morgan Stanley (MS - Analyst Report) to search sale options.

For the last two months, IGT has been looking for prospective bidders that include gaming companies as well as private equity firms. Year-to-date, share price of the company has declined 19.24%, which is the primary reason behind the idea of going private. IGT is currently valued at approximately $3.5 billion.

IGT has been facing significant challenges due to the tepid economic conditions that are impacting its gaming business, resulting in falling domestic replacement and lower play levels as well as a mix-shift to lower-yielding standalone lease operation games. The casino sector has witnessed a tighter spending due to concerns about unemployment levels and the lackluster macroeconomic condition.

Currently, gaming operators are replacing existing machines at a much slower rate than they have historically, primarily due to the challenging environment and the need to preserve cash. Additionally, intensifying competition from the likes of Bally Technologies (BYI - Snapshot Report) and Zynga (ZNGA - Snapshot Report) in its core as well as interactive markets remains a major headwind.

IGT reported an unimpressive second-quarter of fiscal 2014. Revenues decreased 14.5% year over year to $512.8 million. Product sales and Gaming Operations declined 27.4% and 9.4% year over year, respectively.

Average revenue per unit per day decreased 4.6% from the year-ago quarter to $47.00. Gaming Operations installed base of 53,400 units was down from 56,700 units in the year-ago quarter.  

Moreover, increasing investments in product development will increase operating costs, going forward. In the recently concluded second quarter, operating expenses as percentage of revenues increased 670 basis points from the year-ago quarter to 36.7%.

We also remain concerned about IGT’s highly leveraged balance sheet. At the end of Mar 31, 2014, the company had approximately $2.20 billion in total debt. With a net debt position (debt less cash) of $7.43 per share, the investment risk remains quite high for the company.

Nevertheless, we believe that innovative product pipeline, growth from cloud-based products in international markets and strong improvement in the DoubleDown business make IGT an interesting acquisition candidate at present.

However, mergers and acquisitions in the gaming industry face significant regulatory hurdles, which will be a major headwind for a prospective bidder.

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

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