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Scientific Games Corp (SGMS - Analyst Report) recently announced that it will acquire slot-machine maker, Bally Technologies (BYI - Snapshot Report) for $3.3 billion in cash. The company is paying $83.30 per share, which is 38.4% premium to Bally’s closing price of $60.17 on Jul 31, 2014.

Including refinancing of Bally’s existing net debt, the purchase price would amount to $5.1 billion. Shares of Scientific Games were up 2.81% ($0.24) while Bally shares surged 29.13% ($17.53) following the news.

The boards of both the companies have approved the proposal for acquisition. The approvals of Bally’s shareholders and antitrust regulators are however still pending. Nevertheless, the transaction is expected to close in early 2015.

Recently, the company announced the organizational structure for the combined entity. Post-merger, Bally Technologies will function as a wholly-owned subsidiary of Scientific Games.

Upon the closure of the transaction, Gavin Isaacs will continue serving as the President and Chief Executive Officer (CEO) of Scientific Games.  David Robbins, Chairman of the Board of Directors of Bally will join the Board of Scientific Games where he will take up the role of Vice-Chairman.

Scientific Games expects to incur $75 million as acquisition related expenses and another $40 million in the form of capital costs. Post-acquisition, Scientific Games expects $220 million in annual cost savings and another $25 million in annual capital-expenditure savings. .

Scientific Games’ acquisition of Bally Technologies will likely diversify the former’s product portfolio and expand its global footprint. Moreover, it eliminates one of the nearest competitors, which will help in expanding market share.

Acquisitions have been a part of Scientific Game’s growth story. In 2013, the company bought WMS Industries for $1.42 billion. Other acquisitions include Barcrest Group Limited (2011), Sceptre Leisure Solutions (2010) and GameLogic (2010).

Bally acquisition will help Scientific Games to face competition from the combined entity of GTECH and International Game Technology (IGT - Analyst Report) in the long run. Per Bloomberg, the inclusion of SHFL Entertainment, which Bally bought in 2013 gives a slight competitive edge to Scientific Games against GTECH.

However, we believe that the acquisition will put Scientific Games balance sheet under further pressure, as the company is most likely to opt for debt financing to buy Bally. This may hurt profitability due to lower top-line growth. Sluggish casino market that continues to face weak consumer spending and increasing competition from Internet based game providers such as Konami is expected to remain a major headwind going forward.

Currently, Scientific Games has a Zacks Rank #5 (Strong Sell).

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