Scientific Games Acquires Barcrest

Scientific Games Corp. (SGMS - Analyst Report) has agreed to acquire Barcrest Group Limited, a supplier of gaming content and machines in Europe, from International Game Technology (IGT - Analyst Report) for an estimated 33 million pound Sterling, payable in cash. An additional amount of up to 2 million pounds will be payable, subject to the satisfaction of certain conditions relating to third party contracts.

Following the acquisition, Barcrest will be integrated into Scientific Games' gaming divisions, namely Global Draw and Games Media, in the third quarter of 2011.

The huge collection of gaming titles in Barcrest’s library is expected to benefit Scientific Games by adding to its existing gaming content portfolio and its digital delivery network.

With the acquisition, Scientific Games expects to get a stronger foothold in the U.K’s server-based gaming platforms and also in other popular gaming venues, such as bingo halls and gaming centers.

Moreover, with Barcrest in its portfolio, Scientific Games will also have access to new video lottery clientele in Italy and the Czech Republic and will therefore strengthen its international presence.

The acquisition will provide Scientific Games a readily available customer base in the Internet, mobile and other digital delivery platforms, as Barcrest games are available in all these formats.

Separately, Scientific Games had recently signed a contract with Colorado Lottery, after winning a competitive procurement process in October 2010. Under the contract, Scientific Games was to become the primary vendor for instant ticket games and related services to Colorado Lottery.

Scientific Games remains focused on developing its presence in the worldwide instant ticket and online lottery markets. Scientific Games reported revenues of $882.5 million in fiscal 2010, with Instant Ticket sales comprising 53% of the total.

Although Scientific Games reported weak top-line growth in fiscal 2010 (down 4.6% year over year), instant ticket sales increased 2.6% year over year.

Going forward, we expect strong growth from instant ticket sales to drive revenue growth. Moreover, international development activities, especially in the Netherlands, Germany, Italy and China are expected to drive top-line growth over the long term.

We maintain our Neutral rating over the long term (6-12 months). Currently, Scientific Games has a Zacks #4 Rank, which implies a short-term Sell rating.