Scientific Games Corp. (SGMS - Analyst Report) recently signed a new contract with the Illinois Gaming Board (IGB) for setting up a central communications system (CCS) in the State of Illinois. Under the terms of the contract, Scientific Games will design, implement and manage its AEGIS-video central communication system for IGB. The system will connect IGB to every installed video gaming terminal in the state and help it better manage as well as analyze all the betting activity in the state.
Illinois legalized video gaming way back in 2009 in order to generate billions of dollars required for construction and road work. The state had estimated annual earnings of $300.0 million beginning from 2010 through this route. However, the competitive procurement process turned out to be a debacle, when one of the participants, Greece-based Interlot S.A. challenged IGB’s decision of awarding the contract to Scientific Games in August 2010.
IGB finally determined that there was a misunderstanding between the agency and the bidders about the evaluation of the proposals and eventually cancelled the process. The state agency called fresh tenders and after much delay awarded the contract to Scientific Games. This time around, Interlot opted out of the final bidding and Scientific Games won the contract by beating its Northstar Lottery Group joint venture partner GTECH Corp, a subsidiary of Lottomatica S.p.A.
IGB expects the video terminals to go live by the end of this year. The six-year agreement with IGB is valued at approximately $69.0 million, based on a fee of 0.725% of the estimated net terminal income from up to 60,000 video terminals expected to be installed in the state going forward. The contract can also be extended for another four years through mutual consent.
Scientific Games’ video gaming group currently manages approximately 9,000 locations with over 94,000 gaming machines globally. As most of the U.S. states face an increasing revenue crunch owing to the sluggish macro environment, they are looking for new avenues to bolster their funds. Scientific Games has been actively pursuing opportunities in jurisdictions that are seeking to expand into licensed video gaming or replace their existing video gaming systems.
In 2011, Scientific Games won contracts in Louisiana, Illinois, Colorado, Missouri, Georgia and New York, which are expected to drive its top-line growth going forward. We also believe that these contract wins will strengthen Scientific Games’ position as compared to its nearest rival International Game Technology (IGT).
We maintain our Neutral recommendation over the long term (6-12 months). Currently, Scientific Games has a Zacks #3 Rank, which implies a short-term Hold rating.