IGT Partners Lottomatica in Italy

International Game Technology ( IGT - Analyst Report ) recently announced a strategic partnership with Italy-based lottery operator Lottomatica Group. As per the terms of the partnership, IGT will exclusively license its games to Lottomatica in Italy, which will be installed at approximately 9,000 video lottery terminals (VLT’s) all over Italy.

IGT is the latest entrant in the rapidly growing VLT (comma 6b) market in Italy, which delivers gross gaming revenues in excess of $2.0 billion. The Italian VLT market has been attracting many game manufacturers and lottery operators including the likes of Austria-based Casinos Austria International (CAI), Germany-based Merkur Gaming, and IGT peers Aristocrat Lotteries, WMS Industries ( WMS - Snapshot Report ) and Bally Technologies ( BYI - Snapshot Report ) over the last couple of years.

CAI has teamed up with Italy-based Cogetech, while Merkur partnered Inspired Gaming Group. Both WMS and Aristocrat have different partnerships with Cogetech. In mid 2011, Bally signed an agreement with Lottomatica to provide 800 games and systems. However, most of these agreements were for supplying gaming terminals and systems, while only a few supplied gaming content such as the IGT-Lottomatica agreement.

We believe that the partnership will enable IGT to enter the lucrative Italian VLT market with a bang. IGT will also team up with Lottomatica to integrate its VLTs into Spielo VLT network system, which has been widely adopted by Italian concessionaires including Lottomatica.

Although IGT is expected to face significant competition due to the fragmented market condition and strong presence of WMS and Bally in Italy, its superior gaming content and Lottomatica’s dominant position will provide the company a competitive edge over its peers going forward.

As IGT is bearing the brunt of a sluggish domestic market due to lower play levels, higher unemployment rate and weak replacement sales, the company is seeking expansion opportunities in international territories to boost profitability. We believe that IGT will continue to focus on expanding its presence in the international markets and will continue to sign licensing agreements with leading local providers over the long term.

However, we believe that a volatile macro environment, particularly in the west European markets does not bode well for IGT in the near term.

Thus, we have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT has a Zacks #4 Rank, which implies a Sell rating on a short-term basis.