Scientific Games (NASDAQ:SGMS) stock is rallying Tuesday. That’s after the gaming equipment maker said it will divest its lottery management and sports wagering units as part of an ongoing effort to deleverage its balance sheet.
The transactions, which are also aimed at unlocking shareholder value, could come in the form of an initial public offering (IPO), a merger with a special purpose acquisition company (SPAC), or an outright sale or a combination with another entity. Las Vegas-based Scientific Games did not provide a time line for when the divestures will occur.
Today’s announcement reflects key steps to optimize our portfolio and strengthen our balance sheet by significantly de-levering, while also targeting investments in our largest growth opportunities,” said CEO Barry Cottle in a statement. “These steps will accelerate our path to become a content-led growth company focused on leading in both land-based and digital markets.”
The news has Scientific Games stock higher by almost six percent in midday trading. The shares are up 83 percent year-to-date and 5.21 percent over the past month.
In addition to manufacturing slot machines, Scientific Games also provides lottery services to states and wagering platforms to sportsbooks.
Scientific Games Stock Soaring Despite Debt Burden
During the 2020 coronavirus market swoon, companies with weak balance sheets and high debt loads were exposed and saw their shares tumble.
Scientific Games was no exception. Its stock resided around $30 prior to the pandemic forcing temporary shutdowns of domestic casinos. At its March 2020 nadir, the name slumped as low as $3.13, making it one of the truly remarkable redemption stories among gaming equities, as it currently resides above $80.
Still, the slot machine manufacturer carries a massive $9.43 billion in liabilities, which is nearly $2 billion in excess of its market capitalization of $7.48 billion. As such, Scientific Games is exploring options to reduce that debt load. For example, reports surfaced last month the company is mulling an IPO in Australia to raise cash.
What New Scientific Games Could Look Like
In the aforementioned statement, Scientific Games cautions investors that “there can be no assurances” transactions for the lottery and sports betting businesses will be realized.
Assuming those moves do come to fruition, the “new” Scientific Games will consist of traditional gaming and iGaming operations. It will also have the company’s still-substantial stake in online and social casino developer SciPlay (NASDAQ:SCPL). SciPlay equity is an increasingly valuable chip for the former parent company, as that stock is up nearly 36 percent this year.
“Given this significant opportunity, we are targeting our digital businesses to be comparable in size to the land-based gaming business within three years,” said Cottle.
Scientific Games did not estimate the value of any proposed IPO or SPAC merger for its lottery and sports betting units. But it is known that the lottery operation is one of the company’s key revenue contributors.
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