On Monday, Scientific Games (NASDAQ:SGMS) announced the sale of its OpenBet sports wagering business to Endeavor Group Holdings, Inc. (NYSE:EDR) for $1.2 billion in cash and stock, a move deemed beneficial to the company’s debt reduction efforts.
While the transaction, slated to close in the second quarter of 2022, isn’t leading to an upgrade of Scientific Games’ B3 credit rating — well into junk territory — it is credit positive because it starts the company’s deleveraging efforts, says Moody’s Investors Service.
We estimate that gross-debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) will remain above the 6.0x potential upgrade factor based on the sale of the sports betting business alone,” said the ratings agency.
The gaming equipment manufacturer has over $9 billion in debt and is divesting the OpenBet and SG Lottery businesses to firm its balance sheet. The $1.2 billion Scientific Games fetched for the sports wagering unit is slightly more than $1 billion analysts were expecting.
SG Lottery Sale Likely More Lucrative
Las Vegas-based Scientific Games previously said proceeds from the divestments of OpenBet and SG Lottery will be used entirely to pare its debt burden.
Investors are increasingly warm to that idea and to the potential price tag the lottery business could command. Scientific Games stock is higher by almost 16 percent this month and is on pace for a third-quarter gain of about 8.6 percent. The shares more than doubled year-to-date.
With an agreement to sell OpenBet reached, Scientific Games can now focus on the more lucrative sale of its SG Lottery unit. Multiple options are on the table for the lottery business. Several private equity firms are rumored to be mulling offers for SG Lottery, but the parent company is also reportedly considering listing the unit in Australia where an initial public offering (IPO) could command a $5 billion valuation.
SG Lottery is the provider of the systems used to generate Mega Millions and Powerball tickets. Not only that, but the business is highly profitable and is one of the dominant outfits in the high margin North American and European instant games markets.
Where Scientific Games Is Heading
When the divestments of OpenBet and SG Lottery wrap up, Scientific Games will have a new look and distinctly digital focus.
“Sci Games’ decision to divest the lottery and sports betting businesses would leave the company with Gaming, iGaming, and SciPay businesses, enabling it to focus on its land-based and digital markets, which have a large total addressable market and opportunity for growth,” says Moody’s. “We expect the company to focus on content franchises utilizing a cross-platform gaming approach, leveraging content creation investments and enabling player trends.”
In an effort to bolster its online footprint, Scientific Games in July offered to acquire the 19 percent of SciPlay Corp. (NASDAQ:SCPL) it doesn’t already own. The target is considering that bid and Scientific Games said it will not approve any other acquisition offers. Social casino developer SciPlay was spun off from Scientific Games in 2019.
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