Fantini’s Finance

Turn and Face the Changes

The pandemic has changed the world, but how will gaming respond?

By Frank Fantini

Among the questions as the Covid pandemic recedes is how the gaming industry has been changed.

Initially, the discussion was often on the high margins that casino operators have achieved as they cut costs and how much of that improvement can be retained as normal business volumes resumed.

Based on first-quarter results, there is considerable optimism that casinos have learned how to permanently become more efficient, a surmise that may come closer to proven fact as companies begin reporting second-quarter financial performance and project into the future.

These changes might come under the category of blocking and tackling. The way to profit growth now isn’t so much spending on new properties, property expansions or new attractions as much as doing basic things right and freeing up revenue to fall to the bottom line.

Some companies, with two examples noted below, are using this era to fundamentally change their structures, both to dramatically reduce debt and financing costs, and to exploit the growth opportunities presented by online gaming.

Indeed, online gaming itself has been hastened by the pandemic as states legalize sports betting and iGaming to open new revenue streams and as both game developers and gaming operators develop omnichannel approaches to their businesses.

Scientific Games and Everi are two examples of companies whose stocks have been hitting alltime highs recently, and that are taking actions that promise to further reward investors.

First off, kudos to Chairman Jamie Odell and CEO Barry Cottle for a strategic review that proved to be just that.

Often, the term strategic review is a euphemism for “let’s just sell the company.”

In their case, the Sci Games strategic review is resulting in a strategic restructuring of the company.

And, in a sense, the proposed changes are just a dramatic way of achieving an end that the gaming industry is heading towards—being omnichannel providers of gambling entertainment.

Sci Games intends to slash the onerous debt built up financing a series of mergers by selling off the lottery business and non-core sports betting business to focus on the core business of supplying slots, table games and casino management systems plus fast-growing online gaming and social gaming.

Stifel analyst Jeffrey Stantial estimates that the sales could fetch $5.5 billion and allow Sci Games to cut its debt-to-EBITDA ratio to around three times. It was nearly 11 times to start the year, though “ that was inflated by Covid impacts on business.

Lower debt will permit Sci Games to invest in the fast-growing businesses that it is retaining.

The company is considering different routes to divestiture from IPOs to SPACs to sales. And, though it didn’t indicate as such in its announcement, Sci Games could keep a portion of the businesses, as when it IPO’d social gamer SciPlay.

Whatever path is chosen, the reorganization will simplify the corporate structure and help unify company culture, which had been challenged by the several mergers that created today’s Sci Games.

There is some irony that Scientific Games, principally a lottery company, had bought game companies during the merger binge and now will be a pure games company sans lottery. In retrospect, that seems to have been likely with former Aristocrat CEO Odell as executive chairman and in bringing on so many former Aristocrat executives.

Meanwhile, being an omnichannel supplier simply means that a game can be played in a slot machine, online or as a non-gambling social game.

It is the way the gaming industry is headed. For those who a couple of years ago asked where growth would come from in what was seen as a maturing industry, the answer is omnichannel.

KUDOS TO EVERI, ALSO

Everi CEO Mike Rumbolz and COO Randy Taylor have their reasons to crow, too.

Everi is undergoing a comprehensive restructuring of its debt that, to use the popular term of the day, checked off all the boxes.

Everi already had given investors reasons to be bullish. The recovery in casino revenues directly benefits Everi’s fintech business. The expected rush to cashless gaming will benefit another fintech product. And Everi’s slots product line is now filled out and performing well.

The refinancing will cut debt from $1.145 billion to $1 billion, which B Riley analyst Dave Bain estimates will reduce debt-to- EBITDA to just 2.2 times by next year. That certainly will give Everi flexibility to invest in growth.

The first evidence of the success of this process was the announcement that Everi will sell $400 million in unsecured notes at 5 percent interest to redeem 7.5 percent debt.

It doesn’t hurt that Everi also announced that it will report record financial results in coming weeks.

Casino operators are also showing the benefit of rethinking how they do business and of exploiting the digital opportunities.

The list of operators reporting higher earnings thanks to a rethinking of how they do business is long. We expect that second-quarter results will prove this out for many of them, from the biggest, such as Caesars, to the smallest, such as Full House Resorts, and others in between.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. For a free 30-day trial subscription email subscriptions@fantiniresearch.com.