Brookfield Business Partners LP Bags SG Lottery for $6.05B

Posted on: October 28, 2021, 03:00h. 

Last updated on: October 28, 2021, 02:07h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Ending weeks of speculation about the unit’s fate, Scientific Games (NASDAQ:SGMS) said late Wednesday it is selling its SG Lottery business to Brookfield Business Partners LP (NYSE:BBU) for $6.05 billion.

SG Lottery
Scientific Games finally makes a decision on its SG Lottery unit. Brookfield is buying it for $6.05 billion. (Image: Getty Images)

The Canadian private equity shop is shelling out $5.825 billion in cash and an earn-out of up to $225 million, which is based on the acquired entity achieving certain earnings before interest, taxes, depreciation and amortization (EBITDA) objectives in 2022 and 2023.

The sale of SG Lottery is part a large-scale debt reduction effort initiated by Scientific Games in late June, which also included the recent sale of its OpenBet sports wagering arm for $1.2 billion in cash and equity. Since the plan was revealed, speculation swirled about the fate of the lottery arm as the Las Vegas-based company weighed options, namely an outright sale or an initial public offering (IPO) of SG Lottery in Australia.

We conducted a thorough review of paths to divest the Lottery business and we are confident that this transaction maximizes value and certainty while minimizing complexity and execution risk, and positions both Scientific Games and SG Lottery for continued success along their unique growth trajectories,” said Scientific Games CEO and President Barry Cottle in a statement.

The transaction is slated to close in the second quarter of 2022.

Good Call to Sell to Brookfield

Initially, it appeared as though there was ample momentum and sound reasoning for Scientific Games to list SG Lottery in Sydney.

Australian investors are familiar with this type of business and see value in it, perhaps more so than American counterparts. Additionally, early estimates indicated the slot machine manufacturer could raise up to $5 billion in an IPO, valuing SG Lottery at $6 billion. However, those figures were recently pared to $3 billion to $3.14 billion and $5 billion, respectively. Based on the more recent IPO forecasts, Scientific Games appears to be making the right call in divesting the lottery business to Brookfield.

The sale of the lottery unit is pivotal for the seller’s efforts to prune debt. It carries approximately $9 billion in liabilities. If SG Lottery hits the 2022 and 2023 EBITDA objectives and is able to command the full $6.05 billion sale price, that means Scientific Games will have grossed $7.25 billion to reduce its debt burden, including the divestment of OpenBet.

“We think the structure of the transaction allows SGMS to quickly and cleanly apply proceeds to the balance sheet and begin to ramp investment (internal research and development and mergers and acquisitions) to pursue the omnichannel gaming content opportunity,” said Stifel analyst Jeffrey Stantial in a note out late Wednesday.

New Look, Opportunities for Scientific Games

Shares of Scientific Games slumped following the June announcement. But since the mid-July bottom, the stock is up about 57 percent, confirming investors are warm on the plan to reduce debt and focus on the fastest-growing iGaming market.

On that note, Scientific Games is attempting to acquire the 19 percent of social casino developer SciPlay Corp. (NASDAQ:SCPL) it doesn’t already own. That offer was made in mid-July, and no formal decision has been made by the target.

“With both transactions (OpenBet and SG Lottery) out of the way, we see investor focus now shifting to the longer-term thesis. Namely, 1) a new leadership team driving a turnaround in the land-based gaming business, and 2) SGMS leveraging existing content and their omnichannel portfolio to compete in the high-growth iGaming opportunity (recall management is targeting their digital businesses, iGaming and Social, to equal land-based revenues within three years),” adds Stifel’s Stantial.