NEW YORK (The Deal) -- Italy's Gtech has agreed to pay $6.4 billion for Las Vegas's International Game Technology (IGT - Get Report), striking a takeover that will combine the world's largest lotteries operator with the No. 1 maker of slot machines.
Gtech said on Wednesday, July 16, it will offer $13.69 in cash and 0.1819 of a share, equivalent to $18.25, for each IGT share. That's about 18% higher than IGT's Tuesday closing price of $15.50. The bid values the Nevada-based target's equity at $4.7 billion and will include about $1.7 billion of assumed debt.
The offer is the second $1 billion-plus, cross-border deal in the gaming sector this month following Australia's Aristocrat Leisure's July 7 agreement to pay $1.28 billion for Video Gaming Technogies Inc. Gaming companies are under pressure to increase scale to cope with increasing competition and an enduring decline in revenue triggered by last decade's financial crisis.
Spending by U.S. gamblers is likely to fall by between 3% and 5% over the next 12 to 18 months "causing overall industry Ebit to decline between 4.5% and 7.5%," Moody's Investors' Service's Keith Foley noted at the end of June.
The combination of Gtech and IGT will create a player with "superior financial strength, with over $6 billion in revenues and more than $2 billion in Ebitda," Gtech CEO Marco Sala told analysts on a call on Wednesday. The deal is expected to result in about $280 million of cost savings and other synergies and will be immediately accretive to earnings.
Gtech's bid values IGT at an enterprise value equal to about 8.7 times Ebitda, falling to about 6.3 times Ebitda including expected cost savings arising from the combination of the two companies. That is broadly in line with the 8.2 times Ebitda that Aristocrat agreed to pay for VGT.
The deal comes a month after Gtech revealed that it was in preliminary talks with IGT. The Nevada-based target reacted by launching a review of its options, prompting speculation that it could become a target for rival offers from private equity and industry players.
"We are extremely pleased to reach a definitive merger agreement with Gtech as a result of our exploration of strategic alternatives to increase shareholder value," IGT CEO Patti Hart said in a statement.
Billionaire Ronald Perelman's MacAndrews & Forbes Holdings, which holds a controlling stake in Scientific Games (SGMS - Get Report); Apollo Global Management, with a significant holding in Caesars Entertainment (CZR - Get Report); and Carlyle Group were tipped as possible bidders. They may have been put off by IGT's debt, which weighs in at about 3 times Ebitda, putting strain on potential industry bidders' balance sheets and limiting PE suitors' options to use new debt for an acquisition.
Gtech had a net debt-to-Ebitda ratio of about 2.5 times at the end of March. The new company will have debt/Ebitda of about 4.5 to 4.9 times, including $3.7 billion of new loans to pay for the cash portion of the acquisition. Gtech said on Wednesday that it had secured a $10.7 billion loan facility to fund the acquisition and refinance $1.3 billion of IGT debt and €2.8 billion ($3.79 billion) of Gtech debt.
The merged Gtech and IGT will be 80% owned by Gtech shareholders and effectively controlled by De Agostini, the holding company of Italy's Boroli and Drago families. De Agostini owns 59.5% of Gtech and will own about 47% of the combined Gtech and IGT.
It will be led by Gtech CEO Sala, and will be incorporated in the U.K., listed on the New York Exchange and split its operational head office functions between Rome, Las Vegas and Providence, R.I. IGT and Gtech will cancel their listings in New York and Milan, respectively.
The deal is due to close in the first half of 2015.
IGT shares traded in the pre-market Wednesday at $16.80, up $1.3, or 8.4%, on their Tuesday close. Gtech shares traded at €19.38, up €0.94 or just over 5%.