Apollo Global Management (NYSE:APO) and Brookfield Asset Management’s private equity division are reportedly considering making offers for Scientific Games’ (NASDAQ:SGMS) SG Lottery unit.
That news emerges soon after the Las Vegas-based slot machine manufacturer pared the size of an SG Lottery initial public offering (IPO), which would be listed in Australia, to $3 billion. The company hasn’t made an official announcement on the business that provides the systems used to generate Mega Millions and Powerball tickets. But that could happen in the coming days.
Scientific Games has been in discussions with private equity firms about a potential sale of the lotteries unit,” reports Bloomberg. “It’s unclear how much the private equity firms are bidding.”
At the aforementioned $3 billion for an Australia IPO, SG Lottery is valued 15x 2022 earnings. That means that if Scientific Games pursues that avenue, the lottery arm would come to market with a market capitalization of about $6 billion. Factor in debt, and the unit’s enterprise value could approach $7.5 billion.
The $3 billion figure is based on Scientific Games selling a 51 percent interest in the business. It previously said it plans to retain a minority stake. Under an agreement with investment banks working on the deal, the US company could sell up to a 56 percent stake in SG Lottery in a Sydney listing, raising $3.14 billion.
Apollo Interest Not Surprising
In June, Scientific Games announced it would part with its lottery management and sports wagering platform businesses in a bid to reduce debt. At that time, the company said those transactions could take a variety of forms, including spin-offs, outright sales, or mergers with blank-check companies. The sports betting unit was recently sold for $1.2 billion.
While chatter regarding Brookfield’s potential pursuit of SG Lottery is new, rumors about Apollo’s involvement are not. That speculation kicked up over a month ago, when it was also rumored that competing private equity shops Carlyle Group and TPG Capital were also considering bids. The Bloomberg article doesn’t mention those firms as currently being in talks with Scientific Games.
Apollo eyeing SG Lottery isn’t surprising. The private equity giant has made runs at a variety of gaming assets dating back to last year. It was successful in its quest for the Venetian and Sands Convention Center on the Las Vegas Strip. But it missed out on British sportsbook operator William Hill, and the recent sale of that company’s international assets.
The private equity firm was also in the mix for Tabcorp’s media and sports betting businesses. That’s before the Australian gaming firm opted to retain those operations and spin-off its keno and lottery outfits.
Scientific Games Has Appealing Options
Regarding the divestment of SG Lottery, Scientific Games has attractive options. For example, listing the unit in Australia could be a shrewd move. That’s because investors there are familiar with these types of businesses and might have more enthusiasm for the listing than their US counterparts. That potentially pumps the valuation higher in the process.
Likewise, SG Lottery is profitable, generates cash flow, and is growing, meaning the seller is dealing from a position of strength with suitors such as Apollo and Brookfield.
As of August, Scientific Games had $8.97 billion in long-term debt — a figure that confirms the importance of commanding the highest possible price tag for SG Lottery.
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