SunTrust gaming analyst Barry Jonas called it a “holiday shopping spree.”
That’s one way to look at Scientific Games Chairman Ron Perelman’s December acquisition of 1.5 million shares of the gaming equipment manufacturer’s stock for $27 million.
“Mr. Perelman has a history of making opportunistic purchases when he has felt a disconnect in valuation, given Scientific Games’ growth prospects,” Jonas told investors in a Jan. 9 research report. The transactions gave Perelman, 76, a 39.2 percent stake in the company.
Jonas told investors SunTrust was “encouraged” by Perelman’s insider purchases.
Perelman, currently ranked at No. 49 on the Forbes 400 with a net worth of $9.4 billion, made the seven stock purchases – ranging in share price from a high of $17.65 to a low of $15.09 – between Dec. 20 and Dec. 28 through his MacAndrews & Forbes investment vehicle.
He was obviously frustrated by Scientific Games’ stock performance in 2018.
Deutsche Bank gaming analyst Carlo Santarelli said in a New Year’s Eve research report that gaming equipment manufacturers “had had their worst year on record” in 2018. Combined, Scientific Games and rival International Game Technology – the industry’s two largest gaming equipment providers – saw a roughly 55 percent decline in their stock prices over 2017. The combined performance was lower than the 41 percent drop for the sector in 2008 during the heart of the recession.
Scientific Games shares fell 64 percent in 2018, which followed “a meteoric rise” of 266 percent in 2017.
Jonas said the Las Vegas-based company’s decline was due to a “a combination of onetime events,” some unforeseen risks, and its third CEO change in two years. The challenges – including paying $151.5 million in December to settle a federal antitrust lawsuit – combined to drive “a heightened impact” on Scientific Games’ equity.
Scientific Games also carries the equipment sector’s largest long-term debt figure at $8.8 billion, much of which taken on during the company’s two acquisitions of slot machine manufacturers WMS and Bally Technologies between 2013 and 2015 for $7.6 billion.
Jonas predicts a positive 2019 for the company, citing a projected increase in cashflow through its sports betting platform being provided to the nation’s expanding legal sports gambling market and a renewed focus on the company’s lottery business, including products that include digital sales, purchasing and accounting systems for instant tickets at the retailer.
“While underlying lottery trends industrywide look solid, Scientific Games should uniquely benefit from its new initiative,” Jonas said, adding that that could ultimately be more lucrative to the company’s bottom line than sports betting.
He predicted the company’s cash flow will rise from an estimated $1.34 billion in 2018 to an estimated $1.43 billion this year and an estimated $1.5 billion in 2020.
“Scientific Games should see strong free cash flow generation starting in 2019,” which Jonas said could help reduce the company’s leverage. During its third quarter earnings announcement, Scientific Games said it planned to spin off its expanding social game business through an initial public offering. Jonas estimated social games revenue contributes roughly 9 percent of the company’s cash flow and an IPO could help in any debt reduction efforts.
Jonas said his increased cash flow predictions for Scientific Games assumes “no upside” from a social gaming IPO, zero expenditures on currently non-existent growth projects – such as a move into Brazil – and any debt refinancing plans.
“Given that free cash flow and leverage has been a lingering investor concern, we think this is an important management focus and should help improve investor sentiment and valuation” Jonas said.
Which brings us back to Perelman, who spent roughly $5.55 million to buy back 173,000 shares in August in two purchases, one at $31.57 per share, the other at $31.95 per share.
Gaming is just one of Perelman’s interests, which range from candy to cosmetics. According to Forbes, Perelman is a longtime shareholder of cosmetics giant Revlon and is an owner of Humvee manufacturer AM General.
In 2013, when Scientific Games was licensed by Nevada gaming regulators for its purchase of WMS, Perelman attended the hearing in Las Vegas. Then-Nevada Gaming Control Board Chairman A.G. Burnett asked Perelman about his interest in the merger – Scientific Games, at the time, was based in Atlanta and was solely in the lottery business.
“It’s a fabulous deal,” Perelman said. “It will allow us to become a stronger player in the marketplace.” He admitted that his investment fund had previously explored acquiring “a destination resort,” but decided such a move would constitute a real estate investment. He then began exploring other ways to enter the casino industry.
“We like gaming… it’s a great industry,” Perelman said at the time.
Jonas hinted in his research report that Perelman’s December stock deals could give the shares a jump. Shares of Scientific Games closed Friday at $23.90 on the Nasdaq.
“We believe the valuation of its parts is meaningfully greater than the current stock price and a social gaming IPO could be a catalyst for the shares to go higher,” Jonas said.
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
