Merger Summary
Everi Holdings Inc. (NYSE: EVRI) is currently trading at a discount due to uncertainties surrounding its proposed merger with IGT’s gaming businesses and recent softness in its gaming fundamentals.
However, Everi holds significant return potential at current market prices, regardless of the merger outcome.
On February 29, 2024, IGT and Everi announced a merger of IGT’s Global Gaming and PlayDigital businesses with Everi to form a diversified gaming and FinTech company.
Following the merger, Everi shareholders will own 46% of the combined entity, while IGT shareholders will hold 54%. The deal values the combined company at a $6.2 billion enterprise value, with net debt/EBITDA expected to be 3.2x – 3.4x at close.
The transaction is anticipated to close later this year or early 2025, subject to regulatory approval, and the combined company will trade on the NYSE under the ticker IGT.
Business Model
Everi
Gaming (53% of LTM Revenue): Everi’s gaming business involves creating games and cabinets for commercial and Indian casinos. The company generates earnings through revenue share agreements for leased machines and offers digital gaming solutions to online casinos.
FinTech (47% of LTM Revenue): Everi provides integrated financial services solutions, including cash access and software solutions for casinos. It makes money through transaction fees for cash access solutions, subscription fees for software offerings, and hardware sales to casinos.
IGT
Global Gaming (87% of 2023 SpinCo Revenue): IGT’s offerings include cabinets and games, generating revenue predominantly from lease agreements. They also provide comprehensive software solutions to casino operators.
PlayDigital (13% of 2023 SpinCo Revenue): PlayDigital offers digital games and business solutions for iGaming customers and sports betting platforms.
Why This Opportunity Exists
Merger Uncertainty
The complexity of the proposed merger and the need for regulatory approval have catalyzed further stock declines, with Everi’s price down 30% since the announcement.
Fundamental Softness
Recent softness in Everi’s gaming segment is due to strategically replacing older cabinets with newer units to drive higher daily wins per unit (DWPU). Overall DWPU declines result from normalizing back to pre-COVID levels and an aging install base.
Pendulum Swing
The land-based gaming industry rebounded strongly post-pandemic, benefiting Everi from increased foot traffic and casino upgrades. However, as demand tapered, Everi’s revenue growth slowed, resulting in a valuation only seen during the Great Recession and COVID.
Thesis
MergeCo Specific
Diversified Product Offering: Post-merger, MergeCo will have one of the most comprehensive product portfolios in the gaming industry, providing a one-stop shop for casino operators.
Cross-Selling: The combined company can drive additional revenue by introducing offerings to new markets and customers while accelerating Everi’s international expansion.
CAPEX/IP Synergies: The merger will allow for combined IP portfolios and R&D efforts, creating significant savings for MergeCo.
Everi Specific
Gaming FinTech Monopoly: Everi is essential for casino operations, with high switching costs for its systems. The shift to mobile/cashless solutions will drive efficiency for casinos, allowing Everi to capture the entire casino payments ecosystem.
Gaming Reacceleration: Everi’s strong release schedule for new games and cabinets and continued investment in R&D will aid in accelerating the adoption of new cabinets.
Recurring Revenue: 73% of Everi’s revenue is recurring, helping smooth out hardware sales volatility. Growth in the digital business will likely increase the proportion of recurring revenue.
Capital Allocation: Everi has strategically used free cash flow to reduce long-term debt and repurchase shares while investing in R&D.
Management
Randy Taylor: The current CEO of Everi, who will join the board post-merger, has a strong finance background and has driven significant growth in gaming and FinTech revenues.
Vince Sadusky: The current CEO of IGT, who will become CEO of MergeCo, has maintained post-COVID momentum and driven solid growth in sports betting and digital gaming.
Return Potential
There is significant upside potential for Everi whether the merger is completed or not. The stock trades at a significant discount to peers while boasting better margins, returns on capital, and growth potential.
Risks
Competition May Drive ROIC Erosion: If Everi and IGT cannot invest in new games and cabinets, unit penetration could decline, affecting free cash flow.
iGaming/Sports Betting Cannibalization: As iGaming and sports betting grow, patrons may shift away from land-based gaming, disrupting Everi’s FinTech operations.
Continued Gaming Softness: Macro pressures, including inflation and potential recession, could inhibit demand and growth in the industry.
Merger Execution Risk: Merging two large businesses comes with complications that could be costly if not managed effectively.
Conclusion
Everi Holdings represents an asymmetric opportunity for significant returns, regardless of the merger outcome. The company’s organic growth opportunities and discount to peers provide a margin of safety for investors.
While merger uncertainty has weighed on valuation, clarity regarding the transaction will act as a catalyst for Everi stock, whether approved or not.
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