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Scientific Games Merger Expected To Yield Cost Synergies

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Revenue synergies

The combination of Scientific Games (SGMS) and Bally Technologies, or Bally, is expected to result in global sourcing, production, engineering, and product development capabilities. The combined company will also feature a large installed global base of diverse recurring revenue products and services.

In the 12-month period ended March 31, 2014, Scientific Games, or SGMS, and Bally generated combined revenues of ~$3.0 billion.

The above chart shows that the combined entity’s attributable EBITDA (earnings before interest, taxes, depreciation, and amortization) is expected to increase by $329 million as a result of anticipated synergies coupled with certain adjustments.

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Cost synergies

Following the acquisition of Bally for $5.1 billion, SGMS expects to achieve ~$220 million in cost synergies and $25 million in capital expenditure savings by consolidating operations.

SGMS expects to generate these efficiencies in the areas of manufacturing, engineering, field and customer service, and administrative operations. The combined company is also expected to benefit from the accelerated use of various tax attributes against US-based pre-tax income.

Of its anticipated cost and capex synergies, SGMS expects ~80% to be achieved in the first year. The remaining 20% in savings will be realized in the second year. Consolidation is intended to eliminate duplicative functions and bring management under a single leadership structure.

The above chart shows that after consolidation, the company’s EBITDA margin is expected to increase from 35% to 44%. The combination would also boost the company’s free cash flow margin.

Last year, in December 2014, Caesars Entertainment (CZR) and Caesars Acquisition (CAQC) decided to merge to expand their portfolio of assets and facilitate the restructuring of CZR’s $18.4 billion debt.

Investment options

SGMS is a component of the VanEck Vectors Gaming ETF (BJK), which provides diversified exposure to the leisure industry. Investors may also invest in the Consumer Discretionary Select Sector SPDR Fund (XLY) to avoid the risk of investing in individual casino stocks.

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