International Game Technology (NYSE: IGT) has notably reduced its debt, potentially positioning itself to meet management leverage targets over the next several years.
IGT’s famous Wheel of Fortune slot machines. The company’s leverage is declining materially. (Image: Las Vegas Weekly)
Supported by strong third-quarter earnings growth, the gaming device manufacturer is expected to have driven earnings before interest, taxes, depreciation, and amortization leverage to 3.6x last year, according to Fitch Ratings. That puts IGT on pace to pare leverage to 3x by 2026.
Management has a 2025 2.5x-3.5x net leverage target, and was at the midpoint of the band at Sept. 30, 2023. Fitch focuses on gross metrics and subtracts minority distributions from adjusted EBITDA (approximately 0.5x difference in leverage due to the latter),” noted the ratings agency.
Fitch affirmed IGT’s corporate credit rating at “BB+” — a junk grade. The outlook on that rating is “stable.”
IGT Asset Sales Helped
Prior asset sales helped IGT generate cash that was used to lower liabilities, and it’s possible that theme could be repeated in 2024. Last June, the company announced it’s considering strategic alternatives for its global gaming and PlayDigital units.
It’s possible that IGT could merge, sell, or spin-off those businesses. Alone, the sale of the global gaming unit could command a price tag of $4 billion to $5 billion, which could go a long way toward funding IGT’s debt-cutting plans and its shareholder rewards programs.
“From 2021-2022, IGT sold its Italian B2C gaming business and Italian payments business, with proceeds primarily used to pay down debt,” added Fitch. “As of 2Q23, IGT is in the midst of a review to explore strategic alternatives for its gaming and digital segments, considering the company’s EV/EBITDA multiple continues to lag its peers. Barring a status quo, Fitch believes a part of the proceeds could potentially be used to further de-lever, while also bolstering IGT’s liquidity for the upcoming lottery rebid cycle.”
As beneficial as asset divestments might be for IGT, the company has recently been chided for dragging its feet on such transactions.
Advantages for IGT in Selling Slot Unit
There are potential perks for IGT in selling its global gaming segment. Not only is there rumored strong interest in the business, but it has recurring capital needs that weigh on the company’s ability to generate free cash flow.
Additionally, by shedding some more capital-intensive businesses, IGT could better focus on its lottery arm, which is highly profitable and accounts for about 70% of EBITDA.
“IGT generates about 70% of its EBITDA from lotteries, which is resilient and less prone to economic shocks and other threats seen elsewhere in the gaming industry,” concluded Fitch. “It also exhibits favorable characteristics relative to other forms of gaming, such as less cash flow volatility, stable low-to-mid single-digit growth rates even during periods of dislocation, and higher profit margins, while benefiting from significant barriers to entry due to high regulatory oversight and capital intensity.”
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