It is understandable why many of the players in the SGMS/WMS deal would want this deal to happen. Investment bankers get a nice fee for arranging the deal and the financing. The new debt holders get a nice fat interest rate in a low corporate interest rate market. WMS shareholders get a nice premium on the stock price, paid in cash, not shaky SGMS shares. WMS management gets change of control provisions to kick in on their stock options, accelerating big profits for them. The SGMS CFO gets to talk about using its massive NOL carry-forwards to shield some WMS profits (if any), and he gets to use WMS's un-levered balance sheet and cash-flow to borrow $1.6B to finance the deal. ALW gets to make another big deal, talk about synergies (remember IGT/OES?) and milk it for as long as possible before he eventually rides off into the sunset. He and Perelman had to do a deal like this because they knew SGMS was dead in the water otherwise.
But, here is a set of numbers that could be causing others some worry about this deal. Over the past 3 years (2009-2011) WMS has had EBIT (Earnings before Interest Expense and Taxes) of $100M/$125M/$174M respectively, or an average of around $133M per year. It looks like EBIT for fiscal 2012 will be in the same range. To do this deal, SGMS will borrow at least $1.6B to finance the purchase of WMS. If SGMS pays an interest rate on this new junk debt similar to the rate it is paying on $300M of LTD the company recently refinanced, say 6.5-7.0%, then the additional interest expense alone on this new debt will average around $110M per year, which almost totally wipes out the annual WMS EBIT.
In their financial presentations, SGMS always likes to talk about their EBITDA because it is a bigger/happier number than their massive annual EPS net losses. The financials of this WMS deal look a lot like the financials of the existing SGMS: Lots of debt (the deal doubles total LTD from $1.6B to $3.2B) and growing EBITDA, but sharply shrinking or non-existent net profits because of the $105M per year of new interest expense (for a total of over $205M per year) on the combined P&L.
By the way, SGMS is only able to do this deal because interest rates are at historical lows, even for junk grade debt like theirs. If and when rates rise, the massive $3.2B on the balance sheet of the new SGMS/WMS will be hard to refinance without big real improvements in the revenue, cost and cash-flow of the new entity, not just the one-time monetization of some NOL carry-forwards. SGMS does not have a history of acquiring things, making them better and growing them organically. They don't have a proven approach to integrating acquisitions into a well-run existing organization. Maybe the market is thinking about all this today, with the stock trading at $8.75 versus a high of $10.75 the morning the deal was announced. Perelman can make this deal happen, but he can't put his own price on the stock.
Something seemed fishy about this deal. 60 % premium on a company with big cultural differnces and as you say SGMS dismall record of integrating new aquisitions and not just IGT-OES. Bothersome is the amount of money that swings back and forth wildy and its usually the big guy selling bits at a time while the guy that thinks they're smarter than the market and buys a few hundred shares of SGMS gets the #$%$ knocked out of them. We'll see..