(By Balachander) Scientific Games Corp. (NASDAQ: SGMS) shares were downgraded to "sell" from "hold" and price target lowered to $6 from $7 by Deutsche Bank (DB) following the company's agreement to acquire WMS Industries Inc. (NYSE: WMS).
Last week, Scientific Games agreed to pay $26.00 a share or roughly $1.5 billion in cash to acquire WMS, a maker of video gaming machines.
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DB said it has a largely negative view of the deal with significant risks.
"Our view stems from our belief that the limited positives we can identify, namely the two business's non-competitive business lines, both companies deep trademark and IP portfolios, and considerable geographic and product diversity post the acquisition, are outweighed by the risks we find associated with the deal," the bank wrote.
The bank is of the view that the SGMS business model remains stagnant and will continue to be reliant on tough-to-handicap and somewhat binary legislative events for which the value to SGMS, in the event they occur, is nearly impossible to quantify.
The downgrade also reflects the current industry headwinds and WMS specific struggles are unchanged, DB said.
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The bank said rich premium and difficult to identify synergies make the pro forma outlook for SGMS daunting.
DB believes SGMS's business model remains challenged given bidding on lottery privatizations, thought to be the next leg of growth for SGMS, have become more competitive, thereby elevating the potential for lower returns.
Structural changes to online lotteries have been slow to materialize and have failed to move the needle from an EPS perspective, the bank wrote.
SGMS shares, which have been trading in the 52-week range of $5.53 to $13.07, plunged 9.59 percent to trade at $8.58 on Tuesday.