Breakingviews: Brookfield pays less than jackpot in lotto deal

Shareholders of betting firm Scientific Games are feeling the letdown. The $9 billion firm run by Barry Cottle is offloading its lottery business to Brookfield for $6 billion. That’s not a terrible price, and an alternative plan to list in Australia saw valuation hopes trimmed back. Yet a 13% drop in Scientific Games’s shares suggests investors were hoping for a jackpot.

The price Brookfield is paying, including earnouts if the business hits performance targets, comes in at around 13 times Scientific Games’s expectations for full-year adjusted EBITDA for the lottery business. That is roughly in line with the whole company’s enterprise value-to-forward EBITDA, according to Eikon. It’s also a little more than a third of the parent company’s overall enterprise value, which is about the share of revenue it contributed in the first half of the year. It suggests Brookfield may not be paying much of a premium. But with Scientific Games’s multiple 50% higher than in early 2020, it’s not a bad price to ink either.

Some peers, like Australia-based Aristocrat Leisure, have higher valuations. But Scientific Games tried other avenues that turned up worse outcomes. It hoped to float the lottery business at a valuation of as much as $10 billion, but Reuters reported last week that expectations had come down closer to this deal’s price. A public offering would have only allowed Scientific Games to sell off a portion of the lotto business. This deal makes for a clean break, with certainty, and gives it cash up-front to help pay down some of its $8 billion net debt load.

Still, investors took nearly $1 billion off its market cap on Thursday. Part of the problem is that valuation expectations in the space have spiraled over the past year. The company’s shares have risen 162% since last October, while lottery competitor International Game Technology climbed 270%. When the public market is paying out this big, shareholders are going to be annoyed with anything but a bonanza.

(Reporting by Jennifer Saba)

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