Sunday, September 18, 2016

Perelman's Financial Games for SG

Bloomberg reported:

Scientific Games Corp. shareholders loved the slot machine and lottery company’s decision to consider an initial public offering of its fast-growing interactive-gaming unit. Bondholders, not so much.

Shares of Scientific Games jumped almost 17 percent after the Las Vegas-based company said on Sept. 7 it would consider joint ventures, an IPO and other options for the business, which makes casino-style games for mobile devices. The bonds fell and remain lower a week after Scientific Games designated the business an unrestricted subsidiary, raising concerns among bondholders about how any proceeds may be used. Scientific Games, 40 percent-owned by New York billionaire Ronald Perelman, had $8.07 billion in long-term debt as of June 30.
Such a decision would need to be made by SG's board of directors, which holds fiduciary responsibility for the company and its many subsidiaries.  Here's a list of board members who will ultimately decide what happens with the interactive gaming unit.

Most of them are Perelman's people or came with the acquisition of WMS Industries and Bally Technology, the two interactive game companies SG acquired in 2013 and 2014.

SG's press release on the WMS deal stated:

WMS was acquired for approximately $1.5 billion in cash. In connection with the merger, Scientific Games entered into a new $2.6 billion credit facility, consisting of a $2.3 billion term loan facility and a $300 million revolving credit facility that was undrawn at closing. The term loan facility was used, in part, to finance the acquisition, to pay off existing indebtedness and to pay fees and expenses relating to the merger and related financing.
Las Vegas Review Journal reported on the Bally deal:

Scientific Games is paying $83.30 per share to acquire all outstanding shares of Bally, valued at $3.3 billion. The lottery company is assuming $1.8 billion in debt.

Scientific Games completed the financing for the buyout earlier this week, pricing out $3.15 billion of debt to be used in the transaction. In October, the company said it raised $2 billion for the merger.
Much of Scientific Games debt was added to buy the firms they may want to spin off. Surely the debt would go with it.  Nope, and that's the bondholders' concern:

The view is different for bondholders, according to Barbara Cappaert, an analyst with KDP Investment Advisors Inc.  Putting the interactive business in an unrestricted subsidiary means that cash may not be available to pay interest or reinvest in the company’s other businesses, she said.  Funds could be used to buy back stock or declare a dividend.

“Given what has happened with other issuers due to the opportunistic use of unrestricted subsidiaries, bondholders are right to be concerned,” said Anthony Canale, head of high-yield research at Covenant Review, a research firm that analyzes credit agreements. He cited Caesars, which sold some of its hotels to an affiliate and then put its most heavily-indebted unit in bankruptcy
Bondholders are rightfully concerned they will be subject to a PEU slight of hand move.  SG's board will make any decisions and should be liable for any harm they cause in the service of Ron Perelman's billions in fortune.