Over the weekend, Barron's published a positive article on Multimedia Games (MGAM). The article focused on bullish comments from analysts and investors who believe the stock is worth at least $35 a share -- and up to $40, if the company is acquired.
The bulls must have been psychic because it turns out Multimedia was acquired for $36 per share by Global Cash Access Holdings (GCA) on Monday. Pretty fortunate timing, if you ask me. Timing aside, is this a good merger for investors?
Global Cash Access Holdings specializes in getting cash to the casino floor so gamblers can deposit it in the casino's coffers. GCA's QuikCash ATM machine sits on the casino floor and can accept credit and debit cards. If the bank declines the patron's card for any reason, GCA steps in to assist the gamer in getting approval to withdraw more money. Sweet! Gamblers love the machines because it's like having an electronic loan shark standing by when you're on a hot streak and bump up against your credit limit.
The Barron's article cited analysts who believe Multimedia Games can move higher because of the strength of its new gaming platform. The company's hit product, TournEvent, has grown from an initial 31 installations to 275 by the third quarter of fiscal 2014.
TournEvent is a fully customizable slot machine, which consists of a 40" 1080p HD display with an interactive sound chair that allows casinos to run slot machine tournaments. Because of the fully programmable nature of the company's slot machines, casinos are able to change games easily, which can heighten player enthusiasm and keep gamblers coming back for more.
I would argue we saw a similar phenomenon when video poker machines were introduced in the 1970s and 80s. Video poker machines were seen as a huge improvement over the mechanical one-armed bandits. At the time, video poker machines allowed casinos to easily reprogram the machines to change the odds. Because of their interactive play, video poker machines were popular with both gamers and casinos. In fact, the machines were so popular, mechanical slot machine makers quickly rushed into the market. Through a series of savvy acquisitions and strong product introductions, International Game Technologies (IGT) became the king of video slots throughout the 1990s.
Multimedia Games has 4,000 machines installed at 275 locations, which adds up to just a 2.8% market share in the U.S. The company's largest markets, the Native American casinos in Oklahoma and Washington, are tapped out. According to estimates, MGAM has 13% market share in both states. Gaining additional share is going to be tough. California, for example, has more than 68,000 slot machines installed and Multimedia Games has just 3% share, according to the American Gaming Association.
In Nevada, America's gaming capital, the company has barely made a dent. Of Nevada's estimated 178,000 slot machines, Multimedia has just 715 machines.
Since Global Cash Access is licensed to operate in 350 gaming jurisdictions worldwide and has ATM machines in more than 1,100 casinos, the merger should help MGAM gain market share.
The combined company will have revenue of $800 million and 80% of it will be recurring. Management will need all that recurring revenue to pay down the $1.2 billion in debt they are taking on to get the deal done.
By acquiring Multimedia, GCA can accelerate its single-digit growth rate to the mid-20s, cut overhead by $30 million and sell gaming machines into its existing casino accounts. The deal is expected to close in seven months.
The only way to grow in the lackluster gaming industry seems to be by doing deals, cutting costs and selling more products into the same old accounts. These types of deals can work, but it remains to be seen if GCA's salesforce can actually sell video games instead of ATMs. Since it will take several months to get this deal done, I would stay on the sidelines. I would wait until the combined company reported its first quarter, which will give you a hint as to how successful the merger will really turn out.