Global slot machine and social gaming supplier Aristocrat is expected to actively pursue strategic mergers and acquisitions in the near future, with the company’s strong financial position also allowing it to settle any deals using cash, according to ratings agency Fitch.
The forecast formed part of a new update in which Fitch affirmed the Long-Term Issuer Default Ratings (IDRs) of Aristocrat Leisure Ltd, Aristocrat Technologies Australia Pty Limited and Aristocrat Technologies, Inc at “BBB-“ with a stable outlook, reflecting the group’s strong business profile as a global gaming supplier and low gross leverage of around 1.0x.
Noting a historically conservative fiscal policy, the agency highlighted the fact that Aristocrat is in a net cash position with liquidity boosted by an AU$1.3 billion equity raise in late 2021 ahead of a planned takeover of online gaming platform Playtech plc. That deal ultimately collapsed, but Fitch said it expects the Australian gaming giant to reallocate its hefty war chest to other M&A opportunities.
“The company sits in a flexible position to comfortably fund small to mid-size acquisitions and major share buybacks with cash, all while adhering to its conservative net leverage policy,” the agency said.
“Fitch expects Aristocrat to continue to pursue strategic M&A, particularly in the real-money gaming (RMG) sector, given its strong financial flexibility, solid portfolio of slot content and its lapsed acquisition of Playtech in 2022. Aristocrat’s credit profile has headroom for M&A and Fitch expects future acquisitions to be funded in a manner that is consistent with ‘BBB-’ leverage metrics.”
Aristocrat remains the dominant slot machine supplier in Australia and is one of the “Big 3” in the United States alongside IGT and Light & Wonder, holding a 20% share in US slot sales and a higher share of premium install units – equivalent to over 30,000 machines – according to Fitch.
However, the company’s M&A strategy has seen its digital business become increasingly significant in recent years, with segment revenue rising from 16% of group-wide revenue in 2017 to 46% at end-2022 on the back of its Plarium and Big Fish acquisitions.
While Fitch suggests there are “limited synergies” between Aristocrat’s land-based and digital arms and prefers the stability of its traditional slots business, the agency acknowledged the healthy diversification digital provides in terms of product diversification and scale. It also proved a valuable asset at the height of the COVID-19 pandemic, when land-based venues around the world were closed.
“In 2020, digital grew over 30% due to more consumers remaining at home using digital products, which helped to offset the significant declines seen in the legacy slot business,” Fitch said. “Despite more entertainment options for consumers, digital continued to experience mid-single digit year-on-year growth in 2021 and 2022.”
The agency estimates lower revenues for digital in 2023, although still well above pre-pandemic levels, while traditional gaming will experience flattish growth on “a modest pullback in gaming operations performance in North America offset by continued recovery of outright slot sales and growth in international jurisdictions.”