IGT Stock Dips Following $2.6 Billion Payment to Secure Lucrative Lottery Contracts

Key Highlights: Discover the essential details and winning strategies behind the most lucrative lottery contracts currently available in the gaming industry.

Speculation arises over whether IGT overpaid for the contract renewal.
Analysts noted that the risk related to stock overhang has been alleviated.

In premarket trading, International Game Technology (NYSE: IGT) looked set for a strong start on the news of its renewed Italian lottery contract. However, by late morning, the stock began to decline, as analysts raised concerns that IGT may have paid more than anticipated for this crucial deal.

IGT stock — Texas Lottery scratch-off tickets produced by IGT. The company renewed its contract with the Italian Lottery, but at a higher-than-expected cost. (Image: *Casino.org*)

A consortium led by IGT and including Allwyn, Arianna 2001, and Novomatic Italia secured what IGT Chairman Marco Sala deemed “one of the world’s most important lottery contracts” for the next nine years for a staggering $2.6 billion. This sum exceeded Wall Street’s expectations and consists of various payment structures, including 2025 obligations of $558.26 million and $335 million, with the remainder due in the following year.

According to Truist Securities analyst Barry Jonas, the current annual earnings estimated at €400 million suggest that the anticipated internal return rate (IRR) for this nine-year contract could fall between 10-15%, significantly lower than previous estimates. Nevertheless, the exploration of digital gaming expansion alluded to in the company’s recent announcements could potentially lead to improved returns.

Having exercised the rights to operate Italy’s lottery for over three decades, IGT has faced market pressures that saw its stock drop by 20.41% in the last year, in part due to fears of losing this lucrative contract.

Positive Insights on the Italian Lottery for IGT

Despite the hefty price tag associated with the $2.6 billion payable to Italy’s Agenzia delle Dogane e dei Monopoli (ADM), the resolution of this deal opens new pathways for growth within the Eurozone’s third-largest economy.

CEO Vince Sadusky mentioned IGT’s plans to enhance internet lottery sales in Italy, aiming to leverage this into a broader presence within Italy’s iGaming and sports betting segments, as well as other areas of digital gaming.

However, experts remain cautious, suggesting that the high cost of the Italian lottery contract might hinder IGT’s ability to return capital to investors following its ongoing merger with Everi and Apollo Global Management.

As Jefferies analyst David Katz observed, the significant bid likely diminishes the stock’s upside potential. IGT’s management has indicated intentions to utilise proceeds exceeding $4 billion from the successful merger, prioritising a reduction in debt and potential capital returns, but this new bid complicates those prospects.

Impact on Competitors

Flutter Entertainment (NYSE: FLUT) was also in contention for the Italian lottery deal. Last year, they acquired the Italian lottery giant Sisal for $2.2 billion and are currently pursuing a merger with Snaitech, thereby establishing a substantial foothold in Italy.

While Flutter missed out on the Italian lottery contract, its impact on the parent company’s shares is likely to be minimal.

As Jonas pointed out, losing the Italian Lotto position to IGT may not significantly change market perceptions of FLUT, as the traditional Lotto segment has historically been viewed through a lens of lower multiples, diverging from FLUT’s primary digital focus.

In summary, IGT’s renewal of the Italian lottery contract for $2.6 billion brings both opportunities and challenges. While it secures a crucial revenue stream for nearly a decade, the cost raises concerns about future investor returns and competition dynamics in the gaming landscape.