Brazil’s gambling industry are set for a boost a year after the country passed its lotter and sports betting law. International Game Technology (IGT) as well as Scientific Games (SGMT) were selected as the instant lottery partners leaving analysts optimistic about their potential profits.
IGT and SGMS agreed to go 50/50 on the total concession of $202 million. They will be paying in instalments for the privilege with the first payment of $24million and several additional yearly payments of $25 million.
Union Gaming Analysts estimate a $25 million start-up cost for the two companies. The details of the contract provide the lottery tickets should pay 65% of sales.
This is the first instant lottery offering in Brazil and the commission is higher than other markets. A typical term is 5-9 years while IGT and SGMS will get 15. This will help them build a business in a virgin market.
Analysts suggest that this will give:
“IGT/SGMS plenty of time to recoup its investment and make what we estimate could be a very attractive return (~45% IRR).”
The shares of IGT and SGMS were in the news and Union Gaming Analysts believe that traders may be underestimating how lucrative the deal may be. They estimate that the market could be worth up to $2.3 billion by the fifth year of operations.
“IGT/SGMS will receive 18.3% of sales which yields $423m of net revenue. We assume a 25% EBITDA margin which means ~$106m of EBITDA to the JV and $53m each for IGT/SGMS. Using a 7x multiple and a 15% discount rate, we estimate the contract is worth ~$1 per share of present value for IGT and ~$2 for SGMS.
“Given the relatively low capex (and phased installments), coupled with the sheer size of Brazil, we believe lotex could be one of the more lucrative lottery contracts in both IGT/SGMS portfolios.”