International Game Antes Up for Online Casino, a Credit Positive

International Game Antes Up for Online Casino, a Credit Positive

International Game Technology (Baa2 stable) said 12 January it would acquire privately held Double Down Interactive LLC, the developer of the DoubleDown Casino application on Facebook, for $500 million. The credit-positive acquisition will give International Game, a maker of slot machines and other casino gambling equipment, an immediate presence in the fast-growing social gaming arena and another potential outlet for its existing game content.

DoubleDown’s 4.7 million monthly active users play blackjack, slots, poker and roulette using chips they purchase with Facebook Credits, the virtual currency on Facebook. Players can win more chips and achieve various rankings and awards in the application. However, they are not making cash wagers and cannot redeem their chips for real currency; this differentiates the games from online gambling, which is currently illegal in the US.

Were the US to legalize online gambling, International Game would have a platform to capitalize on it through its ownership of DoubleDown and its prior acquisitions of WagerWorks, Million 2-1 and Entraction Holdings AB, which provide online gaming content and services for certain jurisdictions where online gaming is legal. Although the US Congress would have to act to legalize online gaming, a recent legal opinion from the US Department of Justice potentially brought legalization a step closer. In December, the Department of Justice announced it had shifted its stance against online gambling with a ruling that the Wire Act of 1961, a pillar of its legal fight against offshore poker outfits, applies only to sports betting, potentially opening the door for states to pursue online sales of lottery tickets and casino-style gaming options.

International Game is paying a high price for DoubleDown, about $100 per monthly active user (MAU), which is more than triple the $30 per MAU implied by the recent market capitalization of social gaming leader Zynga Inc., developer of the popular Farmville game. The price includes $250 million in upfront cash and various milestone payments in the future. The cash payments will dent liquidity (unrestricted cash totaled $460 million as of 30 September), but the deal will not raise leverage, materially weaken the company’s credit profile or affect its ratings. Nor will DoubleDown add materially to International Game’s consolidated revenue or earnings in the near term.
In the longer run, the acquisition could put International Game in competition with its land-based casino customers, which could hurt its core slot-machine business. Nevertheless, the deal gives the company access to millions of consumers with an interest in casino-style gambling, allowing it to broaden the appeal of its games.