Wall Street was hoping for a better reaction from investors on news that Scientific Games agreed to settle a federal lawsuit with four companies for 45 percent of what a judge and jury ordered the gaming equipment supplier to pay back in August.
Shares of Scientific Games closed at $15.85 Friday on the Nasdaq, up 9 cents or 0.57 percent. The company’s stock price had been up as much as 5 percent in the first trading session since the manufacturer said it would pay $151.5 million to end the litigation.
“We view today’s announcement as a positive for the stock given it removes a perception overhang and management distraction,” SunTrust gaming analyst Barry Jonas said in a research report issued Thursday evening.
After the markets closed Thursday, Scientific Games announced the settlement, which negated a jury verdict in a Chicago federal court room that awarded the four companies $105 million. A judge tripled the award, and, with attorney’s fees and costs, Scientific Games owed $335 million. The Las Vegas-based company originally said it would appeal the verdict.
Jefferies gaming analyst David Katz said the settlement “removes an overhang that has weighed on the stock over the past four months.” However, Scientific Games hurt its near-term financial position and free cash flow generation, Katz said.
Union Gaming Group analyst John DeCree agreed the settlement removed “potentially years of uncertainty and paves the way for a promising 2019.” He had previously told investors Scientific Games had a “compelling case for appeal.”
The Chicago jury ruled Scientific Games initiated sham litigation to keep a rival automatic card shuffler out of the market.
In 2014, Chicago-based Shuffle Tech filed an antitrust lawsuit against Scientific Games. That lawsuit came out a 2012 patent-infringement action filed in Nevada by SHFL Entertainment – which is now part of Scientific Games – against DigiDeal Corp., Aces Up Gaming Inc. and Poydras-Talrick Holdings LLC, all of whom Shuffle Tech worked with in 2012 to launch its first automatic card-shuffler.
Shuffle Tech, which had planned to make and sell 800 shufflers in its first year but legal fees consumed the company’s investment money.
SHFL Entertainment was acquired by Bally Technologies in 2013 for $1.3 billion. A year later, Scientific Games acquired Bally for $5.1 billion.
Katz told investors Scientific Games has other issues on its plate that it needs to resolve, namely $2.2 billion of its $8.7 billion in long-term debt that is callable at the end of December. Also, Scientific Games’ largest lottery contract with the state of Pennsylvania will be re-bid in 2019.
“Finally, we have cited ongoing changes within the corporate and segment-level leadership, which present additional uncertainty,” Katz said.
DeCree said if Scientific Games hadn’t settled the lawsuit, the matter could have lingered and potentially scared off new investors and impeded key transactions, like a favorable debt refinancing.
Scientific Games officials said on the company’s third quarter earnings call they were considering an initial public offering for its social gaming business.
“The announcement of a potential social gaming IPO indicates management is focused on creating shareholder value,” Jonas said. “Today’s settlement removes an outstanding distraction and enables management to focus on executing on its growth trajectory.”
Howard Stutz is the executive editor of CDC Gaming. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
