IGT - Palm Harbour Capital - International Games Technology: Risk Reward Remains Massively Skewed Towards The Upside

2024-06-09 07:20:00 ET

Summary

• International Game Technology has announced that it will spin off its Global Gaming and PlayDigital divisions and merge them with Everi, with IGT shareholders holding a 54% interest in the combined company.
• The deal was initially well received by the market, but concerns about the gaming segment's portfolio refresh and the risk of losing the Italian lottery concession have caused the shares to decline.
• Despite the risks, we believe that the risk-reward ratio remains heavily skewed towards the upside, with a fundamental value of over $45 per share.

The following segment was excerpted from this fund letter.

International Games Technology ( IGT )

We have been shareholders of International Game Technology since December of 2019 and we first wrote about it in our first quarter 2020 letter, in the depths of the COVID panic when we were adding to the position. We initially invested under the thesis that the lottery business was a high quality, recession resistant, recurring business and that the market was punishing the stock due to high leverage. The leverage was due to the previous merger bringing GTECH and IGT together as well as to the nature of the business where typically a large upfront fee and/or capital expenditure is required to win a multi-year concession from a government. The company was paying too high a dividend to support the controlling family and we thought they would eventually adjust this to pay off the debt to prepare for future tenders. COVID then occurred and showed how even the recession resistant lottery business could be put on its knees for a short period of time....

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