Analyst questions IGT’s purchase of Double Down Interactive

A gaming analyst said Tuesday he has “grave concerns” about International Game Technology’s $500 million acquisition of an online social gaming company, taking a contrarian position from other Wall Street research firms.

In a report to his clients, Union Gaming Group principal Bill Lerner said IGT could hurt its core slot machine business and may be spending too much to acquire Double Down Interactive, which is the developer of Facebook’s Double Down Casino.

Many analysts believe the deal could help IGT launch an online gaming website for U.S. consumers. However, Lerner also said three major casino operators are “irritated” that IGT has chosen to compete with companies that buy IGT slot machines and are also exploring entering the Internet gaming market if the activity is legalized.

He didn’t name the casino companies, but said “they represent about 13 percent of North American gaming devices.”

Lerner added that the opinions might provide some insight into how other casino operators view the deal.

“They suggest that they will react negatively especially if IGT pushes around content that they cannot have access to,” Lerner wrote in the research note. “They also are concerned about how IGT will treat poker once they launch it and when it is legalized.”

Lerner advised investors to sell their shares of IGT, which is traded on the New York Stock Exchange, in favor of other gaming equipment manufacturers, including Bally Technologies and Shuffle Master.

“We believe upwards of $500 million for a singular-platform dependent start-up could easy turn into a problematic, dilutive transaction in relatively short-order,” Lerner said.

IGT officials, however, said the deal to acquire Double Down, which has 4.7 million active users, was done to put the Nevada-based slot machine maker’s products in front of the booming social media market.

“IGT has no plans to operate an online casino in Nevada and compete with our customers,” said Staci Alonso, IGT’s vice president of marketing.

IGT announced last week it was buying Double Down for $250 million in cash, $85 million in retention payments over the next two years and as much as $165 million in cash payable over the next three years, subject to certain financial targets.

The company believes its game titles can help increase traffic on the Facebook website. At the same time Facebook players will become familiar with IGT’s slot machines and will look for the games when they visit a casino.

An IGT official said the company won’t compete with casinos as a result of the Double Down acquisition.

Lerner, however, suggested IGT is paying 28 times cash flow for Double Down, which he believes is too high even without incentive payments.

“This collectively strikes us as extremely generous for a start-up that is approximately two years old, with virtually no barriers to entry,” Lerner said. “To be fair, Double Down is growing rapidly.”

Janney Montgomery Scott gaming analyst Brian McGill had a different opinion. He told investors Tuesday the deal was a surprise, but could be a catalyst for the company’s game titles.

“The one major positive would be if online poker is legalized, it now has a partner in Facebook and it could benefit from this relationship,” McGill said. “In the meantime, it is expected that virtual gambling will continue to grow and IGT will benefit from now putting its titles on the site that can be available for virtual gaming.”

IGT is already operating online casinos in Europe. Last year, the company spent $115 million on Entraction Holding, a Swedish technology company that operates online poker networks and supplies online gaming products.

Even if IGT wants to operate its own online poker website, it would face a major barrier to entry. Nevada’s recently adopted Internet poker regulations only allow companies with land-based casinos to open an online gaming website.

Gaming Control Board Chairman Mark Lipparelli said discussions surrounding potential federal online gaming regulations also contain language calling for operators to have a bricks and mortar casino presence.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871. Follow @howardstutz on Twitter.