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Italy's GTECH to Buy Casino-Equipment Maker IGT

Merged Companies Will Base in Tax-Friendly U.K.

By connect
Updated July 16, 2014 2:39 p.m. ET
Gtech plans to buy International Game Technology in a $4.7 billion deal. Pictured, a Gtech slot machine. Reuters
Two of the gaming-equipment industry's biggest players—Italy's Gtech SpA and Las Vegas-based International Game Technology IGT +1.06% —are teaming up, but taking their game to tax-friendly Britain.
Lottery operator Gtech, facing slower growth at home, said Wednesday it has agreed to buy casino-equipment maker IGT for $4.7 billion in cash and stock. Gtech will also assume about $1.7 billion in debt as part of the deal.
The acquisition will give the Italian gambling giant the greater exposure it has been seeking to the U.S. casino industry, and will create the world's biggest lottery operator and gaming-equipment company.
But the agreement is also the latest in a string of big deals that involve a change of address for the combined company, resulting often in more favorable tax treatment. U.S. pharmaceutical giant AbbVie Inc. ABBV +2.60% 's nearly $54 billion agreement this week to buy Ireland-based Shire SHP.LN +3.95% PLC was driven partly by tax benefits. That deal envisions the combined company moving to the U.K., where it would pay lower taxes.

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Many of these deals are structured as so-called inversions, and have typically involved a U.S. company buying a foreign company in a more favorable tax regime and moving its tax base to that other country. In the Gtech-IGT deal, it is a European company and a U.S. one combining and then relocating to the U.K., where corporate taxes are generally lower than both the U.S. and Italy.
"The effective tax rate ought to improve slightly by having the tax residency in the U.K., but that is clearly not the primary reason for the operation," John Vandemore, IGT's chief financial officer, said in an interview.
The two companies now have a tax rate in the high 30% range and that is expected to fall to the mid-30s for the combined company, said Mr. Vandemore.
"We had to domicile the company in the EU because of obligations Gtech had and if you think of all the factors and the U.K. being an English-speaking country it made sense to do it there," IGT Chief Executive Patti Hart said in an interview.

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The tax maneuver is facing growing scrutiny on both sides of the Atlantic amid a recent frenzy of such deals. The Wall Street Journal reported Tuesday that the Obama administration is urging immediate legislation to curtail the practice.
Amid a failed bid by Pfizer Inc. PFE +0.59% to buy Britain's AstraZeneca AZN.LN +0.59% PLC for some $120 billion earlier this year, some U.K. politicians criticized the deal as an attempted tax dodge by the U.S. company. But executives have defended such moves as move a strategy that can make their companies more competitive globally.
As part of the deal, Gtech and IGT will merge under a new holding company, which will be listed in New York but have its corporate headquarters in the U.K., where it will establish tax residency, and its operational headquarters in Las Vegas, Providence, R.I., and Rome.
The arrangement is similar to one structured by Fiat Chrysler Automobiles F.MI +1.36% NV, the Italian-American car maker. As part of its full merger with Chrysler, it shifted its corporate residence to the Netherlands and its tax residency to the U.K.
WSJD is the Journal's home for tech news, analysis and product reviews.
The deal is the latest in a series of consolidation moves in the gaming industry. Earlier in July, Australian slot-machine maker Aristocrat Leisure Ltd. ALL.AU +1.25% agreed to purchase Video Gaming Technologies Inc., a leading U.S. manufacturer of slot and bingo machines, for $1.28 billion.
Last year, two other deals topped $1.3 billion each.
The Gtech-IGT deal makes sense and brings some synergies but "certainly doesn't fix any of the issues overnight," said Eilers Research director of research Todd Eilers.
IGT and fellow U.S. slot makers are still facing a trio of headwinds. Their core customers—low-end gamblers—have been walloped by the weak domestic economy. The companies are also struggling to figure out how to cater to a new generation of players and competition has increased substantially in recent years.
"Who wants a winded 800-pound slot gorilla?" was the title of a report by Union Gaming Research analyst Robert Shore in June after rumors emerged that IGT was in talks to sell itself.
Gtech operates lottery games world-wide, including the Lotto game in Italy and several state lotteries in the U.S. Based on last year's results, the combined company would have derived half its revenue from gaming equipment and 35% from lotteries.
By marrying up their respective market shares in two different segments of the gaming-equipment market, Gtech and IGT may avoid anticompetition scrutiny in the U.S. and Europe.
"We don't think we will have any antitrust issues because the overlap is very minor," Gtech CEO Marco Sala said in an interview.
Mr. Sala will be CEO of the combined company with Ms. Hart becoming a vice chairwoman.
Gtech said it would pay $18.25 per share for IGT, 75% in cash and the rest stock. IGT shares rose 9.6% to $16.98 in midday trading in New York while Gtech closed 4.1% higher in Milan.
Gtech has grown over the past five years, thanks in part to a gaming boom in Italy—the largest gambling market in Europe and number four in the world, according to 2012 figures compiled by Global Betting and Gaming Consultants. But Italy's stagnant economy has started to catch up with the company.
Gtech generates 57% of revenue in its home market. After a 29% jump in sales in 2011, the company hasn't managed much growth over the past two years.
At the same time, companies like IGT have been challenged by an uneven economic recovery in the U.S., which accounts for more than three-quarters of its revenue, and by heightened interest in online social gaming. In March, IGT unveiled plans to reduce its global workforce by 7% as part of a series of cost-cutting measures.
Gtech said the acquisition will lead to more than $280 million in savings for the new entity by the third year after the closing, which it expects to happen by the middle of next year. The new entity had combined revenue of more than $6 billion last year.
The Boroli and Drago families control a stake of almost 60% in Gtech and will see that drop to about 47% after the acquisition, the cash part of which will be paid for with funds on hand and through $10.7 billion in new financing from Credit Suisse, Barclays and Citigroup. Gtech will use the excess credit to refinance existing debt.
—Shayndi Raice and Kate O'Keeffe contributed to this article.
Corrections & Amplifications
The Boroli and Drago families control a stake of almost 60% in GTECH. GTK.MI +0.79% An earlier version of this article incorrectly said that stake was controlled by the De Agostini family.
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