Aristocrat Leisure Ltd. #BB+# Ratings Affirmed After Big Fish Games Inc. A Outlook Remains Stable

Stocks and Financial Services Press Releases Friday December 1, 2017 09:18
MELBOURNE--1 Dec--S&P Global Ratings
  • Aristocrat Leisure Ltd. has entered into a binding agreement to acquire 100% of Big Fish Games Inc. for US$990 million (A$1,320 million).
  • Although the company will largely fund the acquisition with debt, its leverage will remain within our tolerances for the rating.
  • As a result, we have affirmed our 'BB+' ratings on Aristocrat and its related debt.
  • The stable outlook reflects our expectation that Aristocrat's strengthening market position in gaming-machine sales, gaming operations, and digital products will reduce the company's historically high volatility of profitability.

MELBOURNE (S&P Global Ratings) Dec. 1, 2017--S&P Global Ratings said today that it had affirmed its 'BB+' long-term corporate credit rating on Aristrocrat Leisure Ltd., a gaming company based in Australia. The outlook on the rating remains stable. We also affirmed our 'BB+' rating on Aristocrat's debt and the recovery rating of '3'.

We affirmed the ratings following Aristocrat's announcement that it has entered into a binding agreement to acquire 100% of Big Fish Games Inc. for US$990 million (A$1,320 million). The company will fund the transaction with a US$890 million term loan and US$100 million of cash, resulting in debt to EBITDA rising to the low 2x following completion. The predominantly debt-funded acquisition can be accommodated within our 'BB+' rating given Aristocrat's existing low leverage. We forecast Aristocrat to deleverage below 2x over the next two years, while maintaining adequate liquidity.

Nevertheless, the acquisition leaves Aristocrat with limited headroom to undertake new capital management activity and reduced buffer to withstand earnings pressure at the current rating. That said, we continue to view Aristocrat's financial policies as supportive of the rating, including S&P Global Ratings' adjusted debt to EBITDA to remain below 2.5x under normal operating conditions.

The acquisition of Seattle-based social gaming company Big Fish follows the group's recent acquisition of Israeli-based mobile game developer Plarium Global Ltd. in October 2017. These acquisitions will expand Aristocrat's digital gaming segment to about 38% of revenue on a pro-forma basis.

In our opinion, Aristocrat's shift to digital gaming will likely result in a greater proportion of recurring revenues as well as achieve some diversification across its portfolio, which has traditionally been exposed to the volatile gaming machine technologies industry. We view the recent acquisitions to be aligned with Aristocrat's existing capabilities and will position the company to respond to broader structural trends affecting the gaming industry. That said, our rating factors in some execution risk as well as our assessment that digital gaming has fewer barriers to entry compared with Aristocrat's traditional gaming machine segment.

Aristocrat's results for the year ended Sept. 30, 2017, underscore the group's continued strong performance. Its Class III premium gaming operations and growth in its Class II installed base increased its revenue in North America. Meanwhile, the strong performance of its Heart of Vegas application supported its digital segment. As of Sept. 30, 2017, and before its acquisitions, the group's gross debt to EBITDA was about 1.2x, which is consistent with our expectation for the year.

The stable outlook reflects our view that Aristocrat is committed to sustaining debt to EBITDA less than 2.5x under normal operating conditions, with the ability to increase to 3.0x for strategic opportunities.

The stable outlook also reflects our expectation that Aristocrat's strengthened market position in gaming-machine sales and gaming operations will reduce the company's historically high volatility of profitability.

We could lower the rating if the company's debt to EBITDA is greater than 3.0x as a result of corporate activity or capital management decisions, or greater than 2.5x under normal operating conditions. A decision to increase leverage beyond this level would undermine our assessment of the company's future financial policy commitments.

We could also lower the rating if a material deterioration were to occur in the economic environment in the U.S. or Australia, or if Aristocrat's market position across its portfolio severely weakens.

While upward rating action is unlikely over the one to three years, we could raise the rating if Aristocrat's cash flow generation and financial policies enable it to sustain debt to EBITDA of less than 1.5x. These financial ratios take into consideration the volatility of Aristocrat's profitability.


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