L&W enters charitable gaming space with $1 billion acquistition

Global gaming powerhouse Light & Wonder (L&W) has made headlines with its strategic acquisition of Grover Gaming’s charitable gaming assets, signaling potential shifts in the gambling industry landscape.

As per a press release dated February 18, L&W will invest $850 million (£675.5 million/£815.4 million) in cash upfront, complemented by a performance-based earn-out structure worth up to $200 million over the next four years. The transaction is anticipated to finalize in Q2 of this year.

Market analysts have expressed optimism regarding this acquisition, with some forecasting it as the start of a new wave of consolidation in the gambling sector.

Frank Fantini, an esteemed gaming analyst and founder of Fantini Research, remarked on L&W’s trajectory, suggesting that the expansion into adjacent sectors like charitable gaming opens doors for major players to enter early by acquiring established brands. In an interview with iGB, he noted the likelihood of more traditional gaming companies pursuing acquisitions similar to Grover’s.

Favorable Valuation Metrics

On the subject of valuation, Fantini highlighted that the acquisition’s 7.7x AEBITDA multiple is quite favorable, especially when considering impending cost-saving measures and growth prospects.

“Given that gaming tech firms typically command valuations of around 10x EBITDA, this acquisition is immediately accretive to L&W’s earnings,” he explained. “When the deal offers a lower valuation than that of their own stock, it represents a compelling opportunity.”

Research analysts at Macquarie echoed this sentiment, assigning an “outperform” rating and delivering an insightful note titled “Finding their Four Leaf Grover.” They underscored that L&W’s strategic acquisition adds a significant long-term growth driver through its entry into a burgeoning adjacency. Furthermore, they maintained confidence in the company’s $1.4 billion EBITDA target for 2025, anticipating double-digit growth in iGaming and sustainable profitability across its SciPlay division.

Insights from Investment Analysts

Barry Jonas from Truist Securities aligned with his peers, titling his commentary “Move Over Big Bird.” He hailed the acquisition as particularly attractive, noting the robust growth opportunities it presents within the charitable gaming market—an area characterized by high barriers to entry.

The acquisition was financed through a combination of cash reserves and incremental debt, while L&W aims to maintain its net debt leverage ratio within a targeted range of 2.5x to 3.5x. The company reaffirms its ambitious AEBITDA target of $1.4 billion by 2025.

Founder Garrett Blackwelder of Grover Gaming will assume an advisory role for the next three years, ensuring continued stability and success for the newly acquired assets. According to L&W, Grover reported $135 million in revenue and $111 million in AEBITDA for 2024, underscoring its robust financial foundation. This acquisition expands L&W’s footprint, granting access to over 10,000 leased electronic pull-tab machines across five states: North Dakota, Ohio, Virginia, Kentucky, and New Hampshire.

Commitment to Charitable Gaming Market

During an investor call, L&W CEO Matt Wilson conveyed his company’s strong belief in the potential of the charitable gaming sector. As regulatory advancements for iGaming stall, established markets like charitable gaming appear increasingly lucrative for major players.

“Our focus will be on leveraging our R&D expertise in the charitable gaming arena,” Wilson told investors. “Historically, we’ve invested billions in developing strong franchises, innovative game mechanics, and artistic enhancements across multiple studios. Our goal is to direct that innovation towards the charitable sector.”

Looking ahead, Wilson identified Minnesota and Maryland as key focal points for expansion. Although L&W considered organic growth within the charitable gaming sector, he acknowledged the challenges of navigating a fragmented customer base—Grover currently services 1,500 clients across five states, compared to L&W’s 700 clients throughout North America.

“While organic growth would take years to achieve, this acquisition allows us instant access to 10,000 units and the chance to integrate our game content swiftly,” Wilson explained.

Understanding Charitable Gaming and Electronic Pull-Tabs

Charitable gaming is a unique framework where a significant proportion of generated revenue supports local philanthropic entities. It is increasingly seen as a more favorable form of gaming expansion, particularly in states traditionally resistant to gambling. However, regulations governing charitable gaming vary widely at the state level, influencing the types of games permitted.

According to Harbor Compliance, charitable gaming operates in some capacity across all but two states—Hawaii and Utah—with additional state-level restrictions in Alabama, Maryland, Pennsylvania, South Dakota, Vermont, and Wyoming.

Pull-tabs, commonly likened to lottery tickets, offer players the chance to reveal winning combinations by pulling back perforated tabs. They exist in both paper and electronic formats, with e-pull tabs being integrated into cabinet systems that resemble traditional slot machines. This integration enhances the player experience but is distinct from Class II machines, video lottery terminals (VLTs), and historical horse racing machines.

E-pull tabs are legalized in 11 states while traditional paper versions are permitted in approximately 40 states. Both formats have gained popularity among veterans and charitable organizations, such as the Veterans of Foreign Wars (VFW) and the American Legion.

For L&W, the objective lies in migrating established gaming titles into Grover’s e-pull tab infrastructure. During the investor call, Wilson emphasized their expertise in adapting games for various verticals. “We’ve successfully navigated these transitions before; we understand the intricacies involved,” he asserted.

A Strategic Shift for Light & Wonder

This acquisition represents a significant pivot for Light & Wonder, a company that has undergone a dramatic transformation over the past decade. Previously known as Scientific Games, L&W faced challenges arising from its extensive expansion across diverse gaming sectors, leading to substantial leverage.

In June 2021, L&W announced a strategic realignment, divesting its sports betting and lottery divisions to return to its gaming-centric roots. The lottery segment was sold to Brookfield Business Partners for $5.8 billion in April 2022, while the sports betting division was acquired by Endeavor for $800 million in September. Concurrently, L&W engaged in considerable debt refinancing.

Since then, L&W has seen remarkable growth, with its stock price increasing from the mid-$70s during the divestiture period to $106 at present. This trajectory has solidified its position as one of the top three gaming suppliers globally, alongside Aristocrat and IGT. The acquisition of Grover Gaming marks L&W’s most substantial investment in its new streamlined state, aligning with the company’s vision for future growth.