Brazil’s gambling industry looks ready to take off. Nearly a year after the South American country passed its lottery and sports betting law, International Game Technology (IGT) and Scientific Games (SGMT) have been selected as their instant lottery partners, and analysts are very optimistic about their potential profits.
To win the contract, IGT and SGMS agreed to go 50/50 on a total concession payment of R$818 million ($202 million). They’ll be making payments in installments for the privilege, with the first measured at R$97 million ($24 million), with seven additional yearly payments of R$103 million ($25 million).
Union Gaming analysts have estimated a $25 million startup cost for the two companies. The details of the contract provide that lottery tickets should pay out 65% of sales to winnings, 16.7% to the government and the remaining 18.3% going to the two companies.
As this is the first instant lottery offering in Brazil, the commission is higher than other markets, and the term longer. A typical term is 5-9 years, whereas IGT and SGMS will get 15. That should help them build up a business in a virgin market. Anlaysts crunching the numbers suggested this will give “IGT/SGMS plenty of time to recoup its investment and make what we estimate could be a very attractive return (~45% IRR).”
While shares of both IGT and SGMS were up on the news, Union Gaming analysts think traders might be underestimating how lucrative this deal could be. They estimate that by the fifth year of operations, the market could be worth $2.3 billion, based on the $4 billion in national lottery sales the country has. They shared their math on potential sales:
“IGT/SGMS will receive 18.3% of sales which yields $423m of net revenue. We assume a 25% EBITDA margin which means ~$106m of EBITDA to the JV and $53m each for IGT/SGMS. Using a 7x multiple and a 15% discount rate, we estimate the contract is worth ~$1 per share of present value for IGT and ~$2 for SGMS.
“Given the relatively low capex (and phased installments), coupled with the sheer size of Brazil, we believe lotex could be one of the more lucrative lottery contracts in both IGT/SGMS portfolios.”
