Briefing: We attended the analyst briefing with Novomatic/AGI...

Briefing: We attended the analyst briefing with Novomatic/AGI ahead of the AGI general meeting on June 3 to approve the sale of Mr Len Ainsworth’s 53% (172.1m shares) to Austrian based, Novomatic AG at A$2.75 per share. An Explanatory Memorandum (EM) ahead of the vote by shareholders was released to the market last week.

Key takeaways: 1) Novomatic is the behemoth of European gaming having established/acquired a series of local market businesses with strong/dominant market shares in the major countries; 2) non-European slot manufacturers such as IGT and Aristocrat have traditionally been unable to make material inroads in Europe due to the local market nature of most countries; 3) the transaction may take 12 months to become fully effective due to the myriad of regulatory approvals although AGI branded Novomatic based games could be available within six months in Australia; 4) the transaction has not been marketed as a cost-out story although there would appear to be significant procurement cost opportunities – Novomatic manufacture c60k machines annually compared to AGI at c12k; 5) Novomatic’s game library can be adapted to different markets (Class II, III etc); and 6) the combination looks to be complimentary - Novomatic is keen to take AGI’s stand-alone progressive offerings into Europe and AGI is keen to access Novomatic’s multi-terminal offering for Australia.

The sweeteners: The EM contains details of commitments that Novomatic and AGI have agreed should the vote be approved. In summary: 1) AGI and Novomatic will share their game libraries (at a cost of US$10k per game) for an initial period of four years – Novomatic and AGI have 540 and 650 titles respectively; 2) Novomatic has agreed to purchase 1k AGI units in each of FY17 and FY18 for its own properties; 3) Novomatic has granted AGI exclusive distribution rights for Novomatic products in Australia/New Zealand and also in USA and Canada subject to certain performance criteria; and 4) AGI will be able to distribute its land based game titles through Novomatic’s online real money and social gaming platforms.

Financial estimate: AGI has quantified the estimated benefits of the package as increasing PBT by A$10.6m in FY16 (A$8.4m recurring) and A$26.9m in FY18 (A$24.7m recurring). Much of the benefits accrue sharing games libraries and AGI gaining a vastly improved distribution platform in Europe. The report forecasts that as a result of the deal AGI’s market share of replacements will increase from 23% to 28% in Australia and from 5% to 7.5% in North America. The financial estimate represents a material increase to our current forecasts although AGI will need to ramp-up costs including R&D to realise the opportunity.

Changes to forecasts: None at this time as we will await the vote on June 3.

Investment view: BUY call maintained. Whilst minority AGI shareholders may feel aggrieved at not being offered the same takeover premium as Mr Ainsworth we believe this has been more than compensated by agreements now disclosed by AGI and Novomatic. To state the obvious, Novomatic can accelerate the development of AGI in a manner that cannot happen under the current ownership structure (with due respect). We view the Novomatic relationship as a pivotal inflection point in AGI’s history after a prolonged period of share price underperformance.