A wholly owned subsidiary of International Game Technology (IGT), Barcrest Group recently signed an agreement with United Kingdom based Global Draw, a wholly owned subsidiary of Scientific Games Corporation (SGMS). The agreement forms a strategic partnership between the two companies.

Under the terms of the agreement, gaming machines manufactured by Global Draw will use Barcrest’s content. The gaming machines, more than 7600, will be installed in over 2100 Ladbrokes shops throughout the United Kingdom.

Both the companies expect the partnership to be successful, particularly in the Licensed Betting Office (LBO) market. Barcrest currently supplies more than 7500 machines in this sector while Global Draw has more than 20,000 LBO terminals throughout the United Kingdom.

We believe Global Draw has a huge market in the United Kingdom and this partnership will enable IGT to increase its market share. Barcrest’s programs and games will be available across all the 20,000 LBO gaming terminals, which will boost the company’s long-term profitability in our view.

We also believe this strategic partnership has immense potential for the company’s top-line growth on a long-term basis. IGT reported a weak top-line growth in the third quarter of 2010, with revenues declining 5.3% year over year.

IGT continues to face regulatory issues in Alabama, which had a negative impact on its gaming operations in North America. We believe this partnership will boost the company’s revenue growth in international markets, offsetting its domestic weakness in the near term.

Moreover, this partnership reflects IGT’s strategy of expanding its gaming services in a number of new markets such as Ohio, Chicago, Kentucky, New Hampshire, Rome and Canada, which will drive profitability over the long term.

This venture would also cushion IGT from competition, particularly from Bally Technologies Inc. (BYI), WMS Industries Inc. (WMS) and privately held Aristocrat Leisure Limited.

Recommendation

We maintain our long-term Neutral rating (6 to 12 months), despite a weak third-quarter 2010, based on the belief that IGT has a strong product portfolio and the company recognizes the importance of open network and is well positioned to gain from server-based gaming in the long term.

Currently, IGT has a Zacks Rank of #4, which implies a Sell rating on a short-term basis.

Zacks Investment Research

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