On Monday, Stifel adjusted its stance on International Game Technology (NYSE:IGT), downgrading the stock from Buy to Hold and revising the price target slightly downwards to $30 from $31.
The firm's analysis indicates long-term confidence in the company's prospects, particularly following the announcement of a spin-off that is expected to serve as a significant catalyst. The spin-off aims to establish a more effective capital structure and shareholder base for IGT's lottery segment, with minimal negative synergistic effects.
The valuation of IGT's shares, which closed at $26.64 on Friday, incorporates the potential value of the MergeCo ownership, estimated to contribute approximately $5-6 per share. By comparing to the lowest valuation among its lottery peers, the firm suggests a fair value of around $33 per share for IGT, a 21% increase from the last closing price. However, the near-term upside is seen as limited due to the intricacies of the spin-off process and uncertainties surrounding IGT's Italy Lotto contract renewal.
Stifel highlighted that the chosen taxable spin-off structure, a Reverse Morris Trust, is intended to provide MergeCo with greater capital allocation flexibility post-spin. Although the tax impact is expected to be minimal due to a UK holding company loophole, investors may face a tax on gains from the sale of the Global Gaming + PlayDigital business. This tax implication may cause potential investors to delay building positions in RemainCo until after the spin-off is finalized.
The future trading performance of IGT shares is also under scrutiny as the company approaches the Italy Lotto contract bidding process slated for late 2025. While Stifel remains positive about IGT's strategic positioning, the firm plans to reassess its outlook once more details emerge post-spin-off, which is expected to close late in 2024 or early in 2025.
Additionally, Stifel has made a minor adjustment to its standalone IGT model, increasing the 2024 Global Lottery Adjusted EBITDA and Global Gaming Adjusted EBITDA projections by 1% each, based on currency movements and management's forward-looking statements.
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