Is it time to take a punt on Aristocrat Leisure Limited?

Pokies maker expands in the US with US$1.3 billion acquisition

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Gaming machine manufacturer Aristocrat Leisure Limited (ASX: ALL) will increase its offshore sales to 82%, with North America contributing 60% after the company announced a US$1.283 billion takeover of rival Video Gaming Technologies (VGT).

VGT is one the US’s leading gaming operations, and will add massive scale to Aristocrat’s gaming operations. Aristocrat had 8,200 installed machines, but VGT has 20,200, bringing the new total to 28,400 and giving the Australian company 31% of the North American Tribal Leased Game market share. That’s well ahead of competitors IGT, Bally and Scientific Games (SG).

Aristocrat says the acquisition will provide earnings per share growth in the low-to-mid teens. Importantly, all of VGT’s revenues are recurring, taking the percentage of Aristocrat’s recurring revenues from 15% to 35% post acquisition.

As Aristocrat’s CEO Jamie Odell said in a statement to the ASX, “The strategic and financial benefits are compelling for Aristocrat shareholders.” He added, “VGT has a complementary product offering and provides a unique opportunity to accelerate our growth in the US recurring revenue segment, which has for some time been an important strategic objective.”

The company will fund the purchase with a new US$1.3 billion loan, a $375 million placement, a $100 million debt facility, a $30 million share offer to the Ainsworth family (who are significant shareholders), and a share purchase plan of up to $60 million. The Ainsworth family originally founded Aristocrat, before Len Ainsworth quit the company and started up Ainsworth Game Technology Limited (ASX: AGI) – a fast growing competitor to Aristocrat.

Mr Odell also announced that the company had experienced solid growth this financial year, with revenues up 7.6% for the six months to end of March 2014. But on a comparative basis, Ainsworth Game Technology looks cheaper than Aristocrat, is generating much stronger growth and had virtually zero debt. For those reasons alone, I’d take Ainsworth over Aristocrat – but here’s a even better bet than both the poker machine makers…

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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