Why I think Aristocrat Leisure Limited could be a buy at this share price

Gaming company Aristocrat Leisure Limited (ASX: ALL) has announced this morning that it has completed its US$990 million acquisition of social gaming company Big Fish Games Inc. from Churchill Downs Incorporated.

Big Fish is one of the world’s largest developers of Social Casino, Social Gaming and Premium Paid games and will transform Aristocrat’s Digital business and create the second-largest Social Casino publisher in the world by revenue.

The announcement saw the company’s share price rise 1.32% to $22.96 in today’s trading session.

Big Fish is the sixth-largest Social Casino game publisher globally and was the seventh-largest mobile publisher by revenue in the U.S. in 2016.

For the 12 months ending 30 September 2017, it generated adjusted revenue of US$458 million and adjusted EBITDA of US$83 million.

The acquisition of Big Fish increases Aristocrat’s Digital revenue contribution from 24% to 38% and approximately doubles digital pro-forma revenues to around A$1.26 billion.

Management expects the transaction to be earrings per share accretive pre any synergies in the first full year of ownership. The Big Fish purchase will be financed via a combination of cash reserves and a US$890 million loan which raises the company’s pro-forma net debt to last 12 months of EBITDA to 2.2 as at 30 September 2017.

Foolish takeaway 

The acquisitions of Big Fish and Plarium in 2017 and the existing Product Madness portfolio will fundamentally change the makeup of Aristocrat as the Digital component now becomes the largest part of the business at 38% of pro forma revenues as at 30 September 2017.

Aristocrat’s traditional strength in poker machine sales and gaming operations now represent 35% and 27% of the company’s revenues.

The move towards a greater emphasis on digital revenues is in line with the general industry trends.

According to market researcher Newzoo during its Q4 2017 global gaming update, mobile gaming remains the fastest growing gaming market growing at 23.3% to $50.4 billion annually on the back of increasing growth of tablet and smartphone games and improved monetisation strategies.

Mobile gaming now comprises 43% of the total global gaming market, well ahead and growing faster than the traditional PC and console markets at 28% and 29% respectively.

Aristocrat’s acquisitions are not without risk though, as mobile games can quickly fall out of favour. However, in my view with the continued strength of the traditional business in conjunction with the growth in mobile gaming it remains superior to underperforming rival Ainsworth Game Technology Limited (ASX: AGI) in the gaming sector.

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Motley Fool Contributor Tim Katavic owns shares of Aristocrat Leisure Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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