International Game Technology (IGT) and Scientific Games (SGMT) have joined Brazil’s gambling industry as instant lottery partners with the country’s LOTEX.
The partnership, which has been unveiled nearly a year after the South American country passed its lottery and sports betting law, was announced after IGT and SGMS agreed to go 50/50 on a total concession payment of $202m.
As a result of winning the sponsorship contract, IGT and SGMT will now be making annual payments of around $25m for seven years, apart from the first installment which will cost both the organisations $24m.
Union Gaming analysts have estimated that based on the $4bn in national lottery sales the country currently has, the market could be worth $2.3 billion by the fifth year of operations.
They shared their math on potential sales: “IGT/SGMS will receive 18.3% of sales which yields $423m of net revenue. We assume a 25% EBITDA margin which means ~$106m of EBITDA to the JV and $53m each for IGT/SGMS. Using a 7x multiple and a 15% discount rate, we estimate the contract is worth ~$1 per share of present value for IGT and ~$2 for SGMS.
“Given the relatively low capex (and phased installments), coupled with the sheer size of Brazil, we believe LOTEX could be one of the more lucrative lottery contracts in both IGT/SGMS portfolios.”
The analysts also estimated a $25m startup cost for the two companies, with the details of the contract provided showing that lottery tickets should pay out 65% of sales to winnings, 16.7% to the government and the remaining 18.3% to the two companies.
As this is the first instant lottery offering in Brazil, IGT and SGMS can expect a longer than usual term of around 15 years compared to the typical 5-9 years.
Moreover, the analysts concluded that the commission will also be higher than other markets, stating: “IGT/SGMS [have] plenty of time to recoup its investment and make what we estimate could be a very attractive return (~45% IRR).”