Inside Caledonia's US gaming deal

Former Aristocrat chief executive Jamie Odell was at dinner in New York in February when American billionaire Ron Perelman offered him the chance to transform Scientific Games Corp.

To anyone else, this ‘‘opportunity’’ would have been a good reason to choke on their food, considering the company in question has not made a profit since 2007.

Also, it is overloaded with debt. Its enterprise value is about $14 billion, but only $2.6 billion of this is in the equity value; the balance is made up of debt.

It is the most heavily indebted gaming company among the dozen in its peer group, according to S&P Global Market Intelligence.

But Odell’s immediate reaction to Perelman’s offer was positive. He was more than happy to step up and find the $1.2 billion needed to buy Perelman’s 34.9 per cent stake in Scientific Games, despite the obvious challenges.

His confidence was founded on his inside knowledge of the company, his belief in the management team and the fact he had spent the previous nine months advising its chief executive, Barry Cottle.

Once he had agreed to lead the purchase of Perelman’s stake, Odell turned to Will Vicars and Mike Messara at Caledonia (Private) Investments to anchor the acquisition.

He knew them well because Caledonia was Aristocrat’s largest shareholder when he was CEO between 2009 and 2017.

The deal shows Australia's ability to build a significant presence in global financial markets despite our remoteness.

That was a golden period for Caledonia, partly because of Aristocrat, which increased its market capitalisation from $1.3 billion to about $7.5 billion.

Under Odell’s leadership, Aristocrat made two transformational acquisitions in the United States.

It paid $US30 million for Product Madness, which grew into a global leader in social gaming, and it paid $US1.3 billion for Video Gaming Technologies, which gave Aristocrat the recurring revenue to fund growth. (This latter deal was named in Chanticleer’s 10 best M&A deals of the past 20 years.)

Once Odell had Caledonia on board, he turned for advice to David Berman, Macquarie Capital’s co-head of US industry coverage and global head of consumer, gaming and leisure investment banking.

Berman is regarded as a gaming guru among investment bankers. He was the lead investment banker on the deal and the co-financial adviser was Terry Walsh from Oaktower Partnership.

It is understood the bankers had no problem finding a range of US investors to join Caledonia in the purchase of Perelman’s stake. Unlike Australia, a shareholder in the US can sell a controlling interest without the buyer having to make a full takeover offer.

Second shot for Odell

The new investors are being coy about revealing the identities of all those involved in buying Perelman’s stake, except to say that no one will own more than 9.9 per cent, which is a disclosable amount in the US.

Chanticleer understands Caledonia will own 9.9 per cent, worth about $360 million.

Odell now has a second shot at transforming a gaming company as the new executive chairman of Scientific Games. For the time being, he will have to manage the situation remotely.

It is clear this will not be a problem as he has managed to handle a $1.2 billion deal from his home in Melbourne through Zoom meetings of up to 25 people.

He comes to this task with a couple of distinct advantages.

First, he knows the company inside out, having been appointed an adviser to Scientific Games by Perelman in May last year.

Odell was helped in that task by Toni Korsanos, who was chief financial officer at Aristocrat from 2009 until 2018. She was an integral part of the company’s transformation.

During her 10 years at Aristocrat, Korsanos was responsible for many corporate functions, including strategy, global supply chain, company secretariat and human resources. She was also in charge of M&A, treasury and investor relations.

Odell realises that to become a growth company, Scientific Games must slash its debts and invest for growth.

She is a director of Crown Resorts, Treasury Wine Estates and Webjet. Along with Odell and several others, Korsanos co-founded an Australian private assets growth fund in 2019 called JAADE Private Asset Fund, in partnership with Ellerston Capital.

Odell and Korsanos got investment banking advice from Dane FitzGibbon, the former UBS banker now working for Jarden.

They have over the past 18 months put in place a new leadership team in the core gaming division of Scientific Games. They have been working on developing a turnaround strategy.

Odell realises that to become a growth company, Scientific Games must slash its debts and invest for growth.

Scientific Games fell into the trap that has afflicted so many US companies over the years. It seemed to think that because debt was cheap, it was not a problem. But the quarterly interest payments have turned into a millstone.

Odell will have complete authority to transform the company, which will have a new board of directors who will oversee a transformation strategy to optimise the business.

'A deep and diverse mix'

Scientific Games, which operates in gaming, lottery, social and digital gaming industries in the United States and internationally, has a small presence in Australia.

The new team at Scientific Games will introduce an Australian corporate governance structure with a majority of independent directors. The company wants to have ‘‘a deep and diverse mix of gaming industry, financial, strategic and operational experience’’.

Odell will be executive chairman and Korsanos, executive vice-chairman. A statement released overnight says ‘‘they will be joined on the board by an additional independent non-executive director’’.

Perelman, the executive chairman, Barry Schwartz and Frances Townsend, who are representatives of Perelman’s MacAndrews & Forbes holding company, will also resign from the board.

The company said the first tranche of Perelman’s sale was expected to be completed on Tuesday (Wednesday AEST). The transaction is expected to be completed over the next few weeks.

The changes to the Scientific Games board of directors will become effective upon the first tranche sale.

Perelman's decision to sell out of Scientific Games is part of a broader divestment strategy that will allow him to focus more on his philanthropy.

Odell’s opportunity to turn around Scientific Games carries considerable risks and is unlikely to deliver results quickly. It will take years to reduce the company's enormous debt burden.

Also, the reduction in debt has to occur while the company retools its technology stack.

However, Odell has the advantage of knowing and working with the entire executive team. Chanticleer understands he has confidence in Cottle.

Caledonia’s cornerstone investment in Scientific Games is relatively small compared with some of its other concentrated bets in US stocks. It is clearly backing Odell’s proven abilities in corporate transformation.

The combination of Australian management expertise and Australian funds management skills make this deal stand out as an indicator of the potential power of services exports.

It shows Australia's ability to build a significant presence in global financial markets despite our remoteness.

Also, it is a telling reminder that COVID-19 has not killed cross-border deal-making involving a well-known billionaire handing effective control of one of his key assets to an Australian.