International Game Technology (IGT) CEO Patti Hart Discusses Definitive Merger Agreement with GTECH S.p.A. (Transcript)

Jul.16.14 | About: International Game (IGT)

International Game Technology (NYSE:IGT)

Definitive Merger Agreement with GTECH S.p.A. Conference Call

July 16, 2014; 08:30 a.m. ET

Executives

Patti Hart - Chief Executive Officer

John Vandemore - Chief Financial Officer

Marco Sala - Chief Executive Officer of GTECH

Alberto Fornaro - Chief Financial Officer of GTECH

Analysts

Carlo Santarelli - Deutsche Bank

Cameron McKnight - Wells Fargo

Joseph Greff - JPMC

Steve Wieczynski - Stifel

Amit Kapoor - Gabelli & Co.

Shaun Kelley - Bank of America

Robin Farley - UBS

Justin Sebastiano - Brean Capital

Todd Eilers - Eilers Research

Operator

Good morning, and welcome to the International Game Technology Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded.

It is now my pleasure to introduce Kate Pearlman, Vice President of Investor Relations and Treasury. Ms. Pearlman, you may begin.

Kate Pearlman

Thank you and welcome to today’s call regarding IGTs announcement to enter into a definitive merger agreement with GTECH.

Leading our call today will be Patti Hart, our Chief Executive Officer; and John Vandemore, our Chief Financial Officer. Also joining us on the call today is Marco Sala, Chief Executive Officer of GTECH and Alberto Fornaro, Chief Financial Officer of GTECH.

As we get started, please note that the slide presentation for this call is posted on the IGT Investor Relations website, which includes our Safe Harbor language on page two.

Today’s call and simultaneous webcast may contain forward-looking statements, including statements about IGT and GTECH, the proposed transaction, the future of our potentially combined businesses and other statements of IGT’s or GTECH’s plans, objectives, expectations or intentions.

Certainly statements that may be made today will be considered forward looking as the term is defined under the rules of the Securities and Exchange Commission and are therefore subject to the Safe Harbor created by such rules.

These forward-looking statements are based on currently available information. Actual results could differ materially from those anticipated in the forward-looking statements due to a variety of factors, which are discussed in detail in IGT’s filings with the SEC and reported results should not be considered an indication of future performance.

Although we believe the assumptions and expectations reflected in any forward-looking statements are reasonable, such forward looking statements involve risk and uncertainties that could lead actual results to differ from those contained in today’s presentation materials and discussions.

Now I’ll turn the call over to IGT’s Chief Executive Officer, Patti Hart.

Patti Hart

Thank you, Kate and good morning everyone. We want to say thank you for joining us today on very short notice. As most of you have seen this morning, earlier today we announced that we’ve entered into a definitive merger agreement with GTECH to combine our two companies. So I’m going to start you on page four of the presentation for those of you who are referring to the presentation.

This is a very exciting day for us at IGT. I think this combination really does provide the opportunity to create the global leader in end-to-end gaming. The combination really creates leadership across virtually all segments of gaming, including the Number One position that we’ve enjoyed at IGT for some time as the number one gaming equipment supplier, adding the success that our friends at GTECH bring to that as well and the number one lottery business that GTECH has worked hard over many, many years to establish.

In addition to that our top tier social gaming business through DoubleDown and the combination of our interactive real money wagering businesses also provides market leadership positions for the company.

As we looked at the business, one of the things that we found to be most attractive was the global scale that comes from diversity in products and diversity in our geographic mix, which provides a much more balanced portfolio for the company, for our customers and for our shareholders.

We feel strongly that the combination of our R&D efforts further strengthens our efforts from an R&D perspective and allows us the opportunity to continue to create innovation that I think is desired and necessary for the industry.

We are expecting to realize more than $280 million in Synergies. You’ll hear more from John about that and at the end of the day, we find ourselves as the industry leader, with more than $6 billion in revenue and $2 billion in EBITDA.

I mean this transaction really provides a value for our shareholders at IGT of $18.25 a share for all of our equity holders, in a combination of cash and stock, which does represent a 46% premium to the closing price on June 6, which was the day prior to the initial reports that we were pursuing and exploring a sale of the company. And that provides great near term value for our shareholders, but the equity component of this transaction also provides a continued long-term opportunity to create value as well.

So moving to slide five quickly, when you look at the companies and you put them together, there is very, very little overlap in products, customers or markets that we serve. We see this fits together in a way where one and one does equal more than two.

From the lottery operations business, that GTECH again has storied history and is part of the business from instant ticketing, to solutions and full operations of lottery infrastructure. From an iGaming perspective also GTECH and IGT, both have been focused on this part of the business, GTECH brining a more robust, I would say application set when you look at their poker, bingo and casino and sports betting offerings.

The video lottery business is where you see an overlap, but I think an overlap in a way that’s very complementary, where both companies have historically been manufacturers and providers of video lottery terminals, but GTECH also brings their system component, I think demonstrated again this week as GTECH was awarded the Central System bid in Greece, which we are all hoping to leverage.

If you move down the chart from a content, we’ve always said at IGT its about content, content, content, and in bringing the brands that IGT has been know for and has leveraged historically to potentially new markets with our new partners, and then adding and rounding out the casino business, which I think everyone would agree IGT has been the undisputed leader in, and then our social DoubleDown business which we and GTECH executives have been committed to leveraging as well, as you think about the good work we’ve done to position ourselves from a Facebook perspective as a real top grossing app and a top tier social casino.

Moving to page six, one of the many strengths of this combination is the result in diversity. I think first from a product perspective if you look at the GTECH product portfolio from a revenue perspective on the left hand side, their $4 billion more concentrated in lottery, but not exclusively being derived from the lottery business, and ours which has been over the years relying on the gaming equipment sector, including our gaming operations revenue and on a combined basis what you see is a business that is much more balanced from a gaming equipment lotteries interactive and other source of revenues. So from a revenue perspective, being a really nice balance to really I think reduce any specific exposure, any concentrated exposures for the company.

And then as you move to page seven, you also see a combination that creates more diversified geographic mix as well, and as you see our revenue as it sits today in both companies, are really, our roots are represented really in where our revenue comes from today in our geographic mix. So GTECH enjoying great success that they had in Italy over the years, but leveraging that success into the U.S., Canada and international.

One of the things we are going to have to do at IGT is start thinking about international differently. We always think about Italy as international. Now we have to think about that as a home country for IGT as well. And then IGT which has been concentrated for many years in U.S. and Canada, growing in our international markets, but still very reliant on one geography and you put those businesses together, and think about our international businesses, everything that’s now ex-North American and ex-Italy.

So a much more balanced portfolio from a product perspective and a geography perspective, again, reducing I think the vulnerabilities of serving single markets.

So with that, I’m going to turn it over to John and ask him to share a few more of the transaction details. John.

John Vandemore

Thank you Patti, and I’ll be referring to slide eight in the presentation with some transaction details.

As Patti mentioned, the overall transaction price today was valued at $18.25. Importantly there’s a cash component of $13.69, but as Patti mentioned, a very exciting opportunity to continue to participate in the worlds leading gaming company post combination with the scale and diversity that Patti just highlighted, reflected in an exchange for shares at 0.1819 NewCo shares.

Patti mentioned this a 46% premium to the undisturbed IGT stock price on June 6. I won’t highlight the transaction value other than to say we think this very well balances the leadership position IGT occupies today, but also the opportunity that the combined company will have in the future.

There will be a new company established in the combined entity that will be a New York Stock Exchange listed entity. The ownership of that new entity in anticipated to approximate about 20% for IGT’s existing shareholders and 80% for GTECH shareholders.

We mentioned in the press release, the governance structure, which we think, again balances the global perspective of the new organization. There will be eight representatives from GTECH, including the CEO, Marco who is here with us today and five representatives from IGT, including Patti as a Vice Chairman, and our Chairman, Phil Satre as the non-Executive Chairman of the Board.

Finally, although we talked a little bit about the financial impact, this is a cash accretive transaction and as we mentioned and will show you now in a couple of pages, opportunities that generate significant synergies through the combination.

On the next page, to just give you a very quick highlight of the transaction structure, this will involve re-incorporation for both entities into a new holding company. That holding company is expected to be domiciled in the United Kingdom and be a tax resident of the United Kingdom. This will therefore involve a transition of shares for GTECH shareholders on a one for one basis into the new company and as we mentioned, of IGT shareholders based on the exchange ratio into approximately 20% of the new company shares.

Some of you may know that the De Agostini family represents the majority holder in GTECH today and will continue as a significant holder in the new company and they have agreed to vote their shares in GTECH in favor of the transaction.

There is one element of the Italian code that is important to understand here, very similar to appraisal rights in the U.S. that will be in effect until the conclusion of the emergence general meeting of GTECH to vote in favor of the transaction. That relates to the potential recession rights of exciting shareholders. We will examine how that proceeds and obviously we’ll take that into account as we evaluate leverage levels and the ultimate shareholdings of the company, but our anticipation is that that impact to the overall share base in GTECH will be modest.

The last item I’ll mention on this slide is a loyalty share program, a program to allow for enhanced voting for all shareholders. Encouraged to foster a shareholder base of long term shareholders, by entitling them to enhanced voting rights after a per-specified holding period. I would note however that this program will not become functional until after three years of the combination.

Next page, I’ll touch really quickly on Synergies as Patti mentioned, quite a substantial contribution from Synergies along in this transaction. We’ve broken down for you here broadly where we expect those Synergies to be achieved. We do expect those to be achieved over an approximate three-year period. They comprise, what’s noted here as Industrial Efficiencies. I would characterize those as being in the order of purchasing power leverage, manufacturing efficiencies and the like.

We also highlight overlapping corporate and support activities, that’s simply the elimination of duplicative costs associated with having previously two public companies, the duplicative cost of boards, auditors, other duplicate support functions.

And then a small amount relative to R&D overall, but optimize R&D, we consider this in the light of – thinking about unifying platforms, development platforms for game content development, to ensure that we have a single go-to-market perspective from a technology and development standpoint.

And the last category, but certainly not the least is what we’ve identified here as Natural Revenue Enhancement. These are enhancement opportunities that we believe exist simply by combining the strengths of GTECH with the strengths of IGT in approaching the market more broadly.

Obviously we will be in the Italian market from an IGT perspective in a way that we haven’t been before, and we think that in and of itself creates opportunities, but simply combining our approach to customers, combining the power of IGT’s content with GTECH’s lottery business, provide ample opportunities to provide for revenue synergies across the broad portfolio, the broad and diverse portfolio of product that Patti previously mentioned.

And then as I mentioned, we are targeting achievement of these synergies over a three-year period and obviously would expect to continue to update on the progress of those synergy achievements over time.

With that I’ll turn it back to Patti.

Patti Hart

Great. Thanks John. I’ll just take you to the last page of the presentation please, and I’ll just start by saying I think I can speak for our broad and our entire senior management team when I say that we are incredibly excited about this transaction about the opportunity to combine our company with a company of the caliber of GTECH.

To really create what will be the leading end-to-end gaming company in the industry, allows us really to combine all of the assets necessary to enhance the leadership position that GTECH has built over the years and IGT has built over the years. It’s wonderful to be able to put two leaders together in the same room.

It does uniquely position us, we believe, to capitalize on opportunities that are going to be created, and are being created today by ongoing convergence in the global gaming market. We’ve always said, wherever gaming is, we’ll be there, and I think this actually allows us to be even in more places around the globe and in every sub-segment of gaming.

It does afford us really a continued investment in innovation given the competitive scale that this provides for us and our customers, and really does enhance the cash flow and financial strength as we work together to achieve the cost and revenue synergies that we’ve outlined for you.

So we think a very good day, a very good day for the gaming industry. Certainly a good day for IGT, our customers, our employees, our shareholders and we believe a good day for our new best friend, GTECH as well. So we want to say thank you for your time, thank you for your support today and over the years.

And with that, John and I would like to take your questions please.

Questions-and-Answer Session

Operator

(Operator Instructions) Please stand by for the first question. The first question is from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli - Deutsche Bank

Hey Patti, hey John. Just quickly in terms of the process and obviously the process as speculated by initial press reports was going on for some time, by the time it actually hit Reuters, but as you went through the process and obviously, probably engaged with a variety of potential suitors, what were maybe some of the potential roadblocks that some more strategic pairings would have created, i.e., people within the industry, other core gaming equipment manufactures.

Patti Hart

Yes, I mean I would start by saying as you would expect Carlo, I think our broad and our management team acted very responsibility for shareholders and what we were doing was exactly what we told the market we were doing, which was to look at strategic alternatives to create value for our shareholders.

Having said that, I would say that I don’t think there is something that is more strategic than this transaction. I think it is the best strategic transaction, where you can identify amazing amounts of synergies from across some revenue perspectives, with very little overlap on customers, with little risk from an antitrust perspective, with little overlap from a geographic and product perspective.

So I mean this is, the CEO’s dream, strategic transaction, when you can find something like this. So we actually from a strategic – I think there’s a lot of other things you can do that I would put in the category of Economic Engineering, but if you’re really going to be focused on the strategic long term value for shareholders, employees and customers, we just don’t think it gets better than this combination actually.

Carlo Santarelli - Deutsche Bank

Understood, that’s helpful. And then just within the basket of synergies, of the $230 million that are on the cost side of the $280 million number, how much if any of that is kind of overlapping with the $50 million that you guys laid out as part of a cost reduction plan. I believe that was sometime in April. Is that kind of inclusive or is this $230 million on top of that $50 million.

John Vandemore

Yes. No Carlo, I would think of this $230 million as incremental to that. Obviously we’ve been in the throes of marking ourselves more efficient; similarly the folks at GTECH have been doing the same thing. So we are very careful when evaluating the opportunities for synergies. To focus on those that we know would be incremental, so these will be incremental above and beyond the previously announced cost reductions that we had put into place.

Carlo Santarelli - Deutsche Bank

Great, that’s helpful, and then just one last one quickly on the – reading through and I apologies if I may be missed it, but I did not see any language pertaining to breakup fees or anything along those lines. Could you comment on that or if it is in there, I apologize.

John Vandemore

Yes, I mean I think you’ll find when the document is available that it’s fairly standard breakup fees, so nothing that I would characterize as unusual.

Carlo Santarelli - Deutsche Bank

Great. Thank you both.

Patti Hart

Thanks Carlo.

Operator

The next question is from Cameron McKnight from Wells Fargo.

Cameron McKnight - Wells Fargo

Morning. Thanks very much. Question for Patti. How long were you guys in talks with GTECH and what was the catalyst for starting discussions?

Patti Hart

Yes, well, I mean I think – I mean you are very familiar with the story Cam. I mean the question is, when do talks move from partnering to something more than partnering. I mean I think we’ve had a very positive relationship with GTECH for many years as we worked with them to address the Italian lottery. We worked side by side with them in Canada as well, and so the talks don’t begin or end at a particular time. We’ve had a very, very positive relationship with them for some time.

I think we also have done a number of things with them on the interactive side, as far as combining our efforts there, and so Marco and I had many, many conversations over the last five years, we’ve had many good positive conversations that I think have focus on the industry and our individual companies and I think it was at some point we found an opportunity. When we looked at what we were trying to accomplish as a company, which was to diversify both geographically and from a product set, and reduce our reliance on the North American replacement cycle, and it really matched at some point with what they were trying to do.

So I mean, you know the industry cam, it’s a small industry. Everyone is always in conversations with everyone, because that’s the right thing when it comes to serving the marketing and serving our customers, so.

John Vandemore

I would just add Cam. I mean this was a full process though, so make no mistake about it. The team, the board, went through a fulsome evaluation of all options, not just this. At the end of the day, this was simply the one deemed to represent the highest possible value for our shareholders and we think the shareholders of GTECH.

Cameron McKnight - Wells Fargo

Right, got it. Thanks, that makes sense. And then just following on, I’m not sure if you guys have gotten to the stage where you’ve started to drill down on strategy or a change of strategy. Can you just update us on thoughts on the participation side of the business and whether plans have changed now that you’re looking at a combined and much more geographically diversified entity?

Patti Hart

Yes. Well, I mean, I think – we haven’t really moved to where we are putting strategies together. Certainly we’ve been focused on other things with our counter parts at GTECH, and my expectation is that you won’t see a significant shift from the strategy the company has been deploying. I mean the gaming operations part of our business has been, is, and will be a significant part of our revenue and profitability.

This is an opportunity we think to bring more scale to that business, more innovation to that business and more geographic diversity, but I wouldn’t expect to see a significant shift. I think its one of the things that the folks at GTECH have found attractive about the IGT business.

Cameron McKnight - Wells Fargo

Got it. Thanks very much.

Patti Hart

Okay Cam, thank you.

Operator

The next question is from Joseph Greff from JPMC.

Patti Hart

Hey Joe.

Joseph Greff - JPMC

Good morning guys. You’ve answered most of my questions. Just on the $280 million or $230 million of cost synergies, Patti or John, can you talk about the timetable in which you think you can achieve those?

John Vandemore

Yes, obviously a lot of specifics to be worked out, but we think they are achievable over a three year period and I would consider them to ramp up normally, probably ratably over that three year period, but again we’re in early stages of planning the actual achievement of the synergy, so I’ll leave that to future discussion in-depth. But I’d say definitely over the three-year period and we’re very confident about those synergies.

Joseph Greff - JPMC

Including the $50 million related to revenue enhancements?

John Vandemore

Yes.

Joseph Greff - JPMC

Great. Okay, thanks guys.

Patti Hart

Okay, thank you Joe.

Operator

The next question is from Steve Wieczynski from Stifel.

Steve Wieczynski – Stifel

A very good morning guys. So let me ask the question a little bit different way I guess. Patti from your perspective and being around the board, why is now the right time for IGT to enter into a transaction like this? If you look at the – obviously the share price has been a lot higher in the past versus where the deal is going to get done. So maybe why is now the right time to do this?

Patti Hart

Yes, well I think there’s a lot of factors that contribute to a decision like this and I think what this – again, speaking for the board here, the board looked at everything responsibly, including kind of what we see for the business going forward and I mean I think as you see with the Bally Shuffle Master combination, the Scientific Games WMS combination, the pending combination of Aristocrat and DGT, I think its clear to everyone that the industry could benefit from some reduced costs and consolidation is one way to get there and we’re great believers I think in making our contribution to creating an industry. This is healthy for our customers as it can possibly be and we felt like there was an opportunity to do that with this transaction.

There was never a perfect time. I think it’s a balance between making your move from a position of strength and we think the company is in a very solid position from a cash flow perspective, from a customer relationship perspective, but we do think that the industry can be stronger and we can be a better participant in that industry with fewer, stronger suppliers than are in the industry today.

And again, having an opportunity to combine our company with a company like GTECH doesn’t come around everyday. So you have to really take advantage of the opportunities when they present themselves and we think this is a great combination, again, primarily for our shareholders, because that’s our fiduciary duty, but also taking into consideration all of the other constituents, including our employees, our customers and our communities, we felt like the time was right on both sides of the table and we wanted to take advantage of that.

Steve Wieczynski – Stifel

Okay, great. Thanks for the color.

Patti Hart

Thank you.

John Vandemore

Thank you.

Operator

The next question is from Amit Kapoor from Gabelli & Co.

Amit Kapoor - Gabelli & Co.

Hi, good morning. Patti or John, you mentioned the withdrawal rates in the prepared remarks. Can you just walk us through the potential mechanics of that and what the timeline might be in terms of the six month that we’ve had around before the EGM and in terms of minority rights exercised before the deal? I’d appreciate any details around that.

John Vandemore

Yes, of the high level and then if we want to cover more detail, we can do so offline. I would just – its very similar to appraisal rights. There’s a period of time when the existing holders of GTECH will have an opportunity to have their shares put back to the company at a formulaic price associated with the trading volume in advance of the EGM. Once the EGM is called, the shareholders have to make that option. Quite honestly I think it would be somewhat mathematical depending on what that recession right value is.

Again, traditionally we have not seen significant recession right levels and we don’t expect anything extraordinary, but as it relates to the transaction, we’ve certainly contemplated that impact and before we are issuing our final proxy in calling for our shareholder vote, it will be abundantly clear to our shareholders, where the results of that recession right outcome sits.

Again, we don’t think it to be a significant issue, but it is a right for Italian shareholders and obviously we want to make sure that is observed before we have a final say at the end of the day.

Amit Kapoor - Gabelli & Co.

Thank you. And is that “risk” sort of mitigated by the fact that there is a large shareholder, around 50%, does that mitigate the withdrawal rate risk for the deal?

John Vandemore

Shareholder is a little bit higher than that, but I’d also say the risk is mitigated by the strength of the transaction and you see that in GTECH’s trading price today. So I think there’s a lot of factors that will mitigate this as an overall risk. We mentioned it, because it is certainly out there, but again we do not feel it’s significant.

Amit Kapoor - Gabelli & Co.

Okay, thank you.

Operator

The next question is from Shaun Kelley from Bank of America.

Shaun Kelley - Bank of America

Hey, good morning guys. I just wanted to dig in a little bit more on the transaction timelines from here. So could you just walk us through any big picture regulatory concerns or anything else that may need to happen or any of the big milestones that kind of need to happen between here and actual deal close?

Patti Hart

Yes, our expectation Shaun is that we’re kind of looking at a nine to 12 month period. We’re obviously going to do everything to make it on the front end of that timeframe. The big-ticket items are the ones that you would expect. I think the balance of gaming regulatory approval to the extent that we’re not both license and future restrictions. We have to go through the normal anti-trust clearance that you would expect that we do. The GTECH management team and Board have to go through their shareholder meeting and everything that’s associated with that. We have to go through our shareholder meeting.

We are kind of dissolving two companies if you will and creating a new fresh company and it will be domiciled in the UK and listed on the New York Stock Exchange. So there is the necessary work associated with the creation of a new company from the strength of two great companies that exist today.

So the normal things that I think will lead us to kind of a nine-month timeline, there’s always risk. We don’t see anything here that jumps off the page as something that’s an unusually high level of risk for us at this point.

Shaun Kelley - Bank of America

Thanks for that Patti and I guess my second question would just be since you alluded to it a little bit, the decision to domicile in the UK, could you talk about any of the kind of possible advantages that provides and also just how did you kind of arrive at that as being the right place given lot of your licenses are held here in the United States from a licensing perspective, but obviously you have the Italian side now as well.

John Vandemore

I think its kind of a mutual discussion point. One factor to consider is that GTECH had a requirement to be in the EU, so that write-off would limit the opportunities, but we also think the UK is a fantastic opportunity. It’s a great market obviously for both of us. We have significant presence there. It’s a market that’s easy to have a U.S. listing from, which is fantastic.

Obviously it’s an English speaking market, but with a lot of talent availability and that’s encouraging, and then there are some slight tax advantages associated with the domicile, but its really a combination of all of those factors, not one overwriting factor. And then I would simply point out thought that companies will still have a presence in Rome and Rhode Island and in Nevada as was mentioned.

Shaun Kelley - Bank of America

And John, just on that point about the corporate tax advantage, is it something that – can you guys fully utilize that given that your earnings are so tied to the licenses or how big of it kind of a possible implication is it given the statutory tax rate there versus in the U.S.?

John Vandemore

Yes, it’s certainly not the driving rationale for the transaction by any stretch. I mean this is very much about the strategic rational that we’ve set forth. There would be some slight advantages when you compare kind of the effective tax rate of both entities today on a combined basis, so it would be probably on the order of 100, 200, 300 basis points, but again, that’s not the primary rational for the re-incorporation into the UK.

Shaun Kelley - Bank of America

Perfect. Thanks for the color.

Patti Hart

Thank you.

John Vandemore

Thanks Shaun.

Operator

The next question is from Robin Farley from UBS.

Robin Farley – UBS

Thanks. Just to get a little bit of clarity on the timing of the synergies. Is there any reason to think that you couldn’t achieve all the categories outside of the revenue synergies, in kind of the first year when you’re just thinking about eliminating overlap and purchasing and things. I understand the revenue synergy might – perhaps maybe why the timeframe goes out to three years. But is there any of the other categories that would necessarily be achievable in the sort of first 12 months?

John Vandemore

I’ll just add, just I mean the scale of what you have to handle from an execution standpoint and doing it with the right level of sensitivity, owing to the regulatory requirements we have, the licenses we have and quite honestly the employees that could be affected. So I think three years quite honestly is a pretty reasonable timeframe. Obviously we’ll accelerate that where we think we can, but one year is quite frankly inconceivable. It’s just too much execution, too much work and we want to make sure it gets done in the right way.

Patti Hart

Yes, I mean I think its managing Robin the synergies coincident with the disruption and getting ourselves to common platforms, whether its development platforms or manufacturing platforms is something that does take some time and we all have contracts with our current vendors that have to be re-looked, so there is work that has to be done.

But we are really confident that three years is completely adequate, so we don’t think we are in month 36 when we deliver all the synergies. Three years is completely adequate and we’ll get to work as soon as is possible.

Robin Farley – UBS

Okay, great. I guess the last question was just, I may have missed this when I called for the question. It pulled you out of the call for a moment. You had commented on something about adding innovation to the game ops business and I think it was just a brief comment, so I don't know if there's anything to elaborate on there?

Patti Hart

I think again, it’s an outgrowth of the enhanced scale of the business, is the continued ability to invest in innovation, which the industry not only desires, but needs and so we think this scale and the continued application of the R&D, the level of R&D spending will continue to allow us to innovate in game ops, but generally in systems and hardware as well.

Robin Farley – UBS

Okay, great. Thank you.

Patti Hart

Thanks Robin.

John Vandemore

Thanks Robin.

Operator

The next question is from Justin Sebastiano from Brean Capital.

Justin Sebastiano - Brean Capital

Good morning. Most of my questions have been answered, but as far as the licensing that GTECH may have to get done, that they don’t have in the U.S., how many are we talking? How many states or how many different licenses are they going to have to go through for the process?

John Vandemore

I don’t have a precise count for you, but it’s a small number. There’s in terms of licenses, we’re both licensed in many of the same jurisdictions, but there are some incremental. None that we think pose a risk whatsoever.

Justin Sebastiano - Brean Capital

Okay, thank you.

John Vandemore

Thanks Justin.

Patti Hart

Thanks Justin.

Operator

The next question is from Todd Eilers from Eilers Research.

Todd Eilers - Eilers Research

Hi guys, thanks for taking my questions. I wondered Patti, you had some comments about the transactions in the space. Obviously there’s been a number of them over the last year or so. It seems like most of those to-date though have been more product extensions or geographic extensions and not kind of what I guess I would characterize as true consolidation of competitors.

Following the merger with GTECH and some of the other recent deals announced, do you feel like we’re at a stage where the competitive balance is about right or do you see or think there needs to be more consolidation in the gaming equipment space?

Patti Hart

Yes, well I mean I think if you think about the Aristocrat, DGT transaction and then you think about this one, I think there is no pure suppliers anymore, right. I mean there was at one point people that isolated themselves into one niche or the other, but I think when you think about the casino business and when you think about the lottery business and then there’s great space in between, it is the distributed gaming world. We call it BLT, you call it whatever, but it’s more of a distributed gaming world and I think that’s where we see some significant growth opportunities and that’s where you see the overlap between all of these competitors.

So in fact I think we see it as consolidation. I mean I think we are happy to be joining the GTECH family. They are tough competitors and their product and our product has been in the market competing, so I actually do think that this is an opportunity to think about it as consolidation. It is through consolidation of an industry with a great upside benefit, product extensions on both sides of it, but it is – also they have their new Sphinx product which has been very successful and its taking places on the casino floor that frankly I want to own, so this is an opportunity I think.

As industries mature, people who have historically been in niche phases, find an opportunity to look at adjacent markets to grow and that’s what’s happening and so there is a lot more overlap I think between companies than perhaps is obvious from the outside.

So do I think there is room for more? I think in an industry that’s as mature as our industry is, I think its tough over time to find a lot of fragmented suppliers that are very niche oriented and we think this is the best combination and strength for us to add more or reduce our vulnerability, but also to add more strength to the product set.

So we think this is the right thing for us. Will others continue to consolidate? I don’t know, but we will commit the market now from a much better position of strength I think.

Todd Eilers - Eilers Research

Okay, great, and then also just obviously with earnings set for next week, I don’t know if you’d like to maybe take the opportunity to maybe highlight any kind of trends maybe that you saw in the quarter from a top level, anything that might be worth sharing I guess on today’s call?

John Vandemore

Nice one Todd. Nice Try

Patti Hart

Todd we can always count on you to try to get a little piece of information, so yes – I mean we’re not going to comment on the earnings at this point.

Todd Eilers - Eilers Research

Fair enough. Thanks guys.

Patti Hart

Yes, sure.

John Vandemore

Thanks Todd.

Patti Hart

We’re good. Well thanks to all of you for your good insightful questions and again, for your support of the company over the years and your support in advance of what we think is the right transaction for our shareholders, our employees, our customers and the industry. So thanks very much.

Operator

That concludes today’s conference. Please disconnect at this time.

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