S&P Lowers IGT (IGT) to 'BBB-' Following GTECH Announcement; Remains on CreditWatch Negative

Standard & Poor's Ratings Services owered its corporate credit rating on Nevada-based International Game Technology (NYSE: IGT) to 'BBB-' from 'BBB'. We also lowered all issue-level ratings by one notch. All ratings remain on CreditWatch with negative implications.

The downgrade and CreditWatch listing follows IGT's announcement that it entered into a definitive merger agreement with GTECH S.p.A., whereby GTECH will acquire IGT for $6.4 billion, including $4.7 billion in cash and stock. Closing of the acquisition is subject to shareholder approval at both IGT and GTECH as well as regulatory approvals. GTECH expects the acquisition to close in the first half of 2015.

The CreditWatch listing also reflects our expectation that the new combined company's leverage will likely increase to the low- to mid-4x area and could remain above 4x at the end of 2015, which would be somewhat weak for a 'BBB-' rating on the combined company. This level of leverage is aligned with a weaker "aggressive" financial risk profile, compared with IGT's existing "intermediate" financial risk profile. The combined company will incur additional debt to fund the cash portion of the transaction as well as to repurchase any GTECH shares that are put to the company by its shareholders. Our leverage measure incorporates an assumption that 10% (half of the 20% maximum level permitted under the merger agreement) of the withdrawal rights are exercised and funded through incremental borrowings at the combined company. The withdrawal rights represent the legal right under Italian law of current GTECH shareholders to put their shares to the company subject to the conditions to closing. Our current forecast incorporates the preliminary assumption that the combined entity will achieve half of the $230 million of cost synergies in GTECH's public guidance.

In addition, we believe our assessment of the business risk profile of the combined entity may improve to "strong" from the "satisfactory" assessments on IGT and GTECH. This reflects our favorable view of the enhanced product and geographic diversity of the combined company; a relatively limited degree of product, content, and customer overlap; good market positions in product categories; the combined company's anticipated above average profitability relative to other leisure companies; and the potential for operating efficiency improvements from cost synergies. Our potential reassessment of the combined entity's business risk profile will also consider GTECH's plans to address integration risk and the likelihood of achieving, and the impact of, its outlined cost and revenue synergies.

The CreditWatch listing reflects our view that there could be further downside pressure on the rating in the event we conclude the acquisition does not improve the combined entity's business risk profile to "strong," given our view that adjusted leverage will likely be above 4x through 2015. We could also lower the rating if we upwardly revise our business risk assessment because we believe that leverage will likely remain above 4x. This could occur if the combined company is unsuccessful achieving a meaningful level of the $230 million in cost synergies in its public guidance, or if the maximum level of withdrawal rights is exercised in conjunction with the closing of the transaction and funded through incremental borrowing at GTECH.

In resolving our CreditWatch listing, we will assess what impact, if any, GTECH's acquisition of IGT has on our assessment of the new combined company's business risk profile, and we will assess the new company's long-term financial risk profile. We will monitor the companies' ability to address various closing conditions and receive the required regulatory approvals; update our forecast for the combined entity to reflect the appropriate amount of debt once we have greater clarity on the withdrawal rights; and we will meet with management to discuss integration plans and potential synergies,
near- and longer-term growth objectives, and financial policy. We aim to resolve our CreditWatch listing as soon as possible once we have sufficient information about the future capital structure. We could potentially resolve it prior to the transaction closing if we have a high degree of confidence that the necessary shareholder and regulatory approvals will be received.

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