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Rating Action:

MOODY'S ASSIGNS TO LOTTOMATICA S.P.A. (P)Baa3 CORPORATE FAMILY RATING, (P)Ba1 ISSUER RATING AND (P) Baa3 GUARANTEED DEBT RATING TO EUR360 MILLION SENIOR UNSECURED NOTES DUE DECEMBER 2008; STABLE OUTLOOK

10 Jan 2006
MOODY'S ASSIGNS TO LOTTOMATICA S.P.A. (P)Baa3 CORPORATE FAMILY RATING, (P)Ba1 ISSUER RATING AND (P) Baa3 GUARANTEED DEBT RATING TO EUR360 MILLION SENIOR UNSECURED NOTES DUE DECEMBER 2008; STABLE OUTLOOK

First-time ratings

Paris, January 10, 2006 -- Moody's Investors Service has today assigned several ratings to Lottomatica S.p.A ("Lottomatica"), which is planning to raise debt to fund the acquisition of GTECH, the world's leading online lottery operator. The ratings assigned to Lottomatica are as follows:

- A (P)Baa3 corporate family rating

- A (P)Ba1 long-term senior unsecured issuer rating

- A (P)Baa3 guaranteed rating to the outstanding senior unsecured notes of EUR360 million due December 2008 issued by Lottomatica, on the basis of the upstream guarantee that will be delivered by GTECH Holdings Corporation ("GTECH Holdings") and GTECH Corporation ("GTECH Corp."), its main operating subsidiary.

The (P) provisional feature of the ratings will be removed upon closing of the transaction, subject to implementation of the contemplated capital structure and upstream guarantee as well as review of the final legal documentation.

Moody's explains that the (P)Baa3 Corporate Family Rating assigned to Lottomatica is predicated on the company's announcement that it is acquiring 100% of GTECH Holdings in cash for a total consideration of around EUR4.0 billion including assumed net debt, representing a multiple of 9.9 times GTECH's FYE February 2005 EBITDA. To finance the acquisition, Lottomatica will raise EUR1.4 billion in equity and place EUR750 million in hybrid securities, treated 75% equity - 25% debt by Moody's (basket "D"), while GTECH Corp. is expected to borrow EUR1.9 billion in senior bank debt. The funding will be completed with available cash at Lottomatica. Moody's notes that CSFB and Goldman Sachs are the joint underwriters of the equity issue, the hybrid securities and the senior bank debt.

From a business risk perspective, Moody's believes that this acquisition is a transforming deal for Lottomatica, allowing it to shift from the exclusive Lotto concession in Italy to the world's most extensive international lottery portfolio. Lottomatica, which only operates in Italy, generating more than 75% of its revenues and 80% of its EBITDA as the concessionaire of the Italian Lotto game, is acquiring the world's leading online lottery operator, with activities in 50 countries and a global market share of 49%. Moody's acknowledges the moderate competitive pressures present in the lottery industry, as illustrated by the downward price revisions that may appear when renewing medium-term lottery contracts. However, the rating agency believes that the group's strong competitive position, the reliable technology as well as the relatively high barriers to entry -- represented by the large installed base of point-of-sale terminals and the high capital investments necessary to replicate the group's systems -- ensure a high retention rate when contracts are renewed.

The group's focus on supplying and operating lottery systems and the generation of around 89% of its combined revenues through lottery contracts underpins, in Moody's view, a good degree of earnings stability, given the proven resilience of the demand for lottery games in the event of an economic downturn. This stability is also ensured by (1) the nature of the group's remuneration as a lottery service provider based on a fixed commission expressed as a percentage of total lottery wagers; (2) the geographic diversity of the group's lottery revenues; (3) the absence of excessive contract concentration apart from Lottomatica's Italian Lotto concession, which does not mature before June 2016; and (4) the medium-term nature of the group's lottery contracts, which secure more than half of current revenues until 2010.

However, Moody's cautions that the group's lottery business could be exposed in the long run to a gradual shift in gamblers' behaviour in view of the growing choice of alternative gaming propositions, particularly on the internet. Moreover, the rating agency is concerned that the group's diversification in non-lottery operations -- primarily gaming machines and commercial services such as bill payment processing and recharging of mobile pre-paid cards -- could imply less business stability and predictability going forward than is currently the case.

Although Lottomatica is acquiring a company with twice its own revenue levels, Moody's believes that the integration risk associated with the acquisition of GTECH is manageable considering the minimal operational and geographic overlaps. In addition, GTECH's management is closely associated with the transaction -- indeed, GTECH's current CFO and CEO are expected to be appointed CFO and CEO of the new group. Nevertheless, synergies will be limited as Lottomatica operates its own technological system for the Lotto game in Italy. The ratings also take account of the financial condition of Lottomatica's parent company (58% interest), De Agostini -- a family-owned pure holding with exposures to sectors such as publishing, media and communication, insurance and gaming through Lottomatica -- which Moody's expects not to materially deteriorate.

From a financial risk perspective, Moody's believes that the group's credit metrics will be relatively weak for the rating category in the first year of the transaction, with a pro-forma retained cash flow pre-WC/Net Adjusted Debt of around 14% and a Net Adjusted Debt/EBITDAR of 3.3 times as of December 2006 (assuming full consolidation as of 1 January 2006). However, Moody's expects that the credit metrics will improve in the second year at a commensurate level with the rating category, i.e. a retained cash flow pre-WC/Net Adjusted Debt in excess of 15% and a Net Adjusted Debt/EBITDAR of around 3.0 times, which underpins the stable rating outlook.

Although the group is expected to pay large dividends to its shareholders, Moody's takes comfort from the cash retention stipulated by the dividend restriction, through a fixed charge cover covenant tested annually, that will be inserted into the terms and conditions of the senior bank debt. While the capital intensity of the industry is relatively high and the group may wish to pursue its diversification strategy in non-lottery businesses through sustained capital expenditures and acquisitions, Moody's also notes the likely inclusion of restrictions for capital spending in the terms and conditions of the senior bank debt.

In addition, Moody's factors in management's commitment to maintaining an investment-grade Corporate Family Rating in line with its stated financial policy, which includes the key objective of de-leveraging the group following the acquisition of GTECH. Moody's understands that no sizeable acquisitions will be undertaken in the intermediate term.

The (P)Ba1 long-term senior unsecured issuer rating assigned to Lottomatica reflects the material structural subordination borne with the transaction. GTECH Holdings' outstanding bonds are expected to be refinanced by senior bank debt, which should be eventually implemented at GTECH Corp.'s level. GTECH Corp. is the main operating entity of the GTECH group, which generates most of the GTECH group's cash flows. The acquisition financing implies material structural subordination in Moody's view considering the amount of bank debt that will be placed on GTECH Corp. and the cash flow contribution of this entity. The senior unsecured bondholders at Lottomatica's level will have less direct access to GTECH Corp's cash flows than the banks lending to GTECH Corp.

However, Moody's assigned a (P)Baa3 guaranteed rating to the outstanding senior unsecured notes of EUR360 million due December 2008 issued by Lottomatica, on the basis of the upstream guarantee that will be delivered specifically for this debt instrument by GTECH Holdings and GTECH Corp.

Lottomatica S.p.A is the concessionaire of the Lotto game in Italy and reported net revenues of EUR583 million in FYE December 2004. GTECH Holdings Corporation is the worldwide leader in online lottery systems and reported net revenues of USD1,257 million in FYE February 2005.

Paris
Eric de Bodard
Managing Director
European Corporates
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Jacques Ouazana
Analyst
European Corporates
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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