Posted on: June 21, 2022, 11:33h.
Last updated on: June 21, 2022, 01:00h.
Activist investor Engine Capital recently sent a letter to the board of SciPlay Corp. (NASDAQ:SCPL), pressing the gaming company for an update on its intellectual property (IP) negotiations with Light & Wonder (NASDAQ:LNW).
Engine Capital owns 7.4% of SciPlay’s outstanding shares. That makes it the second-largest shareholder in the Las Vegas-based company, behind Light & Wonder, which owns 81% of the social casino developer. Last year, Light & Wonder, then known as Scientific Games, attempted to acquire the 19% of SciPlay it didn’t own. But that takeover effort was later abandoned.
Light & Wonder spun off that 19% of SciPlay in 2019. At the time of that transaction, SciPlay doled out $255 million for a perpetual licensing agreement with its former parent, entitling it to “exclusive access” to all Light & Wonder-created content until the third anniversary of that accord. With that anniversary near, SciPlay and Light & Wonder are currently discussing a possible extension.
Engine Capital has concerns about the talks and is pressing the SciPlay board for a meeting.
On May 13, 2022, we sent you a private letter expressing our concerns regarding these negotiations. Since then, we have had multiple discussions with management, which have only heightened our initial concern that an extension of this IP is unnecessary,” said the investor in its letter to SciPlay directors. “We have repeatedly asked to meet privately with the independent directors to share our views on this topic, but were told that such a meeting would be inappropriate, which is why we have been forced to make our concerns public.”
SciPlay’s well-known offerings are Jackpot Party, Quick Hit Slots, Gold Fish Casino Slots, Hot Shot Casino, 88 Fortunes, Bingo Showdown, and Monopoly Slots. The games are free to play, but feature in-app purchases.
Engine Capital Highlights Potential Governance Issue
In its view, Engine Capital sees an extension of the IP accord being of no value to SciPlay. But the investor’s choice words don’t end there. It goes on to say there are possible governance issues, because Light & Wonder CEO Barry Cottle is also the executive chairman of SciPlay.
“Given the related-party nature of this negotiation and these potential conflicts of interest, we are requesting that the Board form a special committee of independent directors to handle these negotiations and appoint a Lead Independent Director to strengthen the Company’s governance,” writes Engine Capital.
Under the terms of the existing agreement, SciPlay has non-exclusive rights to Light & Wonder content only for existing games. As such, Engine Capital believes the only valid reasons to renew the pact are if SciPlay obtains exclusive rights to Light & Wonder content, and if that content can be used in SciPlay games that weren’t around in 2019.
“SciPlay already has access to Light & Wonder’s New Content on a non-exclusive basis for its existing social casino games,” adds the activist investor. “It doesn’t need to extend the IP agreement to have access to that content, per the initial IP agreement. The only reason to extend the IP agreement would be to ensure that this New Content be exclusive to SciPlay. In practice, we don’t believe it is in the best interest of Light & Wonder to license this content to a third party and hurt its large, strategic investment in SciPlay.”
Not Much Value in New Content
Adding to the questions surrounding the SciPlay/Light & Wonder talks is Engine Capital’s argument that Light & Wonder’s new content may be of little or no value to SciPlay.
The activist investor notes that SciPlay hasn’t introduced any new social casino games since the 2019 initial public offering (IPO). Instead, the company adds content to existing hits. As such, “SciPlay can continue to use the New Content for those social casino games.” Currently, SciPlay’s new game efforts are focused on the casual space.
Engine Capital is also concerned about the upfront payment required to extend the agreement.
“By structuring a potential extension as an upfront payment (as we believe is currently considered), SciPlay’s shareholders would assume the risk associated with the content development. This type of structuring would be highly uncommon in the industry, where such agreements are typically structured as royalty payments,” says the money manager.
Shares of SciPlay are down 21.3% over the past year.
