Light & Wonder under fire from activist US investor over SciPlay IP deal
Shareholder Engine Capital brands $255m perpetual licensing agreement “unnecessary” and questions board conduct in deal
Light & Wonder’s conduct in the negotiation of a $255m perpetual IP and licensing agreement with social gaming developer SciPlay has been questioned by an activist investor in the US.
Writing to SciPlay’s board of directors, New York-based investment fund Engine Capital, which owns a 7.4% stake in SciPlay, queried the signing of the agreement, which came as part of Light & Wonder’s IPO of the SciPlay business in 2019.
The perpetual licensing agreement entitled SciPlay to exclusive access to all content created at Light & Wonder for a three-year period, and non-exclusive access to all IP created or acquired after this point.
SciPlay is currently negotiating an extension of this IP agreement with Light & Wonder, which retains an 81% stake in the business.
However, Engine Capital has said the extension of the deal is of “little value” to the SciPlay business, and that potential conflicts of interest could arise, which might lead SciPlay to make unnecessary payments to Light & Wonder.
Expanding on this, Engine Capital cites Light & Wonder CEO Barry Cottle, who is also executive chairman of SciPlay, a dual role which potentially creates a conflict of interest in the negotiation of the deal.
It has been suggested that SciPlay’s board form a committee of independent directors to oversee the negotiations as well as a lead independent director to strengthen the company’s governance.
Engine Capital has confirmed the sending of a private letter to SciPlay’s board on 13 May expressing its concerns.
“Since then, we have had multiple discussions with management, which have only heightened our initial concern that an extension of this IP is unnecessary,” Engine Capital wrote.
“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,” the investor added.
Engine Capital raises three main points in its argument, firstly that SciPlay already has non-exclusive access to Light & Wonder’s existing social casino games and secondly that any new content produced is unlikely to be valuable for the new casual games developed by SciPlay.
Lastly, the investment firm suggests that as the new content is unproven, any payment should not be made to Light & Wonder on an upfront basis.
“We are also concerned by the process in which the company has assessed the value of this IP,” Engine Capital wrote.
“We understand that a third-party valuation firm is being given projections from management about the additional cash flows resulting from having access to the new content.
The firm continued: “We seriously question how management can assess with any precision the incremental free cash flows from having access to unproven content on a purely exclusive basis versus non-exclusive basis or access to this unproven new casino-theme content for a casual game that has yet to be published.
“Instead of engaging in this theoretical exercise, we believe Light & Wonder and SciPlay should assess the value of this IP (if any exists) by going to the market and testing what an independent third party would be willing to pay for these rights,” Engine Capital added.
In conclusion, Engine Capital suggests that any potential extension of the IP agreement between SciPlay and Light & Wonder should be viewed with “significant caution” without independent board intervention.