IGT Is Betting Online Big-Time (The Motley Fool)

Slot-machine maker International Game Technology (NYSE: IGT - News) looks poised to jump on the bandwagon of companies that are increasing their stake in online gaming. The company plans to acquire Double Down Interactive, one of the biggest virtual casino operators on Facebook.

What's it all about?
Under this deal, IGT will pay $250 million in cash and $85 million in retention payments over the next two years. Additionally, IGT will pay up to $165 million to Double Down, depending on the latter's performance in the next three years.

All in all, this looks like a large amount to pay for a company the size of Double Down, but it's not as if IGT can't afford it. IGT generated over $400 million in free cash flow over the last year.

So is the cash worth it?
This deal will certainly broaden IGT's scope of operations. Already a seller of gaming equipment to casinos, it will now be able to sell virtual products to virtual casinos as well. Being the third-largest social gaming application, Double Down may well provide IGT with a valuable foothold in casino-style social gaming.

Double Down has significantly increased its user count, to 4.7 million now from 3.3 million in October last year, as it capitalizes on the rapidly growing online gaming industry. The industry in itself is expected to grow to $30 billion in 2012 from $20 billion in 2010. What I do like about the deal, however, is the exposure to a new and complementary set of gamers, which is sure to drive IGT's fiscal 2012 earnings. But there's another, larger aspect to it.

What's the catch?
The Double Down deal would mean that IGT is investing around $100 for each one of the former's roughly 5 million users. Now that's a lot of money, something that can be justified only if we consider the potential big bucks IGT can earn if online gambling is legalized. In fact, legalization of online poker would be a dream come true for the casino and gaming industries, something that may be fast becoming a reality as the Justice Department considers doing away with the ban on online gambling.

However, IGT isn't alone. Facebook game maker Zynga (Nasdaq: ZNGA - News) has about 30 million players for its online poker game and could be a great partner for a big branded casino. Industry titan MGM (NYSE: MGM - News) has already partnered with Bwin.Party, and Boyd Gaming and is likely putting pressure on other operators to get a foothold in the space while they still can. IGT could be in for a lot of trouble if an operator inks a deal with Zynga.

Stakes in online gambling will be lower than those at real casinos. Nevertheless, the company's exposure to a widespread online audience should create abundant volumes to push up revenue. Looking at it from that aspect, $500 million doesn't seem particularly extravagant to me, after all.

The Foolish bottom line
This deal could very well be IGT's royal flush. The company seems to be banking on potential revenue based on the expectations that online poker will be legalized. Till then, let's keep our fingers crossed on this one.

Stay tuned for more on this company's fortune. Add International Game Technology to your Watchlist: Click here.

Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of International Game Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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McDonald's Is Betting Big on China (The Motley Fool)

There's good news for the fans of McDonald's (NYSE: MCD - News) in China. Now they all can enjoy burgers, fries, and shakes from their favorite international food chain, as the company has decided to open more stores in the country. While fans of the Happy Meal are probably happier now, how should investors feel?

So what's cooking?
McDonald's aims to open at least 700 new stores in the country by 2013. At present, there are 1,300 Big Mac outlets in China, marking its largest expansion strategy ever deployed there. The newly announced goal sharply accelerates its December plan to open just 200 locations. So why the sudden move?

Mickey D's is no stranger to the Middle Kingdom. In fact, McDonald's has been in China for about two decades and, therefore, understands the market better than many of its rivals who may be just jumping in.

McDonald's bet on China is clearly a play on the country's growing attractiveness as an investment destination and as an opportunity to capitalize on the "Westernization" of consumers. To boost sales and improve profitability, companies have raised stakes in emerging markets where availability of cheap labor and raw materials often help these companies improve margins.

The second reason for this expansion can be the pressure McDonald's is facing from its competitors. The fast-food market is heating up, and this is the time to expand. McDonald's is looking at Asia for growth as it prepares to take on key rival Yum! Brands (NYSE: YUM - News) in its pursuit for growth in China.

In the battle for market share, Yum!'s KFC appears to have a head start in China with more than 3,000 stores already in place. But that's not all. Starbucks (Nasdaq: SBUX - News), the world's biggest coffee chain, has also decided to boost its presence to 70 Chinese cities and triple its presence to 1,500 stores by 2015. A fight for market share would, in all probability, lure other established players such as Domino's Pizza (NYSE: DPZ - News), Wendy's/Arby's (NYSE: WEN - News), and hopefully Chipotle (NYSE: CMG - News) into the fold.

A Fool's take
It's evident that the rivalry is heating up in the fast-food market even in emerging markets such as China. If McDonald's succeeds in its Chinese expansion, it would see an immediate impact on sales and bottom line. The company has the advantage of a two-decade-old presence and such an experience fused with a well-planned strategy should further strengthen its foothold there.

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