Engine Capital Sends Letter to the Board of Directors of SciPlay Regarding Ongoing IP Agreement Negotiations with Light & Wonder
June 17 2022 - 7:00AM
Business Wire
Believes An Extension of IP Agreement Would
Provide Little Value to SciPlay and Expresses Concerns Regarding
Potential Conflicts of Interest Among Negotiating Parties
Calls on Board to Form Special Committee to
Handle Negotiations and Appoint Lead Independent Director to Ensure
Proper Oversight of Company’s Relationship with Light &
Wonder
Engine Capital LP, which owns 7.4% of SciPlay Corporation’s
(Nasdaq: SCPL) (“SciPlay” or the “Company”) Class A common stock,
today announced that it has sent the below letter to the
independent members of the Company’s Board of Directors.
***
June 17, 2022
SciPlay Corporation 6601 Bermuda Road Las Vegas, NV 89119
Attention: Board of Directors
Dear Independent Members of the Board:
Engine Capital LP (together with its affiliates, “Engine” or
“we”) is the second-largest Class A shareholder of SciPlay
Corporation (“SciPlay” or the “Company") with an ownership position
of 7.4%. We invested in SciPlay due to the attractive category
dynamics of social casino games including high player stickiness
and long-tenured games, the Company’s ability to grow revenue per
paying user and payer conversion, its ability to take share in the
higher growth casual segment, and its very attractive
valuation.
As you know, Light & Wonder, Inc. (“Light & Wonder”),
SciPlay’s parent company, IPO’ed a portion of SciPlay in 2019 and
continues to own 81% of SciPlay. At the time of going public,
SciPlay paid $255 million for a perpetual licensing agreement that
entitled the Company exclusive access to all content created at
Light & Wonder until the third anniversary of the IP License
Agreement and non-exclusive access to all IP created or acquired
after the third anniversary (the “New Content”).1 As indicated on
its most recent earnings call, SciPlay is currently negotiating an
extension of this IP agreement with Light & Wonder.
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. 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.
In summary, we believe that an extension of this IP agreement
is of little value to SciPlay and that potential conflicts of
interest could lead SciPlay to provide an unnecessary payment to
Light & Wonder. Specifically, we are concerned that SciPlay’s
management, who is negotiating this agreement with Light &
Wonder, is conflicted since its members report to Barry Cottle, the
Executive Chairman of SciPlay, who is also the CEO of Light &
Wonder. 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.
According to the existing IP Agreement, SciPlay has non-exclusive access to Light & Wonder’s New
Content for its existing games only.
As a result, the only basis for SciPlay to pay additional money to
Light & Wonder to extend the IP agreement would be to secure
the following rights: 1) to ensure it is able to use the New
Content on an exclusive basis in its existing games, and 2) to be
able to use the New Content in new games that were not in existence
at the time of the signing of the original IP agreement.
Based on our discussions with a number of industry participants,
we believe no payment (and certainly no upfront payment) should be
made to Light & Wonder because these rights, and therefore an
extension of the IP agreement, are of little value to SciPlay for
the following reasons:
- SciPlay already has access to Light
& Wonder’s New Content on a non-exclusive basis for its
existing social casino games. 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. We are also skeptical that an
independent third party would pay much for this New Content since
it would be non-exclusive to that independent third party (since
SciPlay also has access to it), making it even more unlikely that
Light & Wonder licenses it to a third party. Therefore, we do
not believe it is justified for SciPlay to pay for this theoretical
right of exclusivity and contend that SciPlay should not be forced
to pay more than what an independent third party would be willing
to spend on the non-exclusive New Content.
- The New Content is unlikely to be
valuable for the new casual games developed by SciPlay.
We note that since its IPO, SciPlay has not launched any new social
casino games and is unlikely to do so, since it can simply continue
to add content to those existing games. Therefore, per the initial
IP agreement, SciPlay can continue to use the New Content for those
social casino games. Meanwhile, SciPlay has focused on creating new
games in the casual space, where the New Content (which is focused
on the social casino space by virtue of its association with Light
& Wonder) is unlikely to be relevant.
- The New Content is unproven and
therefore, if there is a payment, it should not be an upfront
payment. 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. Management seems to be in favor of an upfront
payment because it does not impact the Company’s EBITDA and EBITDA
margin. This should not be the driving factor. Instead, the best
risk adjusted decision should be made independently of whether a
payment hits the income statement or not.
We are also concerned by the process in which the Company has
assessed the value of this IP. 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. 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. SciPlay should not have to pay
more than what a third party would pay. We suspect that SciPlay and
Light & Wonder would find that this content has de minimis
value and that no independent third party would be willing to
deliver an upfront payment for this unproven content.
To protect the value of minority shareholders’ investment in the
Company and ensure that Light & Wonder does not unfairly wield
its outsized influence over SciPlay in these negotiations, we
believe the independent members of the Board must immediately step
in. In light of what we believe are shareholders’ valid concerns
regarding the Company’s intertwined relationship with Light &
Wonder – as evidenced by SciPlay’s low trading multiple – the Board
should treat the potential extension of the IP agreement with Light
& Wonder with significant caution.
In conclusion, we are deeply troubled by these developments and
are requesting that 1) any negotiation to extend this IP
agreement be made by a newly created special committee of the
Board and 2) the Board appoint a Lead Independent
Director. We are again requesting a meeting with you as soon as
possible to discuss the content of this letter. We have given a lot
of thought to this topic and believe we can be helpful to the
independent directors. We are reserving all of our rights under
Nevada law and otherwise to take whatever actions we may deem
necessary in order to protect our interests and the best interests
of all SciPlay shareholders from any activities that involve the
waste of corporate assets and/or unjustified related-party
transactions.
Very truly yours,
Arnaud Ajdler
Brad Favreau
Managing Partner
Partner
***
About Engine Capital
Engine Capital LP is a value-oriented special situations fund
that invests both actively and passively in companies undergoing
change.
1 This applies only to existing games at the time of the signing
of the initial IP agreement.
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version on businesswire.com: https://www.businesswire.com/news/home/20220617005090/en/
Longacre Square Partners Bela Kirpalani, 646-386-0091
bkirpalani@longacresquare.com
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