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N.Y. investment firm questions IGT's decision-making

11 February 2013

A New York-based investment firm Thursday became IGT - International Game Technology's first outside shareholder to publicly question the slot machine manufacturer's management decision-making since a proxy fight surfaced last month over the company's direction.

In an open letter to IGT Chairman Phil Satre, Orange Capital LLC managing partner Daniel Lewis suggested the company conduct a "Dutch auction" tender for 25 percent of IGT's outstanding shares and "reconstitute" the company's board to include former IGT Chairman Charles Mathewson and two others.

"IGT's valuation is near its all-time low on the basis of net income and cash flow," Lewis said in the letter. "We believe this reflects the investment community's lack of faith in the operating strategy and capital allocation decisions of IGT management and the board."

Mathewson, who spent 17 years as IGT's chairman and CEO, and analyst-turned-investor Jason Ader are soliciting proxy votes from company shareholders to gain three seats on IGT's eight-person board.

The group controls 3 percent of IGT's outstanding shares.

Ader and Mathewson believe IGT's current management neglected the company's core slot machine business and "alienated" casino customers. The actions caused IGT's financial performance to deteriorate, with the share price falling more than 20 percent during the past three years.

In an interview, Lewis said Orange Capital, as an independent shareholder, reviewed both IGT position and the arguments from Ader and Mathewson.

"IGT has had some well-publicized missteps and their own customers say the company has lost its way," Lewis said.

IGT Vice President of Corporate Communications Susan Cartwright said in an email that the company's board and management team, "are always open to the views of shareholders who share our goal of enhancing value."

Orange Capital owns more than 1.2 million shares of IGT's stock and has the right to buy an additional 2.4 million shares. In aggregate, the investment company controls 1.4 percent of IGT's outstanding shares.

Lewis said a "Dutch auction," in which IGT would buy back a certain amount of shares at a premium above market pricing, could boost the price of the remaining shares.

"IGT is very undervalued," Lewis said. He added that the tender offer would allow IGT to maintain significant financial flexibility and that the company's leverage would remain well below rival slot machine manufacturers.

Cartwright said the IGT board "continually evaluates the company's capital allocation strategy."

In fiscal 2012, she said IGT returned $545 million in cash to shareholders in the form of dividends and share repurchases. The company has approximately $600 million remaining under its share repurchase program.

In the letter, Orange Capital suggested the company reach an agreement with Mathewson and Ader and seat the group's board nominees, which includes Mathewson, Daniel Silvers of Ader Investment Management and Raymond Brooks Jr., principal of R.J. Brooks Cos. and former CEO of ACA Financial Guaranty Corp.

Also Thursday, gaming analysts from Wells Fargo Securities suspended their research coverage of IGT because the firm is a financial adviser to the company in connection with the proxy contest.

Shares of IGT gained 33 cents, or 2.07 percent, to close Thursday at $16.27 on the New York Stock Exchange.