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Shuffle Master could benefit from Pennsylvania decision

8 January 2010

LAS VEGAS, Nevada -- For table game supplier Shuffle Master, Pennsylvania's gambling expansion could be the jackpot.

Gov. Ed Rendell signed a bill into law Thursday that will allow the state's slot machine-only casinos to add table games.

Pennsylvania's 14 largest casinos can each add up to 250 table games, while the state's two small resort-style casinos can have a maximum of 50 games each.

Casino operators will pay an upfront license fee of $16.5 million. The two smaller casinos will have license fees of $7.5 million. Table game revenue will be taxed at 16 percent initially, dropping to 14 percent after two years, providing Pennsylvania some much-needed budget relief.

"The favorable tax rate ... is a significant positive for operators in Pennsylvania," JP Morgan gaming analyst Joe Greff told investors.

Roth Capital Partners gaming analyst Todd Eilers said Pennsylvania could theoretically reach 3,100 table games.

"We estimate initial demand to be closer to 815 games based on the existing number of casinos in operations, final tax rate and upfront license fee," Eilers said in a research note.

Las Vegas-based Shuffle Master, which manufactures table game management equipment and provides nontraditional table games, such as Three Card Poker, Let It Ride and Caribbean Stud, may be the big winner, according to analysts.

Shuffle Master is the primary supplier for automated card shufflers and some analysts predicted the company could place up to 500 of the devices in the state.

Executive Vice President David Lopez said Shuffle Master had success previously in Pennsylvania with placement of its dealerless electronic table games, which were classified as slot machines.

"We now have a great opportunity to strategically partner with our Pennsylvania customers by providing them with a greater variety from our diverse suite of products," Lopez said.

Eilers said Shuffle Master will benefit as other states, including West Virginia and Ohio, add table games. He said Delaware may change its current table game laws and allow its three racinos to add between 150 and 225 table games in order to compete with Pennsylvania.

"In our opinion, Shuffle Master is the best way for investors to play table game market expansion," Eilers said.

Pennsylvania gaming authorities said it will take six to nine months to draft the regulatory framework to govern table game operations.

Wall Street, however, isn't waiting to comment.

Analysts said Las Vegas Sands Corp., owner of Sands Bethworks in Bethlehem, Pa., will also benefit from adding an estimated 80 to 100 table games to the casino, which already has 3,000 slot machines.

"With table games, Sands Bethworks, which is an hour outside of Manhattan, should be able to draw a more lucrative customer," Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said. "We believe Las Vegas Sands will now move forward with adding more nongaming amenities."

In a statement, Las Vegas Sands said adding table games will enhance the $743 million Bethlehem casino, which was built on the site of the historic Bethlehem Steel Mill and opened last Memorial Day.

Atlantic City casinos, according to analysts, are the biggest losers.

"Atlantic City properties will be under more pressure," Wieczynski said. "Atlantic City could now lose more customers from the New York City area."

Deutsche Bank gaming analyst Andrew Zarnett said Atlantic City was losing the one advantage it held over slot machine-only Pennsylvania casinos. He said revenue from table games represents about 25 percent of the Atlantic City market.

"Some properties, such as Borgata, have greater exposure to table games than the average," Zarnett told investors. "Looking into 2010 we reiterate our negative outlook on Atlantic City as Pennsylvania supply continues to grow and existing casinos ramp up marketing efforts to lure the day-tripper away from Atlantic City."