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Liz Benston

U.S. Slot Stocks Off on U.K. Report

7 April 2004

Shares of two major U.S. slot and video poker machine makers fell this morning as British legislators issued an interim report today recommending a more cautious approach to gambling deregulation than anticipated, a move that analysts said will dampen plans by U.S. casino companies to profit from an aggressive expansion of slot machines and casinos in the United Kingdom.

In early trading today, shares of International Game Technology of Reno fell $1.11 per share to $45.36, while Las Vegas-based Alliance Gaming Corp.'s stock fell $1.26 per share to $32.73. Both companies have identified Britain as one of their strongest growth opportunities outside of the United States, where higher taxes and legislative tussles have hampered growth of commercial casinos.

But casino representatives said the recommendations were generally favorable and that the report could help fast-track a draft gambling bill overhauling gambling regulations dating from 1968.

"Overall, the recommendations in the report -- which may or may not be accepted by the government in the final legislation proposed -- are somewhat more conservative than generally expected and certainly less than hoped for in a number of key areas," Bear, Stearns & Co. casino analyst Marc Abramson wrote in a research report today.

"We would characterize the recommendations as generally negative for both the slot makers and casino operators looking for expansion opportunities in this market," Goldman, Sachs & Co. analyst Steven Kent noted in a separate note to investors. "The news will take some wind out of the sails for U.S. companies who thought this would be an infinite opportunity."

MGM MIRAGE President and Chief Financial Officer Jim Murren said the recommendations mark "another positive step" toward deregulation.

"We're a bit confused that people are surprised by the recommendations ... they are consistent with the messages we've been getting for the last two years," Murren said.

Murren said the recommendations wouldn't hurt any of the four casino deals that the company has announced with British entities. All of the projects, including a proposal to develop a casino near a London exhibition hall, are in redevelopment areas, he said.

"That's expressly why we picked the sites we did," he said.

The limitation on slot machines also is consistent with the gradual introduction process that operators have proposed, he said.

"It makes sense initially to limit the number of gaming positions and have supply grow with demand. That's also something we anticipated and planned for."

Most important, the report stated the "economic imperative to move forward quickly" with deregulation, he said.

"It's clear from this report that the committee is recommending a fast track process here, which is on the margin, positive" for all U.S. gaming companies, he said.

Harrah's Entertainment Inc. spokesman Gary Thompson said the recommendations are "absolutely not a setback" for the company, which is pursuing a joint venture with British bingo operator Gala Group Plc to develop up to 10 regional casinos.

"Right now we're very optimistic and pleased with the overall thrust of these recommendations," he said. "We think they did a tremendous job studying a variety of complex issues in a relatively short amount of time," he said. "They recognized the economic benefits (of casinos) and they recognized that Parliament needs to move quickly on the proposed legislation. If Parliament acts in the current session, development projects could begin as soon as 2005."

The deal with Gala fits into the government's plans to open the market to regional casinos, he said. Harrah's "doesn't agree with" the limits placed on slot machines and expects to discuss the issue further with British legislators, he said.

The legislative committee based its recommendations in part on input from witnesses who said the increase of slot machines would lead to an increase in problem gambling, he said.

"There is no empirical evidence to back that up," he said. "Once they take a look at the evidence, their concerns about strictly limiting the number of slots will go away.

As for limiting resorts to redevelopment areas, Thompson said Harrah's hasn't yet detailed its plans for building major resorts.

"We are looking at the possibility of destination resorts but we are moving cautiously until we see what happens with the ultimate bill," he said.

Las Vegas Sands Inc. spokesman Ron Reese declined to comment on the recommendations early today, saying the company, owner of the Venetian resort on the Las Vegas Strip, is still reviewing the committee's report.

The committee recommended that the largest casinos offer up to 8 slot machines per table game, with slots capped at a maximum of about 1,250 machines. The report didn't define the size of resort casinos but said they should offer non-gambling amenities and be built in redevelopment areas.

Smaller casinos would be required to offer at least 5,000 square feet of gaming space and would be limited to 3 machines per gaming table -- a measure designed to prohibit the proliferation of gambling halls and curb problem gambling.

Legislators also recommended that slot machines jackpots be linked on the casino floor but not across casinos, as they are in Nevada and other states. They also proposed that casinos be non-smoking.

The committee report said the recommendations could be considered in the 2004-2005 session of Parliament.

It also recommends a progress revenues after three years following implementation and then every five years thereafter.