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Rod Smith

Mixed Reactions to UK Gaming Recommendations

8 April 2004

LAS VEGAS --Las Vegas gaming operators pining for expansion opportunities in Great Britain were largely undermined with official recommendations released by the House of Lords, two Wall Street analysts said Wednesday.

However, two major Las Vegas operators and Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, saw the report as a positive for casino companies and manufacturers because it is likely to speed reforms.

Analysts like Deutsche Bank's Marc Falcone called the parliamentary committee's comments on draft legislation to deregulate gaming in the United Kingdom disappointing.

"Based on our initial read of the report, its findings are likely to disappoint companies and investors who were looking to the U.K. as a substantial growth opportunity," he said.

While the report is intended to be advisory, analysts said it is likely the final regulations will reflect its recommendations, Falcone said.

The committee recommended severe limitations on the number of table games that would be allowed for each slot machine in a casino, he said.

In addition, Bear Stearns & Co. analyst Mark Abramson said in an advisory to investors that casinos will be required to target economic redevelopment and demonstrate significant "cultural" benefits.

In addition, progressive games linking games on a casino floor or between casinos will be barred, and the report recommends moving quickly with pending legislation to help grandfather in existing operators.

Abramson called the report "disappointing for shareholders of MGM Mirage and, to a lesser degree, Harrah's."

He also said the proposals fall below the initial expectations laid out by International Game Technology and Alliance Gaming for slot machine sales.

"We think too much emphasis has been placed on the U.K. opportunity. With size and site restrictions coming in tighter than expected, we think attractive return on capital investments in this market will be hard to come by," Falcone said.

He also said that because the report appears to give "a big home-field advantage to incumbent operators."

"We think it is possible that some U.S. operators might look at redirecting some of the project capital they had earmarked for the U.K. to more traditional merger and acquisition opportunities with U.K. operators," he said.

Greff called the report "favorable for the eventual expansion of gaming in the U.K.," and said it was therefore a "clear positive" for manufacturers and also a positive for operators such as Harrah's Entertainment and MGM Mirage.

Harrah's and MGM Mirage said they are more encouraged by the move to liberalize English gaming laws than discouraged by the recommendation to grandfather established operators.

Harrah's spokesman David Strow said although his company does not agree with all of the report, it is encouraged to see reform progressing.

"If Parliament does act favorably on this proposal, we plan to move forward with our joint venture into the regional casino market with the Gala Group," he said.

Harrah's Entertainment and the London-based Gala Group signed a letter of intent in June to build at least eight new casinos ranging in size from 30,000 square feet to 50,000 square feet.

Strow said it would be premature to comment on possible implications for building two megaresorts in Great Britain, which Harrah's has also planned.

MGM Mirage managing director for Europe Lloyd North also welcomed the urgency the report expressed for proceeding quickly, although he warned it is premature to say whether it might affect the level of investments operators will make in Great Britain.

MGM Mirage agreed in October to build a $255 million London casino resort in a joint venture with Earls Court and Olympia Group.

The company also announced plans in May to buy a minority share in Metro Casinos Ltd., a small British casino developer.

Shares of MGM Mirage fell 76 cents, or 1.59 percent, to close at $47.09. Harrah's shares fell $1.27, or 2.22 percent, to close at $56. Shares of slot makers also fell.

Alliance Gaming shares dropped 80 cents, or 2.35 percent, to close at $33.19.

International Game Technology shares fell 75 cents, or 1.61 percent, to close at $45.72.