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Rod Smith

Slot Makers Shares Recover

25 June 2004

NEW YORK -- After sinking like bricks following the announcement of MGM Mirage's $7.9 billion bid for Mandalay Resort Group, slot maker shares recovered 3 percent to 5 percent Wednesday as investors realized the deal will have little effect on manufacturers and expanded gaming may still be on a roll.

Following the disclosure of merger talks late June 4, Alliance Gaming quickly tumbled 26 percent, WMS Industries fell 14 percent and International Game Technology dropped more than 10 percent.

The market "panic" was fed by initial investor concerns the combined bargaining power of the two companies would squeeze manufacturers' pricing and profits, analysts said.

However, they said the concerns were unfounded, largely because the combined MGM Mirage company will only operate about 46,000 slots nationwide. Harrah's Entertainment, by contrast, alone operates almost 42,000 slots.

Analysts argue that the combined MGM Mirage, although powerful, will not be significantly bigger than other operators and will still represent a relatively small share of the national equipment market. Therefore, the merged company will far from dominate the slot market.

Ed Rogich, IGT marketing vice president, said "the big three" -- MGM Mirage, Harrah's and Caesars Entertainment -- have been his company's strongest customers, especially because of their programs to convert to cashless slot machines.

Mandalay, by comparison, is a small player and the merger will do more to preserve the status quo in the slot market than to shake up the market, he said.

On the other side of the coin, Eric Hausler, gaming analyst for Susquehanna Financial Group, said Mandalay's slot floors are not as technologically advanced as MGM Mirage's casinos, and they have proportionally fewer cashless, or ticket-in, ticket-out, slot machines.

"It's possible, even likely, MGM Mirage will move Mandalay more aggressively into the cashless stream," he said, noting that would be good for IGT and other slot makers.

However, Mandalay officials have said they only have about 5,000 slot machines companywide that need conversion to ticket-in, ticket-out technology over the next three to five years, so the incremental impact on IGT's annual domestic sales of 80,000 machines will be minimal, Hausler said.

Rogich added that a lot of Mandalay's older slots are in second- and third-tier casinos, such as Circus Circus and Nevada Landing in Jean, where operators typically do not upgrade technology.

In another wrinkle that could be a small benefit for MGM Mirage, the company shares a patent for ticket-in, ticket-out slots with IGT, so any accelerated conversion program will yield a small royalty income boost for the merged company.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said developments in Pennsylvania will have a bigger impact on IGT and the other slot makers than the proposed merger between MGM Mirage and Mandalay.

Pennsylvania lawmakers Thursday approved a tentative agreement to put 37,000 slot machines at 14 sites in the state to raise $1 billion for property tax reform, Greff said.

"We view this as an enormous positive development for IGT. Also this may put the onus back on neighboring Maryland lawmakers to revisit slots at racetracks, creating another market of (10,000) to 20,000 slot machines -- another positive for IGT," he said.

Analysts also cited an agreement reached this week between the state of California and five tribal casinos to raise the ceiling on the number of slots they can have as another catalyst that helped boost manufacturing stocks.

Compared with events in Pennsylvania and California, Greff and Hausler said the MGM Mirage merger simply will have minimal effect on slot manufacturers.

Spokesmen for Alliance and WMS declined to comment Thursday.

IGT closed Wednesday at $36.70, up 4.08 percent on 7.8 million shares, double normal trading volume. Alliance closed at $16.37, up 3.15 percent on 2.6 million shares, double normal trading. And WMS closed at $27.87, up $1.21, or 4.54 percent on 1.5 million shares, triple normal volume.

The recent recovery, however, still left IGT shares down about 13 percent since the merger talks were announced, Alliance down about 25 percent and WMS shares down almost 12 percent.


Company No. of slots % of U.S. total

Caesars Entertainment 47,000 6.3

MGM Mirage-Mandalay

Resort Group (combined) 46,000 6.1

Harrah's Entertainment 42,000 5.6

Boyd Gaming-Coast Casinos (combined) 23,000 3.1

Station Casinos 20,000 2.6

Total United States: 750,000

SOURCE: Deutsche Bank and company data.

Slot Makers Shares Recover is republished from