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Scientific Games makes moves to improve promotion ability

Nov 26, 2002 5:43 AM

   Looking to overcome recent bad publicity attached to one of its divisions, Scientific Games Corporation (SGMS) announced two strategic moves last week: the acquisition of a promotions company and an alliance with a major gaming company.

   The company will acquire MDI Entertainment Inc. (LTRY) for $18.5 million. The company specializes in game and ticket design, merchandize prize fulfillment, management of second and third-chance draws, and other customer related features.

   For the nine months of this fiscal year, MDI Entertainment had revenues of $13.1 million, an increase of more than 22% over last year. Net income for the period, including charges related to this acquisition was $146,685.

   The agreement with Mandalay Resort Group (MGB) permits Scientific Games to promote new instant ticket games using Mandalay logos, designs and visual representations. The new games will allow players to win luxurious Las Vegas vacations at one of the five Mandalay resorts on the Las Vegas Strip.

   The subsidiary company, Autotote, holder of an approximate 65% market share of the pari-mutuel wagers made at this country’ racetracks, has come under fire since an employee and two friends were involved in re-writing, or counterfeiting winning tickets. The biggest scam involved the $3 million winning ticket on the Breeders’ Cup Ultra Pick Six.

   The three are being held on money laundering and fraud charges.

   No management link to the scam has been alleged but criticism of Autotote and other totalizator companies servicing the country’s racetracks has cast a cloud over the racing industry. Most states where racing is conducted are reviewing their equipment requirements in an effort to restore confidence in the integrity of the sport.

Unfair competition

   Bryan Krantz, who family has overcome adversity to keep the horses running at the Fair Grounds in New Orleans, feels he has been asked to compete with large gaming companies on an uneven playing field.

   Boyd Gaming Corporation (BYD) has slot machines at Delta Downs while Harrah’s Entertainment Inc. (HET) will have slot machines when it opens its 2003 race meet at recently-acquired Louisiana Downs. Of course, Harrah’s now has complete control of the land-based Harrah’s Casino in New Orleans.

   But Fair Grounds was excluded when the Louisiana legislature passed racetrack slots in 1997. Concern at the time was the viability of the troubled Harrah’s Casino. The landscape has changed since then but the attitude toward the Fair Grounds hasn’t. An effort in 2001 to change the law also failed.

   Now that Delta Downs has entered the fray, Krantz believes the time has come for a change in the law that would permit slots at his track, perhaps starting with 300 machines and eventually growing to 700 machines.

Aladdin struggles

   Bankrupt Aladdin Hotel/Casino saw October revenues barely surpass those of September, according to its most recent filing.

   Tom Lettero, the company’s chief financial officer, reported October revenues amounted to $19.1 million just topping September’s $19 million. August’s numbers were higher at $22.6 million while July and June raked in $19.8 million and $18.6 million, respectively.

   Lettero noted however, that the loss for the month of October had been reduced to $955,131, a sharp decline from September’s loss of $2.5 million.

   Also improving was the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) which rose to $3.4 million compared with the $2.7 million recorded in September.

   Still lacking is a firm purchase agreement, although at least two gaming companies reportedly have been eyeballing the operation.

Political opposition

   There will be a new administration taking over the political reins for the state of Rhode Island come January but the anti-slot machine atmosphere probably won’t be changing.

   For the past several months, both Lincoln Greyhound Park and Newport Grand Jai Alai have been lobbying for an increase in the number of slot machines they currently operate. There efforts would add 1,825 machines, virtually doubling the number of machines in operation at the two pari-mutuel facilities.

   The decision will be made by the state’s Lottery Commission but both the current governor, Lincoln Almond, and Gov.-elect Don Carcieri have been vocal in their opposition. Actually, Carcieri’s opposition isn’t so much against additional machines but more in a need for a better split of slot machine revenues. He feels the taxpayers are getting short changed in the distribution.

   However, Lottery officials have been strong supporters of the two slot machine operators. Last year, the slots accounted for 80% of the $1.2 billion in total lottery sales.

IGT shares boosted

   Shares of International Game Technology (IGT), producer of about three-quarters of the nation’s slot machines, were boosted in a market research paper prepared last week by Shaeffer’s Market Observations of Cincinnati, Ohio.

   “Fundamentally speaking,” said the report, “the stock is sound. In its Nov. 7 earnings announcement, IGT reported fourth-quarter earnings of $0.95 a share versus $0.73 in the prior year period. One additional potential positive catalyst concerns the recent mid-term congressional elections. Specifically, governors elected in state that have gaming issues on the table (such as Pennsylvania, Maryland and Kansas) have indicated support for some form of gambling. Should any of these issues pass, IGT would be a direct beneficiary.

   “Despite the strong fundamental and technical drivers, it is interesting to note that speculators continue to shy away from the shares. On the options front, players maintain a complacent attitude with respect to the stock. In the December options series, the heaviest level of open interest is a mere 1,486 contracts located at the out-of-the-money 80 call.

   “As for stock players, current short interest of 4.5 days to cover could certainly provide a boost for the equity should the rally continue to play out. Overall, the combined technical, fundamental and sentiment factors point to a continuation of IGT’s strength in the near term.”

Fiscal meltdown

   A fiscal meltdown in Kentucky might be just the catalyst needed by Churchill Downs Inc. (CHDN) and the state’s other racetracks to get the legislature to approve track slot machines.

   But, supporters agree that the process won’t be an easy one. A political impasse has prevented the lawmakers from approving a budget thus requiring Gov. Paul Patton to run the state on his own spending plan.

   He has noted that the state faces a budget deficit of at least $500 million over the next 18 months causing him to suggest he was not “going to put anything off limits.” This said an anti-gamer was the kind of language that lays “the groundwork that expanded gambling will be the fiscal fix that this state needs.”

   Patton, involved in a sex scandal, has already announced that he will not seek re-election when his term expires in December, 2003.

The Insider

   Mississippi’s Coast casinos won $93.2 million during October, an increase of nearly 3% over last year.

   Colorado casinos reported a win of $55.5 million in October. This was 1.5% below last year’s figures.

   CEO Richard Rainwater of Crescent Real Estate Equities Co. (CEI) has increased his stake in the company to 13.5% with the purchase of an additional 1.6 million shares during November.

   Mandalay Resort Group (MBG) pre-announced its quarterly earnings by saying that bad table luck will reduce its earnings per share to $0.50 from an expected $0.52 a share. During the comparable quarter last year, the company earned $0.32 a share.

   Iowa state regulators have renewed the gambling licenses for Prairie Meadows Racetrack and Casino.

   Standard & Poor’s Ratings Services has raised the corporate credit rating for Alliance Gaming Corp. (ALLY) to double B minus from single B plus due to the company’ steadily improving operating performance.

   Fitch Ratings has assigned a ratings of BBB to Harrah’s Entertainment Inc. senior unsecured notes and senior unsecured bank facilities.

   Magna Entertainment Corp. (MIEC) plans to sell $50 million worth of subordinated notes to raise cash for corporate purposes.