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Are Class II slots
the next big boom?

Dec 2, 2003 7:03 AM

Class II slot machines, sometimes called bingo or lottery slots, have always been considered second-class games, at least compared to their Class III cousins ”” standard slot and video machines found in Nevada-style casinos.

But a recent ruling by the National Indian Gaming Commission (NIGC) could send Class II slots to the head of the class for manufacturers.

Under the ruling, the commission declared that bingo slot machines are not slots at all and therefore exempt from state regulation.

The ruling is most significant in California, where tribes are limited to a maximum of 2,000 Class III slot machines at each casino. If those tribes can now install bingo machines that look and operate like slot machines, but that for regulatory purposes are not slots, tribes could be free to expand their gambling operations without regard to objections raised by state or local governments.

Currently, 53 tribes operate about 62,000 slot machines in California. One market analyst, Jefferies & Company, estimated the demand for Class II machines in California could be as high as 55,000 machines.

That figure, coupled with demand from other jurisdictions, could open up a world of opportunity for slot manufacturers.

International Game Technology (IGT), the world’s largest manufacturer of slot and gaming machines, is poised to capitalize on the boom, should it occur.

IGT already has a Class II prototype machine, which could take up to 60 percent to 70 percent of the Class II market.

Another major manufacturer, Alliance Gaming, has positioned itself to service the Class II market with the acquisition of privately-held Sierra Design Group (SDG), a leading supplier of Class II gaming devices, systems and technology.

Under terms of the acquisition, Alliance Gaming will purchase 100 percent of the outstanding shares of SDG for approximately $45 million of consideration consisting of $27 million of cash and 736,000 shares of Alliance common stock, and approximately $95 million of contingent consideration payable in equal portions of cash and stock over the three years following the closing of the sale.

The acquisition, which is subject to regulatory approvals and certain other customary closing conditions, is expected to close in the first half of calendar 2004.

"The acquisition of Sierra Design Group makes a powerful statement about Alliance Gaming’s plans for future growth while giving us an immediate impact in new and emerging markets," said Robert Miodunski, president and chief executive officer of Alliance Gaming.

"SDG has become a strong player in the gaming industry in a short period of time through its customer relationships, innovative products and an overriding commitment to cutting-edge technology," Miodunski added.

Miodunski said that acquiring SDG will give Alliance Gaming an increased presence in the expanding Class II markets outside of California as well, including Oklahoma, Florida and Alabama.

Another major player in the Class II market is Multimedia Games, whose Reel Time Bingo game was the actual machine on which the NGIC ruled wasn’t a Class III slot.

Since that ruling a few weeks ago, the price of Multimedia Games stock has jumped about 40 percent.

While the future looks bright for Class II slot makers, manufacturers can’t yet crank up the assembly lines. The U.S. Department of Justice (DOJ) has appealed the NGIC opinion to the U.S. Supreme Court.

While the Supreme Court often lands on the side of tribes in these kind of challenges, there’s no guarantee what the court will decide.

Experts expect the court to decide within a couple of months whether or not they will hear arguments in the case.