LV slot route operator converting itself into an Internet incubator

David Strow

Wednesday, March 8, 2000 | 11:18 a.m.

After years of struggles, Las Vegas-based Jackpot Enterprises Inc. announced today it is converting itself into an Internet investment company -- a move that leaves the future of the company's employees and slot route operations unclear.

With the move came the departure of Jackpot Chief Executive Don Kornstein, who will act as a consultant to the company on gaming operations. The company -- now called J Net Enterprises Inc. -- said it is "exploring its options for its traditional gaming business," but company officials appear to be leaning strongly toward a sale of those operations.

It appears that Kornstein and other Jackpot executives are at the top of the buyer's list.

"The management and the former CEO are interested in the (gaming) business," said Allan Tessler, chairman of Jackpot. "We have started talking to an investment banker about that business. It will take a little time to put a deal together.

"We can expect a six- to nine-month period before closing a deal. We will focus on this very quickly, and hope to announce something in the near future."

Tessler, who took over as chief executive, noted it was particularly important for the gaming business to be resolved as quickly as possible, because any shareholder taking a stake of more than 10 percent in J Net would still have to be licensed by the Nevada Gaming Commission while the company held the gaming operations.

But a local analyst noted it would be difficult to find another buyer for the slot route operations -- or get a good price for them.

"The route business has seen better days," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "It seems to me there's an awful lot of sellers.

"You're never going to get a good price on a slot route, period. It's just not going to happen."

The conversion, however, was cheered by both analysts and Jackpot investors, who have expressed frustration over the struggles of the company over the past year.

"This is terrific," said New York investor Mario Gabelli, who controls more than 11 percent of Jackpot's stock. "It's a terrific reformatting of the company."

Ken Pavia, general partner in Miami investment fund Bolero Investments and a long-time critic of Jackpot management, said any move made by Jackpot "would almost have to be a good one for the company."

"They assessed their most valuable assets and redeployed them in a manner that should greatly benefit shareholders," Pavia said. "We certainly didn't think our future was in the gaming route business."

Last fall, Jackpot announced it was examining strategic alternatives to increase shareholder value. The announcement came after the break-up of two Jackpot acquisition attempts -- a $424 million bid to acquire Players International of Atlantic City, and a $71 million deal to acquire CRC Holdings.

Jackpot was outbid by Harrah's Entertainment Inc. for Players, and the CRC merger fell through after a Canadian casino managed by CRC objected to the deal.

"What happened to us is we hit the wall in growth opportunities (in gaming)," Tessler said. "We always hoped route gaming would go to other states where gaming was legal, but that didn't occur. We tried to diversify by acquiring various casino businesses, but we weren't able to get deals done.

"We finally decided it was time to move in another direction. This is a far better way of creating shareholder value."

In its new incarnation, J Net -- which will remain based in Las Vegas, for the time being -- will be an Internet investment holding company that will search for investment opportunities among growing Internet firms, particularly those in the business-to-business world. By using Jackpot's stock listing, J Net will become one of the few Internet holding companies listed on the New York Stock Exchange -- most such companies are listed on the Nasdaq exchange.

The model of Internet holding company has been used successfully by a number of companies, particularly by CMGI Inc., located near Boston. CMGI's market capitalization exceeds $34 billion.

Company officials said Jackpot was an ideal entity to start such a venture, since it had more than $65 million in cash, no debt and a market capitalization of more than $100 million. Moreover, the company had connections to the Internet world through Tessler, who was a co-founder of Internet business news service CBSMarketwatch.com.

Alan Hirschfield, former top executive with Columbia Pictures and 20th Century Fox, will join J Net's board of directors as well. Hirschfield helped Tessler launch CBSMarketwatch.

To kick-start their venture, company officials have plans to form a $100 million investment fund. Some $55 million of Jackpot's cash on hand will be committed to the fund, and "leading institutions and experienced technology investors" have committed the rest, the company said. The company also plans to issue $20 million in convertible bonds to investors to help finance its activities.

J Net will start its new life with investments in nine emerging Internet companies, obtained through the acquisition of Meister Brothers Investments, an Internet investment firm. The company paid $4 million in stock for Meister Brothers, Tessler said, and has appointed fund founders Todd and Keith Meister as co-presidents of J Net.

The company also took a 35 percent stake in Digital Boardwalk LLC, a developer of Internet applications and technologies, for $5 million in cash and stock.

"This far exceeds any opportunity in most traditional businesses we've seen, and certainly in the one we're located," Tessler said. "The public markets have already corroborated this strategy. We'll offer the differentiated portfolio (of investments in Internet companies) ... while still having the liquidity of a public company."

In early afternoon trading, Jackpot shares traded at $19.06, up $4.94 -- a 35 percent increase.