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September 15, 2014

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Alliance Gaming hopes rest on sale of slot route operation

Alliance Gaming Corp. of Las Vegas may be just weeks away from selling its most profitable asset -- United Coin Co., the largest slot route operator in Nevada.

United Coin and Alliance's Rainbow Casino in Vicksburg, Miss., and its Rail City Casino in Sparks in Northern Nevada were put on the sales block in November when Alliance launched a sweeping restructuring. If sold, Alliance's future would rest almost entirely on Bally Gaming & Systems, the company's slot manufacturing division.

"We don't have any official offers yet (for United Coin)," said Bob Miodunski, Alliance's chief operating officer. "We are about a week away from getting firm offers in hand."

In the fiscal year ending June 30, 1999, Alliance's slot route operations -- which include slot routes in Louisiana as well as Nevada -- produced 38 percent of Alliance's $458 million in revenues, more than any other division. Both revenues and cash flow have steadily increased at United Coin over the last five years.

By comparison, cash flow declined at Bally Gaming & Systems over each of the past three fiscal years. In its most recent quarter, Alliance said Bally operated at a loss.

But Miodunski believes only the sale of United Coin can pare Alliance's $330 million in debt by any significant amount.

"The only believable reason our stock has languished is that we have too much debt," Miodunski said. "We have two assets that have significant value: Rainbow Casino (in Vicksburg, Miss.) and United Coin.

"United Coin ... really doesn't have that much of a positive impact on the stock. Bally Gaming has a much higher market multiple potential."

If Alliance is successful, it could quickly become a takeover target, one analyst said.

"With their debt, it doesn't make any sense to buy them," said Adam Steinberg, associate analyst at Bear Stearns. "But if they use proceeeds to pay off debt, they still have the No. 2 (slot) market share out there, and that makes them much more attractive as a potential takeover candidate."

Miodunski believes United Coin's sales value could be considerable. It is the largest slot route operator in Nevada, with 8,100 machines, more than double its nearest competitor.

Miodunski also believes the division's value will be boosted by such features as Gamblers Bonus, the cardless slot players club now used on 40 percent of United Coin's machines. Another feature is "AutoPay," a recently introduced system that allows players that win big jackpots to receive cash payment immediately on-site, rather than waiting for hours for a service truck to come out for a hand pay.

A feature like AutoPay means less trucks need to be put out on the streets, so payroll costs can be reduced, Miodunski said. There's also far less risk that a truck attendant would be robbed, since they wouldn't have to carry cash for customer payoffs.

"There's certainly no (value) impairment to United Coin," Miodunski said. "If the numbers come in right, there's a much better chance it will sell."

The same cannot be said for Rainbow Casino. Though its operating income margin is an impressive 63 percent of revenues, Miodunski said Alliance is having difficulty finding a buyer willing to put up a fair price for the property.

One problem, he said, is the possibility a casino will open at a site directly between Vicksburg and Jackson, Miss., one of the casino's key feeder markets. Mississippi gaming regulators have denied this application, but the developers have appealed to the state Supreme Court.

"Until this gets resolved, we aren't going to get anyone to give us the valuation we need to have for the Rainbow property," Miodunski said. "If someone wants to make an offer for Rainbow Casino, we'll consider that offer. But I don't think we'll go through that any time soon."

The sale of Rail City appears to be going much more smoothly, as Miodunski expects to make an announcement regarding its sale within three weeks. However, it isn't going to be a sale that will significantly impact Alliance's debt.

"The good news is, there's no baggage associated with Rail City ... it's about 20 percent of the value of Rainbow Casino," Miodunski said. "It's a very small transaction.

"They may be similar in size, but it's nowhere near Rainbow Casino in earning potential."

After missing quarterly earnings badly in November, Alliance's stock lost half its value in four weeks. On Nov. 4, it traded at $8.13; it now trades around $2.50. Alliance followed the earnings shortfall with a sweeping restructuring that resulted more than 100 layoffs. Departures included former Chief Executive Morry Goldstein and Chief Financial Officer Scott Schweinfurth.

Much of that restructuring was focused on Bally Gaming.

"The difference Bally's has had (from competitors) is they haven't really come out with any home run games," Steinberg said. "The question is, would they be able to come up with one? If they're able to come up with one home run, they can take market share."

Though sales of back-office support software remains strong, Miodunski has tried to re-invent Bally's approach to the slot machine business. Rather than manufacturing slots that are simply sold to casinos, he said, the company has to focus on producing entertaining games that can be sold on a revenue-participation basis.

That means putting more money into research and development -- and it also means Bally must be more responsive to customer input during the design cycle. The company has placed more attention on getting player focus groups involved in the design process at a much earlier stage, so development dollars and time can be conserved.

"This is going to be a business that's fixed on creating good games to put in the boxes," Miodunski said. "The company has historically spent too much time worrying about building boxes, rather than what goes into those boxes. At the end of the day, it's what's in the box that's most important.

"We will always be a manufacturer of games for purchase, but (leased games) is where our focus is going to be."

A key element of this strategy is producing networked games with progressive jackpots. Bally's entrance into this market is the "Thrillions" system, which Bally's uses with its "Betty Boop" series of slot machines. At this point, Thrillions can only be found in Park Place Entertainment properties, though the company is negotiating to bring it to new casinos.

The progressive, wide-area market is currently ruled by International Game Technology, particularly with its statewide "Megabucks" system. But Miodunski believes Thrillions can compete effectively on a philosophy of "smaller jackpots, more frequently."

"Players recognize the smaller prizes are much easier to maintain," Miodunski said. "We'll let IGT go after the big bang. We'll go after the more frequent, smaller payouts."

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