Antitrust probe stalls IGT, Anchor merger

David Strow

Thursday, Aug. 30, 2001 | 10:58 a.m.

For the second time this year, a major gaming industry merger is being held up by a federal antitrust investigation.

International Game Technology of Reno announced Wednesday that the Federal Trade Commission has requested more information about its plans to buy Las Vegas-based Anchor Gaming in a stock swap valued at more than $1.2 billion. The deal's "waiting period," required under federal antitrust law, was set to expire Wednesday.

"There's clearly going to be some delay," said Bob McIver, IGT's investor relations officer. "We can comply with the request within a few days, but they have to have time to consider what we send them. The ball is very much in their court."

However, McIver said IGT remains confident the deal will pass federal scrutiny.

"Our degree of confidence in the doability of this deal has not changed," McIver said.

Anchor, too, doesn't expect the federal government to try to block the deal.

"It's not surprising the FTC came back and asked questions," said Howard Stutz, Anchor spokesman. "In a large merger transaction like this, it's not uncommon for the FTC to ask for (more information. We're comfortable it will be closed by Jan. 31."

That sentiment isn't shared by everyone.

"The chances of this deal being looked at and considered by the Justice Department have ... taken a substantial leap forward," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "If it was 90-10 in favor of IGT before, that overwhelming percentage has been reduced sharply. It's maybe 50-50 now."

The Nevada Gaming Control Board is also examining the merger from a market concentration perspective, said board Chairman Dennis Neilander. Neilander declined to comment on whether the board had antitrust concerns, since the investigation is active.

The FTC's move comes a little more than two months after the FTC asked for more information about Harrah's Entertainment Inc.'s $675 million buyout of Harveys Casino Resorts. In that instance, the FTC was examining market concentration issues in Lake Tahoe.

The Harveys deal gave Harrah's three of Lake Tahoe's six casinos, and well over 50 percent market share. But the FTC ultimately took no action, and let the extended waiting period expire five weeks after its second request. Harrah's closed on its buyout of Harveys eight days later.

In the Anchor-IGT deal, it isn't clear what's caught the FTC's attention.

"They've just asked for additional elaboration ... on various business segments that we and Anchor are involved in," McIver said. "They're just looking for a little more information. (The request) is really a broad brush."

IGT holds a dominant position in the North American slot machine market, controlling an estimated two-thirds of the market. Anchor will do little to change that; its market share, independent of its joint venture with IGT, is estimated at only one-half of 1 percent.

IGT's largest competitors are WMS Gaming, with a market share of 10 percent to 15 percent, and Alliance Gaming Corp.'s Bally Gaming & Systems, with a market share of 8 percent to 12 percent.

"(The Anchor buyout) doesn't hurt the consumer," said William Schmitt, gaming analyst with CIBC World Markets. "In the big scheme of things, does it even warrant the attention they're getting? Probably not. If I go through the issues that could be contested, none of the dynamics of the (slot manufacturing) industry changes at all. It just doesn't make sense why this could be an issue."

The jewel in the Anchor deal is Anchor's share of a joint venture with IGT. This joint venture operates 15,000 machines, including the popular "Wheel of Fortune" and "I Dream of Jeannie" slot machine lines. Over the nine months ending March 31, it produced $196.5 million in net income on $341.1 million in revenues.

Acquiring 100 percent of this venture, along with the rest of Anchor, will push IGT's annual cash flow well above $500 million -- an increase of roughly 50 percent over current levels. As a result, IGT's financial strength will increase dramatically, making IGT an even tougher competitor.

The FTC could allow the deal to proceed, attempt to block the deal in court, or strike a deal with IGT to divest certain businesses.

Divestiture is unlikely, Ehlers believes, because there's little in the Anchor deal that will change the slot machine market dramatically other than the Anchor-IGT joint venture.

"IGT is obviously not going to divest the joint venture, because that's why they're acquiring Anchor," Ehlers said.

Ehlers believes a fourth option is possible -- that the FTC could delay the deal indefinitely by repeatedly asking for more information.

"All the Justice Department has to do is keep asking for more information, keep that request line open for four or five months," Ehlers said. "How long are you willing, if you're the (purchaser), to sit around waiting?"

If the FTC does allow the deal to proceed, another hurdle remains -- that of the "collar" that takes effect 20 days before the Anchor shareholders meeting. Currently, IGT plans a one-for-one stock swap for each Anchor share.

If IGT's stock price averages above $75 over that period, IGT will have the right to call off the deal, though Anchor can propose a lower exchange ratio. If IGT's average price is below $50, Anchor has the right to pull out, though IGT can propose a more favorable exchange for Anchor.

The collar did not appear to be an issue when the deal was announced July 9. IGT's stock closed at $59.12 that day, and had traded as high as $66.04 in June.

But a slide in IGT's stock has raised the possibility the collar could create problems. IGT stock closed below the $50 floor on Aug. 6, and stayed there for six consecutive trading days before moving back above the $50 level. It hasn't dropped below the $50 level since then.

Stutz noted that the collar isn't an issue now, since only the average price during the period before the shareholders meeting matters. A date for this meeting hasn't been set, but it is expected to be held late this year.

"We felt the collar was pretty broad, and we feel it (IGT) will end up in the $50 to $75 range," Stutz said. "We'll address it when it comes, if that is to happen. We can't look out that far right now. We're ready to go with this deal."

Separately, Standard & Poor's announced Wednesday that IGT will be added to the S&P 500 index at the close of trading Friday, replacing Silicon Valley software maker BroadVision Inc. IGT will become only the second gaming industry company to join the widely followed stock index; currently, the only gaming company listed on the S&P 500 is Harrah's Entertainment.

Analysts generally expect the move will cause IGT stock to move up over the next several days, as index mutual fund managers buy IGT shares. This morning, IGT rose 76 cents to $53.48.