Anchor selling casino stake prior to merger

David Strow

Thursday, Dec. 27, 2001 | 11:04 a.m.

With its $1.4 billion-plus merger with International Game Technology just days away, Anchor Gaming of Las Vegas announced Wednesday it plans to sell its stake in a huge California tribal casino.

Anchor announced it would surrender its 68 percent ownership in the Pala Casino's management company to businessman Jerome Turk, who handles the property's day-to-day operations. The move will leave Turk, a former partner in the Fitzgeralds hotel-casino in downtown Las Vegas, the sole owner of the management company.

The Pala Band of Mission Indians will pay Anchor $77 million as compensation -- $14 million cash and $63 million in a promissory note. The deal is expected to close by Jan. 31.

"We requested it, because we felt it could be a possible conflict of interest, because they (IGT) have (slots) in other casinos in California," said Robert Smith, Pala tribal chairman. "We felt we'd be better off buying their shares."

"Half of Pala's slot machines are IGT slot machines," said Howard Stutz, spokesman for Anchor. "They (the tribe) felt funny about that, and they felt they would rather not have IGT involved (in management). We're proud of what we did at Pala, and the legacy we're leaving for the tribe down there."

The $115 million, 185,000-square-foot Pala Casino opened in northern San Diego County in April.

Meanwhile, IGT targeted Sunday as the closing date for its buyout of Anchor. Anchor's shares will be exchanged one-for-one for IGT stock, and IGT will assume $430 million in debt. At current trading levels, the deal has a value of just under $1.5 billion.

Anchor's last day on the Nasdaq exchange will be Friday. Following the close, Anchor will become a wholly-owned subsidiary of IGT.

The announcement comes just days after the Federal Trade Commission lifted an anti-trust waiting period for IGT's takeover of Anchor, and Nevada gaming authorities' subsequent approval of the deal.

Anchor's quarter ends Dec. 31, prompting the desire for speed in closing the deal by then, Stutz said.

"It makes it (the quarterly earnings reports) a little cleaner," Stutz said.

With the year's biggest gaming deal on the verge of closing, analysts are already raising their earnings estimates for IGT.

One of the most bullish new estimates was issued by Goldman Sachs gaming analyst Steven Kent, who raised his fiscal 2002 estimate from $3.10 to $3.30 per share, and established a 2003 estimate of $4 per share. He set a target price of $85 for the stock, up from $70.

Investors should expect earnings growth of 15 percent to 20 percent per year from IGT, Kent wrote.

"We would not be surprised to see the (price-to-earnings) multiple expand further as discussions of new gaming markets turn into reality, pushing the shares even higher," Kent wrote.

UBS Warburg gaming analyst Robin Farley also cited this possibility in a research note, saying it presented "the potential for upside" to her 2003 earnings estimate of $3.91 per share, which was up 20 cents over her old estimate. Farley raised her 2002 estimate from $3.14 to $3.32 per share. Farley set a 12-month price target of $67 per share, up from $60.

Merrill Lynch gaming analyst David Anders hiked his 2002 estimate from $3.20 to $3.40 per share, and his 2003 estimate from $3.65 to $4 per share.

Bear Stearns gaming analyst Jason Ader issued a research note projecting IGT would earn between $3.40 and $3.50 per share with Anchor, up from an earlier estimate of $3.25 per share. Ader said he would issue new estimates following the deal's close.

Based on IGT's historical multiples, "IGT's shares should track closer to $78-$80 per share," Ader wrote.

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