Nevada slot giants merge: Job losses are expected to be minimal

David Strow

Monday, July 9, 2001 | 11:06 a.m.

In the biggest deal in the gaming industry this year, International Game Technology of Reno -- a company that controls two-thirds of the U.S. slot machine market -- announced Sunday it will acquire Las Vegas-based Anchor Gaming for more than $1.3 billion.

The deal between the long-time partners is expected to close by January, assuming it wins the blessings of gaming regulators across the country, federal officials and Anchor shareholders. If completed, Anchor will remain based in Las Vegas as an independent subsidiary of IGT.

"We've looked at Anchor for some time," Tom Baker, IGT chief executive, said. "In some ways, I wish we'd been able to put this together some time ago at lower (stock) valuations. In this particular case, the stars just came together."

IGT will swap its shares on a one-for-one basis for Anchor shares, and will also assume $430 million in Anchor debt. That should give the deal a value of somewhere between $1.3 billion and $1.4 billion, IGT officials said this morning.

Anchor stock rose $2.18 to $56.09 this morning, while IGT fell 72 cents to $58.48.

Anchor employs about 2,700 people, primarily in Las Vegas; IGT employs 4,000, including 250 in Las Vegas. But few layoffs are expected, officials with both companies said this morning. Anchor already cut its work force by about 200 during the last year as part of restructuring its lottery unit.

"It's too early to tell right now, but there is no anticipation of layoffs," Anchor spokesman Howard Stutz said.

Since inking a joint venture in 1996, Anchor's business has become almost inextricably linked with IGT's. Of the 19,000 slot machines Anchor had installed in casinos as of March 31, roughly 16,000 were produced under the IGT-Anchor joint venture. This venture includes one of the most popular slot machines, the Wheel of Fortune.

Anchor released an "I Dream of Jeannie" slot under the joint venture last year, and the two companies recently announced intent to release another seven games under their partnership in the coming years.

Of the $49 million in cash flow Anchor produced in the quarter ending March 31, about 80 percent came directly from Anchor's partnership with IGT.

"If you take a look at the strategic side of each company, the two companies match up exceedingly well," said Anchor Chief Executive T.J. Matthews, who will become the merged company's chief operating officer. "Consolidating our revenues ... makes us financially stronger and allows us to explore future opportunities for growth.

"Conversations have always existed between our companies, whether they belonged together. We feel our shareholders are getting a great value."

The joint venture includes other key technologies, including patents to "coinless" slots. Currently, every major gaming company selling slots with ticket-in, ticket-out capabilities licenses patents held by four companies -- IGT, Anchor, Alliance Gaming Corp. and MGM MIRAGE. These patents are currently marketed by Anchor, but will now fall under IGT's control.

IGT is estimating the deal will increase its earnings by about 5 percent to 7 percent per year.

"This transaction is going to allow IGT to recognize 100 percent of the revenues and the profits now shared by both companies," Baker said. "The strategic benefit to the resulting entity is very significant. Although IGT has had the right to develop (slots based on Anchor's intellectual property), this removes any ambiguity about where we're going with the development of some of this intellectual property."

But little of those gains will come by combining or cutting operations, Baker said.

IGT now controls about 65 percent of the 600,000-machine U.S. slot market. But the Reno company is insisting it doesn't expect trouble from federal authorities under anti-trust laws.

"The machines in the field for Anchor are mostly on IGT platforms to begin with," Ed Rogich, IGT vice president of marketing, said. "So you're not really changing the mix here ... it doesn't have a major effect on market share. We've reviewed (the deal) from all aspects with our legal group."

What will be new for IGT are two business lines -- casino operations and the lottery business. Anchor operates three casinos -- the Pala Casino near San Diego, a tribal casino opened earlier this year and two smaller casinos in Colorado.

"We've stayed away from operating casinos (in the past)," Baker said. "We don't currently have any plans to change the strategy we've had for some time, but we're not ready to say those casinos are for sale. They're not. The management teams are in place, they're being well run. (But) we don't have any plans to expand the casino side of the business.

"We didn't acquire Anchor because they were in casino operations."

An area that IGT is looking at expanding after the deal is Anchor's lottery equipment subsidiary, Baker said.

"Lotteries aren't in a growth period right now," Baker said. "But there haven't really been any value-add products (for the lottery industry) in some time. With the combination of IGT and Anchor, we'll take a fresh new look at that, and we may be able to bring some things to the online lottery side they haven't seen before."

Views were mixed this morning on how much growth IGT will eventually be able to pump out of these new business lines.

"Though we like the deal, it was an eventuality and does not change our investment view of IGT," Lehman Bros. gaming analyst Joyce Minor said. "We still believe IGT's ... growth is decelerating, California has hit its peak, the jury is still out on cashless ... and IGT's valuation is high."

However, Minor said IGT's growth could pick up somewhat as a result of acquiring the contract to manage the Pala casino.

"We believe this transaction is a long-term positive for IGT, as it gives it full control of 'Wheel of Fortune,' the most successful slot machine on casino floors," Goldman Sachs analyst Steven Kent said. "This transaction should be highly accretive (to IGT's) earnings."