Slot manufacturer could see buyout, chief executive says

David Strow

Tuesday, Feb. 12, 2002 | 11:14 a.m.

Yet another small slot maker appears ready to join the trend of buyouts in the gaming equipment industry.

Mikohn Gaming Corp. of Las Vegas announced Monday it was examining "strategic alternatives to enhance stockholder value, including the sale of the company."

These might seem strange comments for a company that has seen its stock double in value in the last 12 months. But David Thompson, chairman and chief executive of Mikohn, said he's received several inquiries from potential buyers recently.

"It's a very small industry, and we've had inquiries from time time whether Mikohn could be bought ... and we've had inquiries from companies wanting to know if we could buy them," Thompson said. "We don't want to pass up any opportunities for our shareholders."

Another alternative the company will explore with investment banker Jeffries & Co. is selling off "operating units and product lines which no longer fit our strategic objectives," though Thompson was not specific on which businesses Mikohn would be willing to sell.

Though Mikohn signaled it could be both a buyer or a seller, gaming analyst Andrew Zarnett believes the company is far more likely to be a buyout target. He pointed to a Monday presentation made by Thompson at the American Gaming Summit in Las Vegas, where Thompson referred to suitors "knocking on the door."

"People don't usually knock on your door asking, 'Will you buy us?"' Zarnett said. "Clearly, it's more of (companies inquiring about a buyout of Mikohn)."

Two Las Vegas gaming equipment companies have already been bought out in the last 12 months -- Anchor Gaming by International Game Technology and Casino Data Systems by Aristocrat Technologies.

Many analysts believe Mikohn, which employs more than 700 people worldwide, could be an attractive addition to that list.

"A lot of the risk associated with that business is no longer there," Zarnett said.

Not everyone, however, agrees Mikohn is an attractive target. One is Dave Ehlers, chairman of Las Vegas Investment Advisors, who points toward a growing debt load.

"They are in perilous financial condition," Ehlers said. "It's a house of cards."

Over the nine-month period ended Sept. 30, 2001, Mikohn posted revenues of $80.9 million, up 6 percent, while cash flow increased 18 percent to $22.6 million.

But over the same time period, net income fell 57 percent to $1.1 million, and the company's debt load increased from $137.5 million to $152.9 million.

Its stock price has risen from a low of $3, hit in March, to more than $8 a share in recent days. But Mikohn has been declining since its Monday announcement -- the stock closed Monday at $7.79, down 14 cents. It fell another 36 cents this morning to $7.43.

Mikohn is spread across a wide range of businesses. Historically it has been a seller of casino signage and progressive jackpot systems, but it branched out into proprietary table games several years ago. The casino game "Caribbean Stud" is a Mikohn product.

In 1999, the company began an aggressive push into the slot machine business. With licenses obtained from Hasbro, Mikohn released slots based on "Yahtzee" and "Battleship." Games based on "Clue" and "Trivial Pursuit" will follow later this year, Thompson said.

"People in the industry know these are attractive games," Thompson said.

Within the gaming industry, four companies must be considered potential bidders for Mikohn, analysts say -- Alliance Gaming Corp., WMS Gaming, Aristocrat and Konami Gaming. Both Aristocrat and Konami entered the Nevada gaming market recently, and both could diversify and expand their American holdings by acquiring Mikohn, analysts say. And all four companies would be able to move into the proprietary table game market by buying Mikohn, a business none of them are currently in.

Alliance hasn't made a large acquisition in recent years, "but you can't leave them out, if you consider where their stock price is today," Zarnett said.

While Alliance's stock has soared, WMS' has been declining, as bugs in its game software led to longer regulatory approval cycles, hurting its earnings. That's led some to believe WMS could be a takeover target itself -- but Zarnett believes it's possible WMS could be interested in buying Mikohn.

"This is not a large transaction (by recent gaming industry standards)," Zarnett said. "There could be a lot of cost savings between the two companies."

IGT has been an aggressive buyer, and Zarnett believes that company might emerge as a buyer as well. But Falcone disagrees with this, believing antitrust issues could create problems.

"IGT is kind of out of it (acquisition mode) right now," Falcone said.

While Falcone agrees Mikohn has attractive assets, he believes it's more likely a buyer will emerge for pieces of the company, rather than the entire firm.

"I don't see many outright acquirers at this point," Falcone said.