Alliance buying Reno firm

By Liz Benston (contact)

Tuesday, Nov. 11, 2003 | 10:59 a.m.

Alliance Gaming Corp. has agreed to purchase a Reno-based manufacturer of slot machines for Indian casinos and state lottery agencies for as much as $191 million, instantly gaining a foothold in markets beyond those offering traditional, Las Vegas-style slots.

Upon the close of the deal, the Las Vegas slot maker expects to purchase the shares of Sierra Design Group for about $27 million in cash and 736,000 shares of Alliance Gaming stock valued at $18 million. Over three years following the closing, Alliance would pay up to $95 million in equal portions of cash and stock if Sierra meets certain performance objectives. The purchase is subject to regulatory approvals and is expected to close in the first half of next year.

Alliance Gaming also has loaned Sierra $51 million for the company to repay certain long-term debt and has agreed to provide a $24 million revolving credit line to Sierra for working capital and to promote the company's growth. The loans are secured by Sierra assets.

Alliance shares rose 11 cents in early trading today to $26.11.

Alliance Chief Financial Officer Robert Saxton said the company intends to operate Sierra Design as a standalone subsidiary and doesn't anticipate layoffs, though some duplicate positions might be eliminated.

"The project won't close until sometime in spring. It's too early to say," Saxton said.

Sierra employs about 370 people, primarily hardware and software engineers. Alliance anticipates keeping Sierra field offices in each state where the company offers machines, which don't duplicate Alliance offices, Saxton said. Sierra also operates a small design center in Las Vegas. The future of that office hasn't been determined, he said.

Privately held Sierra Design makes so-called Class II machines, which are electronic bingo devices that resemble slots and generally appear in tribal casinos that don't offer slot machines. The company also makes slot machines called video lottery terminals (VLTs) that are operated by government lottery agencies from centralized computer systems. Alliance is generally recognized as the No. 2 maker of Las Vegas-style slots, behind Reno-based International Game Technology.

The acquisition gives Alliance access to growing Class II markets such as Oklahoma, Florida and Alabama as well as a centrally operated system of about 9,300 video lottery machines in Washington. Sierra also operates slot machines in Nevada and Connecticut and was one of four companies, along with Alliance, to be selected to provide video lottery machines across eight racetracks in New York.

"The acquisition of Sierra Design Group makes a powerful statement about Alliance Gaming's plans for future growth while giving us an immediate impact in new and emerging markets," Alliance President and Chief Executive Robert Miodunski said in a statement.

"With the emerging (video lottery terminal) and 'racino' markets poised for growth both domestically and internationally, we are now favorably positioned to be a significant provider of technology to these markets," Miodunski said.

The acquisition is "not surprising although maybe expensive," Deutsche Bank Securities analyst Marc Falcone wrote in a research note to investors today. "While we are positive on the merits of this acquisition, shares could trade mixed near-term until investors digest this acquisition." Sierra likely operates with a slightly negative to neutral cash flow, he said.

Alliance said the deal is expected to dilute company earnings by about 10 cents per share in 2004. It is anticipated to contribute up to 15 cents per share in earnings on incremental revenue of about $100 million in 2005 and up to 23 cents per share on incremental revenue of about $120 million in 2006.

"SDG has become a strong player in the gaming industry in a short period of time through its customer relationships, innovative products and an overriding commitment to cutting-edge technology," Miodunksi said.

Recently, the National Indian Gaming Commission, the regulatory body established by Congress to oversee tribal casinos, has issued advisory opinions essentially legalizing certain bingo-slot hybrids. Previously, the federal government's interpretation of Class II machines was vague, allowing some companies to exploit loopholes by creating their own versions of bingo machines that resemble Las Vegas-style slots.

That news led to last week's announcement that International Game Technology, the world's largest slot maker, intends to begin developing Class II games and carve out a dominant market position in areas that can't offer traditional slots or otherwise have restrictions on such machines.

Unlike traditional slot machines, tribes don't need state casino compacts to operate Class II devices. Some states such as California restrict the number of Las Vegas-style slots tribal casinos can offer, while others, such as Oklahoma, prohibit them altogether.