Slot stocks jump on Indian machine ruling

By Liz Benston

Tuesday, March 2, 2004 | 10:59 a.m.

The refusal by the U.S. Supreme Court on Monday to hear a dispute over the legal status of slot machine-like bingo machines is expected to open the door to a proliferation of the devices in tribal casinos nationwide, experts say.

The move affirms two lower courts' decisions affirming the right of tribes to offer so-called Class II games and boosts prospects for traditional slot makers that had been hesitating to enter the market pending the outcome of the case, they say.

The move follows approval last week of a bill in the Oklahoma House that legalizes three forms of Class II slot machines in Oklahoma, the nation's largest Class II market.

"These two events essentially could allow unchecked gambling expansion of Native American casinos with Class II games, Jefferies & Co. gaming and slot machine analyst Lawrence Klatzkin wrote in a research note to investors today. "At this point, the Class II market is essentially untapped by (traditional slot) manufacturers."

Stocks of slot machine makers rose to all-time highs today on the news in spite of analysts' estimates that in some cases already reflected a positive decision. Shares of Reno-based IGT climbed $1.23 to an annual high of $42.82 per share, shares of Alliance Gaming Corp. of Las Vegas rose 90 cents to $27.90 and shares of Chicago area-based WMS Industries Inc. rose $1.27 to $28.65. Shares of Multimedia Games Inc., which controls most of the market for Class II machines, rose $1.60 to $23.99. The Austin, Texas-based company announced a 2-for-1 stock split Monday following a 125 percent increase in the company's stock over the past year.

The Class II designation was created by a federal law in 1988 that allowed tribes to have bingo devices and also allowed slot machines under a tribal-state compact. Bingo devices are considered Class II games, while traditional slot machines, table games and other types of Las Vegas-style games are classified as Class III games. In recent years, Class II games have evolved into replicas of slot machines, complete with spinning reels, sound and flashing lights. But tribes and casino representatives say the machines still act like bingo devices because the outcome is determined by a centrally-determined selection of numbers rather than by a computer chip in each device, as with slot machines.

Unlike Class III games, tribes may offer an unlimited number of Class II machines, which don't require a compact with the state.

About nine states, including California and Nevada, had supported the federal government's appeal of one of the U.S. Circuit Court decisions involving the Seneca-Cayuga and Fort Sill Apache tribes of Oklahoma. State governments are concerned about allowing unfettered gambling for Indian tribes as well as allowing slot machine-like machines that weren't originally envisioned by federal regulators.

The Supreme Court's inaction may lead some states that had resisted Class III slot machines by tribes to negotiate compacts that allow traditional slots in exchange for a cut of slot revenue that wouldn't otherwise be available from Class II machines, Goldman, Sachs & Co. casino analyst Steven Kent wrote in a research note to investors.

That scenario would most benefit IGT, which controls an estimated 70 percent of the nation's slot machine market, analysts say.

IGT, which is already showing Class II machines at trade shows, expects to transform about 40 of its slot machines into Class II versions by mid-2004, UBS Warburg gaming analyst Robin Farley wrote in a research note. The company anticipates testing these games in Oklahoma and California by mid-April, she said. Potential markets also include Washington, Florida and Alabama, she said.

The National Indian Gaming Commission, the federal agency that regulates tribal casinos, is developing a national technical standard for Class II games that is expected sometime this year. The commission was forging ahead on a standard without waiting for any court decision on the matter.

Other states that offer both kinds of machines are expected to see an increase in Class II devices in tribal casinos, they say.

"In certain states like California, where the number of Class III devices are limited (by state compacts), we would anticipate casino expansion with Class II devices," Merrill Lynch casino analyst David Anders wrote in a research note.

The Oklahoma bill, which legalized Class II machines for tribal casinos and racetracks, already passed the state Senate and is expected to be signed by the governor.

Oklahoma represents about 75 percent of the Class II market and will now be open to the major slot makers, Deutsche Bank Securities casino analyst Marc Falcone said.

"This will create a more regulated and more efficient market with new games, products and technologies," Falcone wrote in a research note last week.

Not all analysts agree on the legal certainty of Class II machines.

Mark Abramson, a gaming analyst for Bear, Stearns & Co., said the ramifications of the Supreme Court's inaction "can not be known at this time."

"The legal status would be even more clear if the Supreme Court had heard the cases and decided in favor of the Indian tribes," Abramson wrote in a research note. "As it is, there remains a possibility (albeit very remote at this time) that the DOJ could stage another legal challenge in a state in one of the other Circuit Courts."