Wednesday, November 12, 2003
Copyright © Las Vegas Review-Journal

SLOT MACHINE MANUFACTURING: Alliance Gaming buys Sierra Design

Las Vegas corporation makes $191 million deal for bigger presence in bingo, racino markets

The slot machine market was shaken up Tuesday by the announcement of a $191 million deal for Alliance Gaming Corp. to buy out privately held Sierra Design Group.

"The acquisition is not surprising, but it's also not cheap because there've been rumors (that Sierra Design) was actively being marketed," Deutsche Bank analyst Marc Falcone said.

The total acquisition cost of $191 million consists of $27 million in cash, $18 million of Alliance Gaming stock, $51 million in debt repayment and up to $95 million in contingent payments that may be due in the first three years if Sierra Design achieves key financial objectives, he said. If required, contingent payments will be paid equally in cash and stock.

Alliance Gaming, based in Las Vegas, is also guaranteeing a $24 million line of credit for Sierra Design, a leading supplier of Class II and Class III gaming devices.

"It's a good strategic deal for Alliance Gaming, but they've got to make it work," Falcone said.

The acquisition gives Alliance Gaming immediate entry to the fast-growing electronic bingo machine -- Class II gaming -- markets in Oklahoma, Florida and Alabama; the centrally linked progressive Class III games in Washington; and video lottery terminal, or racino, markets such as New York state where it now offers no products.

"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," said President Bob Miodunski.

Alliance Gaming Chief Financial Officer Bob Saxton called the acquisition of the Reno-based company a strategic move, giving his company the ability to offer products in every type of gaming market and and taking market access away from competing slot manufacturers.

Falcone said it also will undermine International Game Technology and WMS Gaming, which had served the nontraditional markets through Sierra Design.

For Reno-based International Game Technology, he said the buyout represents a missed opportunity because IGT manufactures most Sierra Design slot machines and licenses content to the company for Class II games.

"Sierra Design could have provided similar ease of access to Class II markets, the Washington market, and the doubling of market share in New York," Falcone said.

Further, WMS Gaming, with marketing, administrative and warehousing operations in Las Vegas, has an agreement with Sierra Design to license content for games for the New York racino market, which will be renegotiated or terminated, although it is unclear exactly what future arrangements will be.

IGT declined to comment. WMS could not be reached for comment.

Falcone said the buyout is not expected to have a material effect on Shuffle Master, the other major Sierra Design licensee.

The electronic bingo markets Alliance Gaming will target have been considered particularly important since a recent National Indian Gaming Commission ruling that approved Class II machines as legal gaming devices in tribal casinos.

Class II gaming is limited to bingo and similar type slot games on tribal lands and does not require a state compact. Class III gaming includes many traditional forms of slot and gaming machines.

The federal ruling, in effect, allows American Indian tribes that don't have compacts with states to offer unlimited numbers of bingo slots.

Since the newly approved devices are very similar to traditional casino slot machines, the decision is also likely to clear the way for the further growth of tribal gaming.

In addition, the acquisition will more than double Alliance Gaming's share of the New York VLT market, where Sierra Design has been one of four major suppliers.

Alliance Gaming shares closed Tuesday at $25.90, down 10 cents or 38 percent on 1 million shares trading, double the normal volume.