Slot makers may hit jackpot on states' gaming bet

BANGALORE (Reuters) - Slot-machine makers such as International Game Technology (IGT.N), Bally Technologies Inc (BYI.N) and WMS Industries (WMS.N) may see a significant boost to their results over the next two years as two U.S. states bet on gaming to help bridge their budget deficits.

Ohio and Illinois, facing billion-dollar-plus budget deficits and constrained by high unemployment levels, have recently passed new revenue-generating measures such as allowing slot machines in bars and race tracks.

The combined legislative initiatives in the two states could add about 64,500 new slot machines to the gaming market over the next two to three years, Todd Eilers of Roth Capital Partners wrote in a note.

He estimates there are around 940,000 slot machines currently in the United States.

"These (measures) are ways for states to generate additional tax revenue without raising taxes," Eilers said by phone.

Sterne, Agee & Leach analyst David Bain said, "Different state legislatures are coming to the realization that they just need to find sources of cash, and gaming has worked out as an indirect tax which can be used to fill budgetary coffers."

Last week, Ohio Governor Ted Strickland signed a bill that will see the introduction of 17,500 new video lottery terminals at seven state race tracks.

He has said the initiative would raise about $933 million over the course of Ohio's next two budget years.

Ohio, which faces a $3.2 billion budget gap, may also hold a voter referendum in November to decide on allowing four new casinos in the state.

Roth Capital's Eilers expects about 10,000 new slot machines to be added to the Ohio market over the next couple of years if these casinos come up.

Illinois, which is facing a $9.2 billion deficit for fiscal 2010, expects new gaming initiatives to raise $300 million a year once fully implemented.

On Monday, Illinois Governor Pat Quinn signed into law legislation allowing licensed bars in the state to operate up to five video-gaming devices each.

If all bars were to get five licenses each, the theoretical market opportunity would be about 75,000 machines, Eilers said.

"But most people we talked to suggested that 35,000 is a more realistic figure," he said.

Bain estimates the bill to add about 20,000 to 25,000 machines to the Illinois market over the next couple of years.

Besides, he expects the gaming expansion in Ohio to prompt the Kentucky legislature -- which recently shot down a proposal to allow slot machines at its race tracks -- into reviewing its decision.

"What is Kentucky going to do now? Watch their state citizens travel to Ohio to gamble?"

EARNINGS BOOST

Eilers expects the measures in Illinois and Ohio to boost IGT's earnings by 44 cents a share, Bally Technologies' by 86 cents a share and WMS's by 88 cents a share over the next two to three years.

Sterne Agee's Bain said for every 1,000 units sold, the one-time incremental effect on earnings is usually 1 cent to 2 cents a share for IGT, about 3 cents a share for Bally Technologies and 3 cents to 4 cents a share for WMS.

After that, revenues and profits depend on how long it takes to replace a slot machine with a new one, which may vary from three to five years, he said.

Both analysts said IGT will grab a majority of the new market share in Illinois, as the Reno, Nevada-based company has a dominant video poker and multi-game presence.

Bain estimates IGT will garner about 40 percent to 50 percent of both markets, WMS about 25 percent and Bally Technologies more than 20 percent.

Eilers sees IGT taking about 60 percent of the Illinois market, Bally about 19 percent and WMS about 15 percent.

(Reporting by Mihir Dalal; Editing by Vinu Pilakkott)