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Lottery deal gives IGT foothold with Chinese

3 May 2007

By Matthew Crowley

Las Vegas, Nevada -- International Game Technology, the Reno-based slot giant, on Wednesday announced an alliance with China LotSynergy Holdings Ltd. that will let it gain a foothold in the China lottery market.

In a statement, IGT said it will invest $103 million in China Lot Synergy through shares and a convertible note. IGT said it expects the deal to close by the end of the month. An IGT representative did not return a call for comment Wednesday afternoon.

In a research note Wednesday, Morgan Joseph & Co. analyst Adam Steinberg suggested that the tie to China Lot Synergy is IGT's first step toward gaining a piece of China's potentially lucrative market. Traders bid up IGT on the news; the slot makers shares rose $2.28, or 5.99 percent, to close at $40.33 on the New York Stock Exchange.

Only two types of lottery are legal in China, Steinberg wrote -- welfare lottery and sports lottery. Proceeds from welfare lottery, which is the larger of the legal lotteries, supports charitable causes, he said. Only welfare lottery may legally offer video lottery terminals in China.

China Lot Synergy has a 50 percent interest in Corich International, which has the contract with the China Welfare Lottery to offer video lottery terminals.

In its annual report, China Lot Synergy said it had about 10,700 video lottery terminals operating in 257 municipal cities and 28 provincial cities throughout China at the end of 2006.

Deutsche Bank analyst Bill Lerner noted that the Chinese government-set machine count could rise to 300,000 in the medium term.

"While ambiguous, we conservatively estimate that about 100,000 could be installed by 2011, growing to 200,000 total installations by 2015." Lerner wrote.

Lerner noted that video lottery terminals now about $275 per machine per day and China Lot Synergy receives about 2 percent of gross gaming revenues.

Stifel Nicolaus analyst Steven Wieczynski said the deal is another example of IGT's efforts to expand its reach internationally.

"We believe entering the Chinese lottery market is a huge step for IGT," he wrote. "IGT remains our top pick in the gaming and leisure space."

Steinberg and Wieczynski both rate IGT "buy."

Other gambling equipment companies followed IGT higher Wednesday. Las Vegas-based Shuffle Master rose 61 cents, or 3.63 percent, to $17.41 and Las Vegas-based Bally Technologies, up 46 cents, or 1.97 percent, to $23.80. Meanwhile, Waukegan, Ill.-based WMS Industries rose 80 cents, or 2.05 percent, to $39.82.

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