Analysts go radio-silent as proxy fight roils IGT

14 January 2013

Wall Street sang the praises of IGT - International Game Technology and Chief Executive Officer Patti Hart in December following a daylong meeting with investors to discuss the slot machine manufacturer's 2013 business prospects.

Last week, after news surfaced of a proxy fight over control of IGT, the only sound heard from the equity and high-yield research community concerning the company was the chirping of crickets.

Analysts went radio-silent.

Finally, late Friday, Morgan Stanley gaming analyst Mark Strawn addressed a preliminary proxy statement Ader Investment Management had filed with the Securities and Exchange Commission.

The New York-based firm, headed by ex-analyst Jason Ader, wants to place three directors on IGT's board to change the company's direction.

Ader said IGT should focus more on slot machine development and gaming systems, rather than recent high-cost forays into social gaming and the acquisition of an overseas online gaming operator.

"Overall, we believe the group's requests are in line with investor expectations," Strawn wrote. "At this point, (Ader) lack(s) a company-specific plan to overcome industry (and) structural impediments to growth."

Analysts don't want to take sides in the dispute that pits IGT's current board against former IGT Chairman and CEO Charles Mathewson and the highly respected analyst-turned-investor.

Industry insiders pegged the odds at 50-50 that the proxy battle will result in a change at the top of IGT, including a revamped board of directors and a new management team.

Even if the current leadership prevails, there will be blood on the battlefield. IGT is licensed in almost every gambling jurisdiction in the world, has headquarters in Las Vegas and Reno, and employs more than 2,900 workers in Nevada.

Let's be clear: Mathewson and Ader are not your average dissatisfied shareholders concerned about the company's direction or diminished stock price.

Mathewson, 84, headed IGT for 17 years and is credited with spearheading the company's phenomenal growth in the 1990s. Ader, 44, has been on the board of directors for Las Vegas Sands Corp. since 2009. He was senior managing director at Bear Stearns from 1995 to 2003, where he followed the gaming industry.

Last week, IGT and Ader traded charges through preliminary proxy filings.

The heart of the matter is clear: Mathewson and Ader want a change in direction for IGT, a company they believe is undervalued, has lost prestige in the gaming industry and needs to regain focus.

They also want to show Hart the door.

IGT's current leadership believes the company has been headed in the right direction while the gaming manufacturing sector weathered a stormy economic environment over the past few years that stymied slot sales.

Hart took over as CEO in April 2009. Her background is in technology, having headed companies based in California's Silicon Valley.

In September, she told the Review-Journal that IGT's $500 million acquisition of social gaming giant DoubleDown Casino would eventually be viewed as "the best investment" IGT ever made, behind the development of cashless gaming.

But Hart has also made enemies during her tenure, namely Mathewson, who retired from IGT in 2003, but held the title of "chairman emeritus."

IGT severed ties financially with Mathewson in 2010. His son, Robert Mathewson, was reportedly told not to stand for re-election as an IGT board member a year later.

Sources said last week that Charles Mathewson, who blames Hart for the 16 percent decline in the company's stock price in 2012, has been plotting revenge for the past two years.

In its preliminary proxy filing, IGT said it has had "a long-running dispute" with Mathewson, who "has repeatedly attempted to exert influence over the company's operations and extract personal financial benefits at the expense of all other shareholders."

Mathewson and Ader control more than 8 million shares of IGT, or roughly 3 percent of the company's outstanding stock. This may not seem like a large number. But IGT has many longtime shareholders, some of whom made a lot of money when Mathewson was CEO and remain loyal to the former chairman.

IGT likes to tout itself as a gaming technology company. But the largest albatross around its neck is Entraction, a Swedish online gaming operator acquired in 2011 for $115 million.

In June, IGT told the Gaming Control Board it closed Entraction websites in several Eastern European jurisdictions frowned upon by gaming regulators. Also, IGT was in preliminary talks with U.S. Department of Justice officials concerning wagers placed by American gamblers before 2006.

IGT shut down Entraction's operations a few months later. The company said the business model suffered because of regulatory changes.

IGT plans to use the Entraction technology in legal online gaming markets, but the investment community saw the purchase a colossal screw-up.

In December, analysts treated the Entraction deal as old news.

The investment community gave IGT high marks heading into 2013 follow the investor day, saying Hart and other managers did an excellent job describing how the company would drive growth across its core businesses and demonstrating the DoubleDown's financial potential.

We'll see if those sentiments are still there once the proxy fight plays out.

Copyright GamingWire. All rights reserved.

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