Slot makers hurt by Illinois ruling

SPRINGFIELD, Illinois -- The hopes of slot machine manufacturers in Nevada looking to Illinois as an opportunity for millions of dollars in sales have been dashed by a state appellate court.

Gaming analysts said International Game Technology, Bally Technologies, WMS Industries and other slot makers might have to re-evaluate their quarterly and annual earnings guidance reports because of the potential market loss of some 35,000 video slot machines.

An Illinois appellate court ruled this week that a $31 billion capital construction bill, approved in 2009, is unconstitutional because it violates the state's single-subject rule.

The bill, which had several components, would have legalized slot machine-like video lottery terminals at the state's bars, taverns, restaurants, truck stops, fraternal organizations and veterans halls.

The idea that locations in Chicago could have participated in the plan to add slot machines was potentially lucrative for the game providers.

"For the equipment manufacturers this news is a negative," Janney Montgomery Scott gaming analyst Brian McGill told investors. "The video gaming act stands as the single biggest potential driver for growth in new markets going forward."

Analysts expect Illinois Gov. Pat Quinn to appeal the ruling. The appeals process could delay shipments by slot machine manufacturers well into next year.

Morgan Joseph gaming analyst Justin Sebastiano said that if the ruling holds, the earnings per share of WMS -- which has corporate headquarters outside Chicago -- could fall by 5 cents per share, IGT could see a drop of 2 cents per share and Bally could lose 3 cents per share. Other gaming analysts said there could be even larger declines.

Union Gaming Group principal Bill Lerner thought Illinois would have accounted for nearly 40 percent of all North American slot machine shipments from the second half of 2011 until the end of 2012.

"This expansion opportunity was not unimportant to the gaming equipment suppliers," Lerner said.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said manufacturers will have to hope other slot machine expansion opportunities will open in the coming year, but he was hard-pressed to name any potential new jurisdictions.

"(The) news will bring the sluggish North American replacement market into focus," Wieczynski told investors. "Manufacturers will likely to have to rely on a slight pickup within this segment to meet internal growth expectations."

Most analysts said the appellate court took issue with the many unrelated subjects of the bill, not the VLT legalization. They were also not surprised that Illinois was the source of bad news for the gaming industry.

"Most industry followers would probably agree that the state of Illinois is one of the most unpredictable gaming markets in the country," Roth Capital Markets gaming analyst Todd Eilers said. "In fact, the law that was passed to allow video gaming devices was even a surprise at the time."