Inside Gaming: Acquisition boosts prospects for slot machine maker

It's hard to miss Ainsworth Game Technology's new North American headquarters. The 291,000-square-foot building, currently under construction in the southwest valley along the 215 Beltway near South Jones Boulevard, is already emblazoned with the red Ainsworth "A" logo.

The Australian-based slot machine producer took a significant step last month to begin filling the two-story office, manufacturing and warehouse facility.

Ainsworth will $38 million to acquire Nova Technologies, a small South Carolina-based slot machine company that provides games to the Indian casino market. The deal is expected to close early next year. Company CEO Danny Gladstone spend said the acquisition would complement Ainsworth's current operations and expand its presence within the Indian gaming market.

The transaction marked the third purchase within the last 13 months of a Class II slot machine company by a traditional manufacturer. Last year, Australia-based Aristocrat Technologies spent $1.3 billion to purchase Video Gaming Technologies. In May, American Gaming Systems bought Cadillac Jack for $382 million.

"Nova was one of the few remaining Class II providers that hadn't been acquired," Eilers Research founder Todd Eilers told investors.

Class II games have a different set of characteristics that separate the devices from traditional Las Vegas-style slot machines. The Indian Gaming Control Act provides a set of regulations and rules governing their use. The games are managed by a central server. The machines often incorporate electronic versions of bingo or slot games that pit player versus player.

Eilers said Class II games are tax-free while traditional slot machines are taxed from 6.25% in Oklahoma to up to 25% in other markets.

"If Class II game performance is somewhat close to (traditional slot machine) performance, the games could be more profitable to the operator on a net basis after tax," Eilers said.

The use of Class II games by Indian casinos has rebounded from a low of 42,000 games in 2009, to roughly 55,000 games this year, mostly where the manufacturers share in the games' revenue with the tribal casino operators.

Ainsworth is acquiring Nova's 1,300 games that are located in 11 states.

Mike Dreitzer, the president of Ainsworth North America, said there is ample room to expand the company's Indian gaming presence. Ainsworth's game themes and titles, already used in traditional casino settings, will find their way into the Nova slot machine platform. Ainsworth will also take on Nova's sales and service team. He said Nova's slot machine manufacturing business will be transferred to the new Las Vegas facility.

"It's a strategic move," said Dreitzer, who has headed the company's U.S. operations since 2013. "The merger offers the opportunity to enter markets where we haven't been able to place products."

Dreitzer cited Oklahoma as a growth market. The state was the nation's No. 2 producer of Indian gaming revenue in 2013 with $3.8 billion, according to Casino City's Indian Gaming Report. The market trailed only California's $7 billion industry.

Eilers told investors the transaction allows Ainsworth to expand its gaming operations business in North America. He predicted the Class II slot machines could begin increasing, with possibly 76,000 games in use by 2017. Two Texas Indian tribes were recently approved to reopen their casinos by the U.S. Department of Interior and the National Indian Gaming Commission.

"We view Class II as a growth market in the near term," Eilers said. "Furthermore, the acquisition of Nova gives Ainsworth the technology platform and presence in certain tribal markets where Ainsworth was not well represented."

Dreitzer said Nova's technology could be utilized to pursue slot machine route operation contracts in video lottery markets, such as Oregon, Canadian provinces and Latin America.

The gaming equipment sector is dominated by International Game Technology and Scientific Games Corp. Both grew over the past 24 months through $15 billion in acquisitions.

Analysts who follow the gaming equipment sector have been waiting to see how the midlevel companies, notably Aristocrat, Konami Gaming and Ainsworth, fill in the holes.

The Nova transaction, while not large in terms of dollars, gives the company an additional business model. Gladstone told investors acquisition will have an immediate and positive impact on the company's earnings.

Ainsworth Game Technology was founded by slot machine industry pioneer Len Ainsworth, who also founded Aristocrat in 1953. At age 92, the affable Ainsworth — who according to Forbes has a net worth of $1.25 billion — has skin in the game. As the company's chairman, his goal has been to expand the business to North America.

A year ago, Ainsworth participated in his Las Vegas headquarters' ceremonial groundbreaking with Gov. Brian Sandoval.

"I'm often asked about the future of gaming and slot machines," Ainsworth told Global Gaming Business Magazine last year. "I always respond that the first slot machines appeared more than 110 years ago, and I suspect they will be around a lot longer."