The West Greenwich-based lottery giant says it will not release any more details until its board makes a decision about the offer.

01:00 AM EDT on Tuesday, September 13, 2005

BY ANDREA L. STAPE
Journal Staff Writer

GTECH Holdings Corp.'s board of directors is considering its options after an unidentified company offered to buy the West Greenwich-based lottery giant.

GTECH's disclosure that a buyer made an offer for the company sent its stock soaring 14.4 percent, or $4.38 a share, yesterday to close at $34.81 a share.

GTECH, the world's largest provider of lottery systems and services, did not release the name of the suitor.

"The company does not intend to make any further statement regarding these matters until it either reaches a definitive agreement regarding a transaction or determines not to pursue any such transaction," read GTECH's statement yesterday. GTECH has hired Citigroup Global Markets as a financial advisor to help the board examine its "strategic options," according to the statement. This is the first time in the company's history that it has made a sale offer public, said Robert Vincent, a spokesman for GTECH.

"As a publicly traded company you're always available to be acquired," said Vincent. "The board of directors, as representatives of the shareholders, have a responsibility to maximize shareholder value. If they have an offer that potentially meets that goal, they consider it."

Speculation among stock analysts about the potential buyers was all across the board yesterday. In a note to investors, Morgan Stanley analyst Celeste Mellet Brown said the buyer could be a private equity firm.

In an investor note, CIBC World Market Corp.'s analysts said the most likely purchasers are GTECH's competitors International Gaming Technology or Harrah's Entertainment Inc. Harrah's and GTECH entered into a strategic partnership earlier this year and GTECH publicly supported the casino operator's attempts to build a casino in Rhode Island. Harrah's started placing GTECH's video slot machines in its casinos.

Harrah's is continuing its casino push and is awaiting a ruling from the Rhode Island Supreme Court on the legality of the casino proposal. Reno, Nevada-based IGT is a manufacturer of casino games, such as slot machines.

J.P. Mark, with Farmhouse Equity Partners in Portsmouth, said he doubted the buyer is a lottery competitor due to the possible regulatory problems.

"It could be someone in the gaming industry or someone in the information-technology industry," said Mark.

The company does not have a poison-pill strategy to thwart takeovers, said Vincent. Some businesses put these provisions in place so they can drive up the stock price in the event of a hostile takeover attempt, making the acquisition too costly.

Despite a past speckled with lottery and political scandals, over the past several years GTECH has significantly strengthened its financial position. The company reported $1.26 billion in revenue for the fiscal year ending in February and $196.4 million in net income. In 2003, GTECH signed a 20-year contract to run the Rhode Island lottery. As part of that deal, the company agreed to build a corporate-headquarters building in downtown Providence and the building is now about halfway finished. GTECH employs 5,300 people worldwide, including 1,200 in Rhode Island.

As to whether an acquisition would affect the new building, Vincent, the spokesman for GTECH said, "the management of the company is committed to the headquarters and the growth plan that's been laid out. I can't speculate on what the future would hold other than where we are today."

Although Rhode Island is not GTECH's largest customer on an annual basis, the contract over 20 years is highly lucrative, said Mark. It is GTECH's contracts with states and countries that make it attractive to a buyer, he said.

"It's a very stable company right now, very well managed," said Mark. "I'd rather buy a healthy company than a sick company and this one is in really good shape. With these long-term contracts, they have very good visibility."

GTECH's strong financial condition is due in large part to W. Bruce Turner, the company's 45-year-old chief executive officer, said Mark.

"I don't get the sense that Bruce wants to run the company indefinitely. He's accomplished an incredible amount while he's been there," said Mark.

Turner, who owns 3-million shares of GTECH common stock including unvested restricted stock and stock options, would benefit from an acquisition. The stock Turner controls was worth roughly $93.6 million at Friday's closing stock price. It rose $13 million yesterday with yesterday's jump.

And under Turner's employee contract, if the buying company lets Turner go within 18 months of the acquisition, he will get $2.2 million plus an average of his annual performance bonus from the past three years and the maximum amount allowable annually under the company's executive perquisite program, according to a filing made earlier this year with the U.S. Securities and Exchange Commission. Turner will also be given his prorated salary and bonus for the year and become vested in the company's retirement plan.

But that pay-out happens only if Turner is fired within 18 months of a change in control of the company.

"There are so many different variables, it's just impossible to predict where it would go," said Mark.

More than 9-million shares of GTECH's stock traded hands yesterday, considerably more than the less than 1-million shares that have been traded daily, on average, over past three months. GTECH stock hit a 52-week low of $28.12 a share at the end of June but saw a steady increase over the five days prior to yesterday's announcement.