Casino Notebook: Gtech Keeps Texas Contract

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Lottery operator

Gtech

(GTK)

jumped Friday after the

Texas Lottery Commission

decided not to break the company's lucrative contract to run the state's games of chance.

The Texas Lottery, which has $3 billion in sales annually, is Gtech's most profitable contract, contributing between 35 and 40 cents per share to the company's bottom line, or about $15 million. Gtech earned $2.05 per share in the 12 months ended Nov. 29.

After trading as high as 35 on the news, Gtech ended the day at 33 9/16, up 1 15/16, or 6%. Since Gtech was the subject of a positive

story in

TheStreet.com

on Feb. 9, its stock has risen almost 22%.

Because most analysts expected Gtech wouldn't be able to hold on to the contract past late 1998 or early 1999, earnings estimates for the company may rise,

Merrill Lynch

analyst Naomi Talish says. "This was a surprising but welcome piece of good news."

Talish, a staunch supporter of the stock, stayed bullish even in early February, when Gtech Chairman Guy Snowden was forced to resign after a British jury convicted him of libel. Now she says that Gtech -- which even after its recent gains is trading at just 13 times its earnings and five times cash flow for the fiscal year ending in February 1999 -- could be poised for a run "into the mid-40s."

* * * * *

It wasn't a good week for

Grand Casinos

(GND)

, which found out Thursday that its bid for

Casino Magic

(CMAG)

had

failed. On Friday, Grand stock fell 7/16, or 3%, to 14 15/16.

But Grand did get one piece of positive news this week, as a U.S. bankruptcy court judge in Nevada ruled that the company can't be forced to pony up another $60 million to

Stratosphere

, the publicly traded owner of the ill-fated Stratosphere tower in Las Vegas.

Grand has already written off its entire investment in Stratosphere, but the company sought to compel Grand to add another $60 million it pledged as a "Standby Equity Commitment." Grand argued that it couldn't be forced to pay, since the bankruptcy filing essentially wipes out Stratosphere's equity.

Grand's Jaye Snyder said the company was pleased with the ruling. Persistent rumors have pegged Grand as a takeover target of

Hilton Hotels

(HLT) - Get Report

, and the verdict, if it's upheld, will clear a major obstacle to a possible deal, although Grand still faces several other lawsuits related to its Stratosphere investment.

* * * * *

Rio Hotel & Casino

(RHC)

, a recent favorite of investors in the sector, continued its upward move this week, hitting an all-time high of 29 on Friday before closing at 28 3/4, up 3/4. Behind the climb: Rumors that the company's earnings will blow out analysts' estimates for the second quarter in a row, and a

Las Vegas Sun

story Wednesday that said Rio executives were negotiating to sell the company to a real estate investment trust.

Rio could fetch as much as $1.2 billion, including almost $300 million in debt and $935 million for its shares, or $38 per share, according to the

Sun

. That price would value the company at roughly 12.5 times its 1997 cash flow, a big premium to the multiple placed on other mid-cap casino companies. But unlike its competitors, Rio is the hottest property in Las Vegas, and its revenues, cash flow and profits are soaring.

In the fourth quarter of 1997, Rio reported earnings of $9.5 million, or 41 cents per share, 10 cents ahead of analysts' estimates and more than double its earnings for the same period in 1996. The gain came despite the fact that Rio took a charge of more than $20 million to reserve for the possibility that big-time Asian baccarat players -- the so-called whales -- wouldn't pay their debts.

This quarter, Rio continues to sizzle, according to

Las Vegas Investment Advisors

chairman David Ehlers. Ehlers notes that Rio has been able to increase its hotel room rates even though other Las Vegas casinos have cut theirs, and says he thinks Rio "may be on the brink of substantial gains in the current quarter's earnings per share."