Lotto Fever Could Strike Here

Guess who's back on track? GTECH (GTK), and it's sprinting higher after a bad spill in early December. The stock of this leading worldwide operator and supplier of computerized lottery systems had slumped to a low of 16 late last year. But it has since resurged, shooting up close to its 52-week high of 23. That's remarkable for a company whose sales and earnings slackened last year because of increasing competition. So what's fueling the recent flareup in GTECH's stock? Takeover talk.

International Game Technology (IGT), the dominant maker of coin-operated slot machines, is believed to be eyeballing GTECH. Analysts say the lottery system maker is worth 35 to 40 in a buyout.

One New York money manager who is close to management insiders at International Game says the slot-machine maker wants a friendly merger with GTECH, based in West Greenwich, R.I. The proposed deal, according to this investment pro, is a stock-cash swap transaction. But informal talks between executives in both companies have been stymied, said the source, because of the recent weakening in the price of International Game's stock--from nearly 24 in September to 135/8 on Jan. 31.

Still, a merger with International Game would be the logical move for GTECH, according to some analysts. "The fit and synergy between GTECH and IGT are perfect," says Michael Moe, an analyst at Lehman Brothers based in New York.

He explains that GTECH's earnings have been dragged down by its product-sales gperations, which account for some 23% of total revenue. The services unit, however, which generates 77% of revenues, has been growing robustly, says Moe. But he notes that "IGT is exactly the reverse: Its service operations account for 25%, and product sales 75%." And while the lottery-system operator is big in the international markets, IGT is dominant in the U.S. but just starting to establish its foothold overseas.

The businesses of GTECH and IGT are so closely related that a combination would bolster their bottom lines, notes Moe, who says that based on fundamentals alone, GTECH "is a compelling buy." The stock is trading at only five times cash flow and continues to be an attractive "growth" play, argues Moe. And GTECH by far is the "dominant leader in the lottery market worldwide," he adds.

A spokesman for International Game Technology said the GTECH rumor was "pure market speculation." A GTECH spokeswoman said the company does not comment on market rumors.