Bally Raises Its Bet on Casinos and Lotteries

At the height of Pac-Man’s popularity, distributors of the video arcade game lined their trucks dozens deep behind Bally Manufacturing’s Bensenville, Ill., factory so they could load the games as quickly as they rolled off the assembly line. Some who couldn’t get all they wanted tried to bribe factory workers to get half-finished games.

It was a manufacturer’s dream, and the insatiable gobbler helped lift Bally earnings to $91 million in 1982 from $53 million in 1980. As history records, the public’s appetite for Pac-Man was not endless, and last year, as interest in video games waned, Bally lost $100.4 million on revenue of $1.35 billion.

Bally management knew the boom could end quickly and painfully. But it hasn’t been Bally’s style to avoid risk--or controversy--as it pursued its ambition of becoming one of the nation’s largest leisure-time companies.

Only 10 years ago a little-known maker of pinball and slot machines, Chicago-based Bally has expanded and diversified until it now is the nation’s largest legalized gambling concern, with interests in casino-hotels and state lotteries as well as slot machines. The company owns the Park Place Hotel and Casino in Atlantic City, and currently is completing its $440-million purchase of MGM Grand Hotels from investor Kirk Kerkorian.

Bally’s Scientific Games subsidiary is the biggest provider of instant lottery tickets, and last spring snared a contract to provide supplies for California’s instant lottery that may be worth $40 million a year. Scientific Games is among those vying for the state’s computerized lottery contract--which could add another $100 million a year to company revenue.

Owns 304 Health Clubs

Bally also owns 304 health clubs, the nation’s largest collection, and the second-largest amusement-park chain, Six Flags Corp.

Bally officials say the company expanded into the amusement park, casino and health club businesses in the late 1970s to help shield it from the bruising cyclical swings of the amusement-games business. But some on Wall Street assert that the new businesses involve enough risk to qualify the fast-growing gaming concern as a gambler itself.

Some analysts note that the amusement-park business has its ups and down, and wonder about the stability of health-club business, too. Many managements would also be wary of casino gambling, which involves close regulatory oversight that can suddenly upset a company’s plans, and often brings unwelcome publicity, these analysts note.

But “this company doesn’t worry about that kind of stuff,” said Marvin B. Roffman, analyst with Janney Montgomery Scott in Philadelphia. “It doesn’t scare them.”

Certainly, Bally’s name has kept popping into the headlines throughout its expansion.

Chief Quit Job

The company won its initial license to operate Park Place casino in 1980 only after founder and Chief Executive William T. O’Donnell Sr. quit his job to satisfy New Jersey casino regulators, who alleged he had past ties to organized crime.

Last year, Six Flags and its Great Adventure amusement park in southern New Jersey were indicted for aggravated manslaughter after a May 11 fire in the park killed eight persons. The company was ultimately cleared of any wrongdoing.

In California, controversy has dogged Bally for more than a year, as Scientific Games first spent $2.1 million to underwrite the efforts to pass a state lottery referendum, and then bid for the contracts to handle the “scratch-off” ticket and computerized lottery games.

Robert E. Mullane, Bally’s chief executive, takes the view that scrutiny and controversy come with the territory.

Certain Amount of Pain

“You expect a certain amount of pain if you’re involved in the (gambling) business,” Mullane, 52, acknowledged in an interview. “Let’s face it, when a lot of people think of gambling, they think of guys with black shirts, slouch hats and machine guns.”

For his part, he added, “If I thought we were doing anything wrong, I couldn’t get up and go to work in the morning.”

Founded in 1931 as Lion Manufacturing, Bally claims to have invented not only Ballyhoo, the first pinball machine, but also the first electric razor, remote-controlled television and coin-operated coffee vending machine.

An important moment in Bally’s effort to expand in the gambling business is due to come early next month, when the California Lottery Commission chooses among five bidders for the contract to handle the computerized lottery operation.

Scientific Games accounted for only 3% of Bally revenue last year, or about $37 million, although the unit provides paper tickets and other supplies for 16 of the 23 state lotteries. The California instant lottery contract awarded in May will double Scientific Games’ revenue, and the computerized lottery contract could increase them by another 50%.

Expected to Be Largest

Moreover, the California lottery is expected to be the largest in the country, with annual revenue ultimately expected to reach $3 billion. Winning the contract could give Scientific Games experience and visibility that it could use to win contracts in the other states that are expected to begin lotteries as a means of supplementing tax revenue.

State lotteries generated nearly $7 billion in total revenue last year; some analysts predict the total take will rise to nearly $12 billion by 1988.

“I’ve always thought lotteries were one of the true growth industries,” said Mullane. “It’s a painless form of taxation that the public will vote for two to one--that’s a margin even Ronald Reagan didn’t get.”

In the contest for the California computerized lottery contract, Scientific Games does not have as much experience as such competitors as Control Data, General Instrument and GTECH. So far, Scientific Games handles only one computerized lottery, the 4-month-old operation of New Hampshire, Maine and Vermont.

Bally has at least gotten its name before the public in California.

The company has been criticized for almost single-handedly financing the drive to win approval of a lottery in the November, 1984, referendum. It has also been faulted for persuading the Legislature to write the lottery law in a way that effectively excluded other competitors from bidding for the first contract.

Disclosure Required

The law requires extensive financial disclosure from companies that bid for lottery contracts. Among other details, they are required to disclose the personal tax returns of top officials, and those of shareholders holding stock of 5% or more.

Bally, which regularly makes such disclosures to New Jersey casino regulators, was prepared with all the necessary financial background when the state lottery commission last spring gave prospective contractors two months to submit bids for the instant lottery contract.

Others, however, such as the Webcraft Games division of Beatrice Foods, were unable or unwilling to prepare the financial disclosure in time and dropped out of the bidding. Scientific Games ended up as the sole qualified bidder.

Wrote Language

“It was no secret Scientific Games had an effort going to pass the initiative, and wrote the language of the law in a way to limit competition,” said M. Mark Michalko, who was appointed director of the state Lottery Commission several months after the initiative’s passage. “Bally knew they were the only company that could comply with the law, and that concerned me to the extent it precluded competition.”

At the same time, Michalko asserted the state got a “good price” from Scientific Games, and said the company so far has done a good job on the contract.

But if the lottery business has bright growth prospects, Bally’s lottery operations will probably continue to be far less important to Bally than the company’s casino-hotel holdings.

Park Place last year provided $273 million, or 20%, of Bally’s revenue, and has established itself as a consistently profitable casino even during Atlantic City’s current business slump. With the addition of the two hotels in Las Vegas and Reno, the casino-hotel business will represent 30% of Bally’s total revenue, Mullane notes.

Some analysts, however, say Bally faces a challenge in making the hotels profitable enough to justify their purchase price. One analyst, who asked to remain unidentified, said the $80-million-a-year debt service on the hotels will be just about equal to their combined cash flow.

“The trick will be to coax more profit from what have really been a couple of sleepy, under-performing operations,” the analyst said. “The purchase is a plus, but maybe not a huge plus.”

Similarly, Moody’s Investors Service noted last week as it reduced Bally’s bond rating that the hotels will be only “marginally profitable” under the refinancing plan. The debt-evaluation agency slightly lowered its rating on Bally’s outstanding and proposed bonds.

Mullane, however, called the purchase a “once in a lifetime opportunity” and asserted the company will be able to apply the same know-how in Las Vegas that it has in Atlantic City.

Bally has developed a distinct approach, aiming to attract neither the high-roller who spends thousands or the elderly day visitor who spends cab fare, but rather a middle segment of the casino market.

Kept Costs Down

Park Place has kept costs down. It spends relatively little on the complimentaries--rooms, food, and drinks--that are intended to lure visitors away from the shimmering gaming rooms of its 10 competitors. Such complimentary costs came to about 14.6% of Park Place revenue last year, compared to an industry average of 21.4%.

Park Place also doesn’t spend as much as some others to attract big name performers. In one recent week, while Steve Lawrence and Eydie Gorme appeared at the Atlantis, and Caesar’s showed Smokey Robinson, Park Place offered dancing and singing from “La Cage Aux Folles.”

“The trick is not to spend $1.50 to attract somebody’s who’s going to spend $1,” said analyst Roffman. Park Place is “usually No. 3 in terms of profitability, but . . . the most consistent of the group.”

He notes that Park Place also keeps a slightly larger share of the slot machine revenue than do most other casinos. Park Place hangs on to 13% of the money pumped into its machines, while the average casino keeps 12% of the revenue and returns the remainder in jackpots.

1% Seems Small

Although the 1% difference seems small, it increases the casino’s slot-machine revenue by 8%, Roffman observed.

The casino exclusively uses slot machines manufactured by Bally, which is still the nation’s largest maker of the devices, although slot machine manufacturing now represents only 5% of Bally’s total sales.

Bally seems to have satisfied the concerns of New Jersey regulators about its possible ties to organized crime. With the 1980 departure of former chief executive O’Donnell “the taint has disappeared, as far as we’re concerned,” said Carl Zeitz, a member of of the New Jersey Casino Control Commission.

To make sure O’Donnell was not running the company in absentia, New Jersey law enforcement officials shadowed him for a time after his departure, and also interviewed some Bally employees to search for signs that influence continued. “We never turned up anything,” said a source involved in that investigation.

Earlier this month, Bally’s application for a license renewal breezed through the casino commission in less than an hour.

Ties Became an Issue

O’Donnell’s alleged ties briefly became an issue two years ago in New Hampshire, when that state considered, then narrowly approved, Scientific Games’ bid to provide tickets for its lottery.

California lottery chief Michalko says his agency has investigated Bally, and is satisfied the company is clean. “Bally’s been investigated time and again, and so far as I know none of those charges have been substantiated,” he said.

A year ago, after the collapse of the video game business, Bally laid off 3,000 and took a $171.9-million pretax charge as it drastically cut back its operations. This year, video games will represent about 10% of revenue, down from 20% in 1984, Mullane said.

But although the video games business lost $2.7 million in the first half of 1985, it broke even in the third quarter, and Mullane hints things may be on the upswing. Forty percent of the company’s video game sales have come in the last two months, he said.

The game distributors who lost money in the video games bust “are still turned off by it, but I don’t think kids are,” he said.

Faces Skepticism

Bally faces some skepticism on Wall Street about two other lines of business it acquired to offset its reliance on games--the health clubs and amusement parks, two units that each contributed 25% of last year’s revenue.

Bally’s Health & Tennis Corp. of America, purchased in 1983, operates 304 health clubs under a variety of names, including Jack LaLanne, Richard Simmons, Vic Tanny and Holiday. The unit’s revenue grew 20% to 30% a year during the last decade, and Bally officials have said they expected it to be the company’s leading profit-maker in 1985.

Yet the full-year earnings projections were scaled back this fall, with bad news that reinforced some analysts’ misgivings about the health club business. At the end of the third quarter Bally increased the health clubs’ reserve for questionable debts to $41 million from $21 million, after a abrupt rise in unpaid membership fees in the New York, New Jersey and Texas regions.

In the third quarter, operating income from the health club division fell 43% from the year-earlier period, to $8.1 million, say analysts, who blame the bad-debt problem on overzealous sales efforts to prospects who have little inclination to exercise.

Mullane insists the company already has corrected the problem by firing some middle managers, reassigning others, and prohibiting clubs from selling memberships without any money down. “I’m disappointed in this, but it’s not going to kill the company,” he said.

Won’t Predict Earnings

He won’t predict 1985 earnings, but earlier this year, Bally predicted profits of $35 million on revenue of $1.4 billion. For the nine months that ended Sept. 30, Bally reported net income of $30.2 million on revenue of $1.1 billion.

Some wonder, too, whether the health club business will continue to grow, or whether interest will fade, as it did for such pastimes as tennis and racquetball.

One analyst noted that clubs typically charge first-year members initiation fees that average about $300, and annual charges of about $200.

“About 85% of their revenues have been coming from the big charges paid by first-year members, but what happens when they’ve sold memberships to everybody in the country who might be interested?” he asked.

Mullane insists the health clubs are a “permanent part of the American life style,” and that the challenge for the company is to stay abreast of what the public wants in them. For example, he believes rowing machines are catching on, along with nutrition programs that teach exercisers how to eat properly, and help them maintain those habits.

Bally’s Six Flags Corp. operates seven amusement parks in seven states, including the Six Flags Magic Mountain park in Valencia north of Los Angeles. Bally’s theme-park business is second in size only to that of Walt Disney Productions.

Like Park Business

Bally officials say they like the amusement park business because it faces relatively little competition, and throws off a lot of cash.

Some analysts, however, assert that the theme parks will grow slowly, and that attendance is vulnerable to bad weather and recessions.

In the summer of 1984, for example, the parks’ attendance was hurt by a series of rainy weekends, as well as a death on a roller coaster at its park near St. Louis, and the aftereffects of the Great Adventure Park fire. The accidents are rare, but “four rainy weekends and the whole business is thrown off,” says analyst Roffman. “It’s a lot to worry about.”

BALLY’S WINNERS AND LOSERS Faced with slumping sales of coin-operated arcade games and shrinking revenues at its family amusement centers around the country, Bally in 1984 decided to restructure its amusement game business. That resulted in a one-time write-down of $121.7 million in the fourth quarter on top of full-year operating losses of nearly $87 million in those segments.

Operating income Millions (loss) by division of dollars 1984 1983 1982 Game manufacturing (77.7) (34.6) 143.2 and distribution Amusement centers (9.2) (7.5) 10.6 Theme parks 33.6 49.8 37.8 Health clubs 55.8 20.8 Hotel and casino 60.8 60.2 43.1

Health & Tennis Corp. of America acquired in 1983