Back in 2009, Jamie Odell, CEO of Australian slot manufacturer Aristocrat Leisure, Ltd., made a commitment to improve the legendary slot-maker’s North American business. Odell’s five-year plan to accomplish that goal was to focus on growing the company’s inventory of premium games.
In the ensuing five years, Aristocrat brought in the best design talent in the industry, secured licenses to create blockbuster games from The Walking Dead to Britney Spears, and created show-stopping presentations like the Arc Double and the Behemoth that draw crowds to the slot floor.
But one move at the end of that critical five-year period arguably has done more to boost Aristocrat’s gaming operations portfolio than any other—the 2014 acquisition of Tennessee-based Video Gaming Technologies for $1.28 billion.
The VGT acquisition stood out among the mega-mergers and buyouts of that year, because unlike the others, it did not represent a consolidation, but rather an expansion, giving the acquiring company something it never had—a foothold in the Class II Native American gaming machine market.
More than a foothold, in fact. VGT was and is the largest supplier of Class II games in the U.S. Its 20,000-plus units in the field (mostly in the Class II heartland of Oklahoma) account for nearly 40 percent of the total Class II market.
From just about any angle, everything about the VGT acquisition made sense. “First, we weren’t in the Class II space, so it was an accretive move for us to get into that market,” says Brooks Pierce, Aristocrat’s managing director for the Americas. “Secondly, VGT was a very well-run company in a strong business that we thought we could integrate nicely, which we have. And lastly, the attractive part about it was the gaming operations nature of the business.”
Class II Pedigree
Aristocrat always had great relationships with tribal gaming operators in Class III compacted markets, and if the goal was to augment those relationships in the Class II space, it couldn’t have chosen a better partner than VGT.
Founded in 1991, VGT was one of the first suppliers to realize the potential of the Class II tribal business which was created only three years earlier with passage of the Indian Gaming Regulatory Act. The company quickly established itself in the Oklahoma market.
“VGT was one of the first companies to come into Oklahoma, and built a market share pretty quickly,” says Jay Sevigny, president of VGT. “Most importantly, VGT grew right along with a lot of the tribal gaming, and developed a lot of trust. We think of it as a shared partnership, and today, our relationships are very, very robust.”
In many ways, VGT provided the final piece of the puzzle in Aristocrat’s resurgence, which saw adjusted ship share rise to 23 percent in the fourth quarter of 2015. The Class II business completes a package that already had seen gaming operations business soar, from the company’s traditional casino business to its newer social casino offerings, made possible by the 2012 acquisition of social content supplier Product Madness. Pierce says the majority of Aristocrat’s North American business is now gaming operations content.
But the addition of a burgeoning Class II business to Aristocrat is only one benefit of the union. After all, this wasn’t a strong company taking over a weak company. Each company had developed technology that propelled it to the top tier of its market.
“Unlike some of our competitors’ acquisitions where they were reliant upon synergies to make it pencil, ours wasn’t that way at all,” says Pierce. “It all tucked in very nicely, and now we’ve just grown the business together, and leveraged the best of Aristocrat and the best of VGT.”
The integration of technologies already has begun. Last summer, VGT unveiled Easy Money Jackpot, its first-ever wide-area progressive link, at 11 casinos across Oklahoma. It was made possible thanks to technology from Aristocrat—specifically, the legendary Hyperlink multiple-progressive platform that brought the Australian company one of its first huge successes in the Americas in the early 2000s.
It was a combination of the best technology of the two companies. “VGT had struggled for quite some time and wasn’t able to deliver the wide-area progressive technology,” Pierce explains. “The problem was pretty much ready-made for us. We integrated with VGT, and within nine months, they had a WAP out in the marketplace. And it’s doing phenomenally well. It’s probably the best illustration of where we’ve leveraged our technology for the benefit of VGT.”
“It’s up to about $775,000,” Sevigny says. “People are real excited about it; it’s working very well, and it’s a great benefit to us.”
That was the jackpot at press time—resets are at $250,000. “It’s been a phenomenal additional platform for our customers’ business,” says Pierce. “It gives them a wider breadth of coverage in the Class II space. Obviously, with the volumes of play in Oklahoma, you can get some pretty big jackpots. So from a customer perspective, it has been greeted really warmly.”
Aristocrat, meanwhile, is benefiting from a technology perfected by VGT over the years—the three-reel mechanical platform that houses all those Hyperlink-fueled wide-area progressive slots in Oklahoma.
Despite the moniker Video Gaming Technologies, VGT has been at the forefront of innovation in the reel-spinning genre in the Class II space. The company’s patent-pending mechanical game terminal—traditional reels and stepper motors controlled by VGT’s proprietary Live-Call Bingo platform—has dominated a large portion of the Oklahoma Class II gaming market. Since the merger, Aristocrat and VGT have worked to develop a Class III stepper using VGT’s technology.
At last fall’s Global Gaming Expo, Aristocrat showed the Global Stepper, its first developed with VGT. “It’s a beautiful product,” Sevigny says, “and we’ve been very involved in its development. We have a number of hardware and software engineers that have experience in that area, so we’re very pleased to be part of that project.”
“The stepper has been an interesting part of our integration,” says Pierce. “We worked with VGT engineers on developing platform design and product management, along with our industrial design group. What we’re trying to do is take the best of what we know in Class III—and as you know, our cabinet strategy has been robust, with Helix, Double Arc and Behemoth—and combine the best of that industrial design with the core mechanics and functionality VGT knows so well in the stepper.”
The Global Stepper was displayed in prototype at G2E.
Pierce notes that while Aristocrat has offered stepper lines in the past, low-denomination video has always been its wheelhouse, and VGT has been churning out high-earning steppers for years. “We also think it’s a space that’s ripe for innovation,” he adds.
“And frankly, our customers have been clamoring for us to get into this space, because it’s a big part of their market as well—20-25 percent of the U.S. market. We don’t play in it, but we will by the end of this year.”
Sevigny adds that where VGT helps Aristocrat in stepper technology, Aristocrat helps VGT in video. “First and foremost, the two companies had very compatible cultures,” he says. “This was an acquisition by Aristocrat that was justified based on the complementary aspects of our businesses. They are very dominant in Class III, and VGT is very dominant in the mechanical stepper product. We have stepper technology and capabilities to assist them, and they’re doing a lot to assist us in the development of video products.”
While Pierce and Sevigny are obviously hesitant to reveal specifics, both say the sharing of technologies is likely to result in more products that bring the strengths of one to the market of another—or to new markets altogether.
“VGT was beginning to launch a new platform at the time of the acquisition, and we have that in storage right now,” Sevigny says. “It’s actually a fabulous platform, but with all the development going on with the Aristocrat platform, we’re joining them for this next wave of games.”
But will those games include Aristocrat hits for VGT? VGT titles in Class III casinos? For now, that’s being kept close to the vest, although Sevigny does concede that he would eventually like to do more Class II video products.
But not right away. “We are very excited about putting some Class II games out on their platform, and we do anticipate that we’re going to be bringing some Class III titles in,” says Sevigny.
Pierce says the beauty of the combined company is that both legacy platforms stand alone. “Nobody has better math in Class III than Aristocrat, but you could argue that nobody has better math than VGT in Class II. We feel we’ve got the best of both worlds.”
And both worlds will now grow, adds Sevigny. “We are growing outside of Oklahoma now, and one of the opportunities of being with Aristocrat is that the technology capabilities are significant. With Aristocrat we brought a wide-area progressive to tribal properties, which is fantastic for all of us. And every time we do these types of things, it strengthens the abilities of the tribes and the casinos to succeed and compete, and to continue to grow and achieve their objectives as well.”
Sevigny says VGT is even looking to expand to Aristocrat markets beyond the U.S., and there appears to be great customer interest in that possibility.
“But the real opportunities for us, in the near term, are closer to home.”
As in an expansion of VGT’s already-strong Class II presence in the U.S. beyond Oklahoma, which is home to 90 percent of the current VGT installed base. “We’d love to be in every Class II market,” says Sevigny. “We have a wonderful product and we create great value for the players, and in doing so, we create great value for our tribal partners. Every tribe has its own specific objectives, and some tribes have compacts where they’re allowed Class II and Class III, but we look forward to working with any tribe.”
Adds Pierce, “It’s made sense for us to leverage the VGT infrastructure in Oklahoma, and we have, in terms of service, sales and support. In other markets where Aristocrat has more feet on the ground, VGT will come to us when they look to expand to those markets. They have a direct sales force, but we certainly have contacts and relationships with most of the customers they would call on.
“We look at it holistically. From a customer standpoint, we’re trying to offer them the best of what we have, both in Class II and Class III.”
He adds that customers love dealing with one company for both classes of game, particularly as tribes look to increase Class II inventories. “They love the fact that they can get from one company under the Aristocrat umbrella all the solutions they’re looking for,” Pierce say. “California’s a perfect example—most of the properties out there have a mix of Class II and Class III, so they love the idea of being able to deal with one organization.
“When you get the combination of one interface with two channels that are doing extremely well, and a company that’s dedicated to innovation like we are, and add in for us the stepper product in Class III, it makes it easy for the customer to go do a lot of their one-stop shopping.”
Pierce says the integration of the two companies is complete. “It’s a normal occurrence to have meetings with VGT people on a regular basis, but the nice part is they have their own autonomous organization.
Jay Sevigny works directly for Jamie (Odell). Where we work collaboratively across the business, it’s really been exciting—great for both parts of the company.”
In the meantime, he says Aristocrat has been careful not to upset the very successful apple cart that
Sevigny has governed in Tennessee for just over a year. “The interesting thing about VGT is that in many ways, it’s still operated as a stand-alone, autonomous organization,” he says. “And again, it was very well-run, and from a cultural standpoint, the integration was seamless.”
“Nothing’s changed,” Sevigny says. “In Tennessee we have the administrative functions, primarily because that’s where the founder and owner lived. And we have engineering activities there. In Oklahoma, we have significant assembly and service operations, and our sales force is really based out of there as well. But we do everything the same way.
“Our customers tell us, to their delight, they haven’t perceived any change in their relationship with VGT, or the way that we service them. In fact, the only thing they see is that there’s now more opportunities for them, because of what our combined resources can do for better product on their floors. We have access now to a total of six studios across the world, where we now have game developers that are going to be involved in helping us with our games. That’s been the real exciting part for us.”
For Aristocrat, the VGT addition strengthens a relationship with Indian Country that already was strong. “The tribal community knows us very well,” says Pierce, “not only our cabinets and content, but our systems—the majority of our systems business are tribal customers. Overall, more than 50 percent of our revenue comes from Native American gaming.”
“The headline for all of this is that the experience has really been good,” says Sevigny, “and we’ve worked well. Our cultures are so compatible. We’ve had a couple of huge successes bundling Aristocrat products with VGT products, including the Oasis system. And our tribal customers benefit from this, because where you bring things together, they get more out of a deal, and we end up getting better contracts.”
Even better ones to come, no doubt.