Lottery giant's merger with Lottomatica requires that Texas agree to keep its contract with the company
GTECH Holding Corp.'s stock plummeted as much as 14 percent yesterday morning before rebounding after the Texas Lottery Commission and the Texas Department of Public Safety raised concerns about the company's business practices and ethical integrity.
Investors, anticipating that Texas might adversely impact GTECH's pending $4.8-billion acquisition by Italy's Lottomatica SpA, sold off so many of GTECH's shares yesterday morning that trading in the stock was briefly halted. Over 18 million shares of GTECH's stock traded hands yesterday, nearly 30 times the average number of GTECH shares that trade on a daily basis.
The West Greenwich-based company's stock resumed trading before noon and ended up rebounding to close at $33.29 a share, down 4.37 percent.
During a Texas Lottery Commission meeting Wednesday, according to minutes of the meeting posted on the lottery commission's Web site and an eight-page report issued by the state police, state police investigators said:
GTECH has not been forthcoming with information about legal problems in Brazil.
Paid questionable amounts of money to consultants in countries where it was trying to win lottery business.
And financed a sports stadium in the Czech Republic, where it was negotiating a lottery contract.
The Texas Department of Public Safety has been conducting a background investigation of GTECH, as part of the company's proposed acquisition by Lottomatica, an Italian lottery operator. GTECH, the world's largest provider of lottery systems and services, has a contract to run the Texas lottery until 2011.
The GTECH and Lottomatica merger agreement requires that the Texas lottery agree that it will not cancel its lottery contract with GTECH as a result of the deal.
Robert Vincent, a spokesman for GTECH, said yesterday that the company was surprised by the report and that the "characterization" of GTECH's business practices was "unfair."
"We are concerned and frankly surprised that that would be the reaction," said Vincent. "There are a number of inaccuracies in the report and conclusions that we don't agree with."
He also said that the company has been open with the Texas investigators and investors.
Last month, W. Bruce Turner, GTECH's chief executive officer, said publicly that "Texas already came out and said they had no objections" to the $4.8-billion acquisition.
However, the investigators said Wednesday that questionable activity had taken place during Turner's tenure as CEO, even though Turner had assured the lottery that the company had new and rigorous ethics policies in place.
Consequently, the commission did not take a formal position on the sale or on the continuation of its lottery contract with GTECH.
"No such assurance has yet been given," said Texas Lottery spokesman Robert Heith.
Vincent said the company publicly reported that in 2004 the Brazilian government filed a $650-million civil lawsuit against GTECH, claiming that the company had illegally entered into contracts with the Brazilian lottery in 1997 and again in 2000. The company has said publicly that it was the victim of an extortion attempt as it tried to win contracts for lottery extensions in Brazil and that the U.S. Securities and Exchange Commission had launched a formal investigation into the matter.
"We've cooperated fully with them. The information they have highlighted is information we have made public," said Vincent.
Despite being the current lottery provider for Texas, GTECH does have a checkered past with the state. Texas has previously questioned whether it was paying GTECH too much to run its lottery, and Texas' first executive director was fired after it was discovered that one of her close friends had been employed as a GTECH consultant.
However, prior to this week's commission meeting, the investigation process in Texas appeared to be moving forward smoothly.
Transcripts of meetings of the Texas Lottery Commission show that on both May 17 and June 7, investigators indicated they had no problems with the Italian firms involved in the GTECH deal, Lottomatica and its controlling company, De Agostini SpA.
State police and state and private lawyers assured the panel that there were no problems with the Italian firms, but that the background check on GTECH would continue. The GTECH component was important, they said, because the merged companies would be controlled by current GTECH management.
On both dates, the commission members instructed the lawyers to negotiate an agreement with GTECH to ensure that Texas would be kept informed of corporate dealings, even after GTECH moves outside the jurisdiction -- and the disclosure requirements -- of the Securities and Exchange Commission.
But Texas lottery spokesman Heith said the commission never formally approved any part of the GTECH sale; that decision will be made at some later date for which no timetable or deadline has been set.
Rhode Island, which has a 20-year lottery contract with GTECH, is expected to release its investigative background report on the merger and hold a public forum on the issue next week. It is another one of a handful of GTECH customers that must sign off on the deal.
According to the purchase agreement, the sale must be completed by Oct. 10.
Vincent said the company is "confident that we can satisfy the concerns raised in Texas," and that they won't derail the acquisition.