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GTECH is in play in Brazil

Mar 26, 2004, 9:15 am

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Analysts don't think a political scandal will hurt the company's chances of continuing to run the country's lottery

A top Brazilian government official allegedly told two GTECH Holdings Corp. employees in 2003 that they could have a lottery contract extension.

All they needed to do, said Waldomiro Diniz, the former deputy head of parliamentary affairs, was hire a consultant for between $4 million and about $6 million, according to Brazilian newspaper reports based on the employees' testimony.

A lot was riding on GTECH's ability to nail down the extension. Brazil is one of the West Greenwich company's largest customers, making up about 10 percent of annual sales. The 25-month contract could generate between $120 million and $140 million in revenue for GTECH.

But instead of agreeing to pay the consulting fee in the beginning of 2003, the two GTECH executives, Antonio Carlos Rocha and Marcelo Rovai, contacted company headquarters, according to Robert Vincent, spokesman for GTECH. The company questioned the need for the consultant as well as the people proposing that the contract could be bought. The proposal failed to get the OK from corporate officials, said Vincent.

"The company was approached by individuals with business propositions that they represented could influence the outcome of our contract discussions," said Vincent, commenting this week on last year's contract extension negotiations. "Those proposals were put through normal compliance regimens here and rejected."

Essentially, GTECH says, it was the victim of an extortion attempt.

"It was an unfortunate situation. . . We certainly have put in place a very disciplined compliance and ethics program in anticipation of this taking place," said Vincent. "This situation has shown that the investment we've made in putting in a strict code of ethics pays off."

GTECH ended up negotiating for the contract extension directly with the leadership of the Brazilian lottery, according to Vincent. The extension expires in May 2005.

The situation has come to light over the past few months as Brazilian officials have investigated Diniz for attempting to sell his political influence. Diniz has been fired.

And as word of the investigation has come out since February, due in large part to Brazilian press reports and the Wall Street Journal, analysts and investors have taken a hard look at what it could mean for GTECH's single largest source of revenue.

"I think early on it was affecting the stock price," said Eric Hausler, a gaming and lodging analyst for Susquehanna Financial Group. "Certainly when news like that flows . . . investors would sell now and ask questions later."

GTECH asserts that the Brazilian lottery awarded the 25-month contract extension to the company fairly. But the Brazilian version of the FBI and a Brazilian ethics committee are continuing to look into the situation, according to Vincent. A Brazilian bank, Caixa Economoica Federal, runs the Brazilian lottery.

"It's clearly possible [that it's affected the stock price]. Brazil is about 10 percent of sales," said Wayne Johnson, an analyst with SunTrust Robinson Humphrey. "It's the most important customer GTECH has -- any alleged negative news could have a negative impact on GTECH stock."

GTECH's stock rose $1.08 to close at $59 a share yesterday, under the 52-week high of $62.07 a share it hit at the beginning of the month. The company's stock slid slightly in February as news of the Brazilian investigation broke and again slightly last week. It was down to $55.16 at the end of February.

As the investigation into last year's contract extension continues, Brazil may be gearing up to request bids from lottery providers interested in running the lottery when the extension expires. GTECH has run the lottery since 1997, and also operates a communications network in the country. The entire system could take up to 24 months to update, said Vincent. That time frame may require the lottery to add another extension onto its current contract.

Vincent said GTECH has had positive feedback about its services from lottery officials. And analysts don't necessarily think the recent political scandal will ruin GTECH's chances of successfully winning a new contract in Brazil.

"It shouldn't. If what the GTECH executives are saying is true," said Johnson with SunTrust Robinson Humphrey. "If these allegations are false then there shouldn't be any reason why GTECH could not compete for a renewed contract."

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