Jackpot wins a round in grocery slot controversy

A federal judge issued a preliminary injunction against Raley's and Albertson's Tuesday afternoon, a decision that will keep Jackpot Enterprises Inc. operating 246 slot machines in 15 Clark County Albertson's grocery stores for the time being.

Barring further legal action, the order will remain in effect until a trial is concluded or the companies settle their dispute.

In granting the injunction, U.S. District Judge David Hagen noted that Jackpot had far more to lose by losing the licenses than either Raley's or Albertson's had to gain.

"This not only would result in the loss of operating revenue; it also would cause shifting and, in many cases, termination of (Jackpot's) operating personnel," Hagen wrote in the order. "By contrast, the defendants lose little if anything if the preliminary injunction is granted.

"Raley's plans to have gaming devices in the stores anyway and for the short term of a pretrial injunction the difference in compensation to them for the floor space granted to the use of gaming devices was not shown to be of any substance."

Don Kornstein, president and chief executive of Jackpot, said he was "gratified by the judge's decision." He declined to comment further. Albertson's attorneys couldn't be reached for comment.

Jackpot sued the two grocery store operators last month following a decision by Raley's to dump Jackpot as the slot machine operator at 15 stores it is acquiring in Clark County from Albertson's. Albertson's agreed to sell off the stores as part of an antitrust settlement with the Federal Trade Commission that allowed the grocer to move forward with its acquisition of American Stores Inc., owner of Lucky grocery stores and Sav-On drugstores.

In its litigation, Jackpot has argued that the stores constitute a critical piece of business, and that Raley's should be forced to honor the contract held with Albertson's, renewed last year. Jackpot said the stores account for about 15 percent of its revenues, which were $93 million in 1998.

Raley's later gave the slot operations contract to Alliance Gaming Corp. Last month, the Nevada Gaming Control Board awarded licenses to Alliance to operate machines in the disputed stores, but ordered that the licenses could not take effect until the Jackpot lawsuit was settled.

Albertson's and Raley's argued in depositions that Jackpot didn't have a provision in its contracts that compelled a new owner to honor Jackpot's contract. Chip Cole, Albertson's vice president of litigation and regulatory affairs, argued in his deposition that granting Jackpot a restraining order would have "grave consequences" on the antitrust agreement reached with Raley's, the FTC and the attorneys general of Nevada, California and New Mexico.

Hagen, however, noted that the Raley's agreement also didn't specify that Jackpot's agreement had to be terminated.

"Therefore the court finds ... that the termination was unrelated to the FTC's and Nevada's requirement that Albertson's divest its interest in the stores in question, leaving Albertson's no reason to terminate the license other than one related to its negotiations with Raley's," Hagen said.

Hagen ordered the companies to immediately schedule a settlement conference. If a settlement cannot be reached, Hagen said he will "promptly schedule (the lawsuit) for immediate trial."

Meanwhile, Jackpot's management won another victory earlier in the day, as shareholders voted down a controversial motion that would have forced the company to divulge all acquisition offers the company had received over the past three years.

As worded, the proposal would have compelled Jackpot's board to identify each suitor, as well as all documentation from the negotiations. It would have also required Jackpot's board to reveal the reasons for rejecting each offer. The proposal said that there was reason to believe Jackpot's management "may have violated its fiduciary duty to shareholders and in so doing may have opened a window of opportunity for shareholder litigation ... ."

"Shareholders are encouraged to put management on notice that shareholder value will not be allowed to be compromised by unreasonable, unwise and outrageous business practices on the part of management and individual members of the Board of Directors."

In its response, Jackpot acknowledged that the board has had "numerous" acquisition talks with suitors over the past three years, but said these were simply the normal course of business. It argued that the talks were often subject to confidentiality agreements, and that forcing Jackpot to break these agreements would make it very difficult for the company to initiate acquisition talks in the future.

"Each board member owes a fiduciary duty to protect Jackpot and its shareholders, and in doing so, the board has a right to reject an offer if it deems that it is not suitable or not in the best interests of Jackpot and its stockholders," Jackpot said in its proxy statement.

Kornstein told shareholders at the meeting that the sale of the company was an option that is being actively considered at this time. Jackpot announced Tuesday morning that it would hire an investment banker to help it evaluate "strategic alternatives" for increasing shareholder value.

That may include Jackpot's sale or new acquisition attempts, Kornstein said, noting that a termination fee of $13.5 million received recently from Players International boosted the company's cash holdings by more than $1 per share, making it more attractive to potential buyers.

But he added that the company will also look at "anything and everything," including recapitalization, stock buybacks or special dividends. It may also include diversifying into a business entirely outside of the gaming industry, Kornstein said.

"Anything we do will be with that principal goal in mind (of increasing shareholder value)," he said.

Kornstein was pressed by one shareholder as to why the company gave up on its pursuit of Atlantic City, N.J.-based Players International after Harrah's Entertainment came in with a higher offer.

"We were incapable of matching an offer that would have been bumped by Harrah's," Kornstein said, noting that Harrah's $425 million offer was $50 million higher than Jackpot's offer. "They were determined to have that company.

"By Harrah's coming in and doing what they did validates our strategy."

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