Bloomberg News

Billionaire Graf Seeks Gamblers Abroad as Rules Pinch

November 07, 2011

(Corrects 24th paragraph to show loss for Russia was 55 million euros in story originally published on Nov. 4)

Nov. 4 (Bloomberg) -- Johann Graf, who’s Austria’s fourth- richest man and whose employees call him “Deus ex Automatica” or “God of the Slot Machine,” is finding that his business is becoming less welcome at home.

Vienna lawmakers reined in Graf’s Novomatic, the world’s second-biggest slot-machine maker, ruling in September to block the company from renewing its betting-café permits when they expire in 2015. Politicians say the 55 million euros ($76 million) in annual taxes the government collects from the operations aren’t enough to make up for the social ills from gambling addictions.

“We are seeing tightening regulations because of player protection,” Novomatic Chief Executive Officer Franz Wohlfahrt said in an interview from its headquarters in Gumpoldskirchen, Austria. “We’re expecting regulation that’s much tighter.”

With Austria, and possibly Germany, clamping down on casinos, Novomatic is turning to less-restrictive countries stretching from South Africa to Peru for new customers. The company is depending on its expansion into newer markets to help extend an almost 30-year streak of revenue growth, and said in September that it will seek funding through a bond sale or an initial public offering.

“There are so many markets still out there to tap into where regulation is distant,” said Natascha Schull, a researcher at the Massachusetts Institute of Technology whose book, “Addiction by Design: Machine Gambling in Las Vegas,” will be published by Princeton University Press in May. More regulation at home is like squeezing air inside a half-inflated balloon, she said.

Former Butcher

While Europe was roiled for two years by the sovereign debt crisis, Novomatic’s net income more than doubled to 130 million euros in 2010 as revenue rose 12 percent to 1.2 billion euros. Sales more than doubled during the past five years.

Graf, 64, has a personal net worth of about 4 billion euros, according to Vienna’s Trend magazine. He started Novomatic in 1980, a decade after he was crowned Austria’s youngest master butcher by the country’s meat industry. He and his family own 100 percent of Novomatic.

He built Novomatic’s manufacturing and casino operations in more than 40 countries before retreating from day-to-day operations in 2008.

Graf, who hasn’t given an interview in three years, retired from the media spotlight after he was picked as Austria’s “Man of the Year” by Trend magazine in 2008. His influence in the nation of 8 million people still runs deep. In addition to employing 2,700 locals, Graf hobnobs with leading politicians and funds cultural and athletic events.

Social Connections

The European Union’s regional aid Commissioner Johannes Hahn was on Novomatic’s board from 1997 to 2003. He served as CEO in 2003. Austrian ex-Chancellor Alfred Gusenbauer serves on the board of Equitas Capital, the investment fund that assisted the gaming company’s expansion in Latin America. Novomatic also promotes Austrian musicians and artists at the renovated Jugendstil hall across from Vienna’s Secession Museum.

Graf was among the early people to recognize the opportunities from marrying computer logic to the gaming industry, said Novomatic’s Wohlfahrt from the company’s 96,000 square-meter office, nestled in a traditional wine-producing village 20 kilometers (12 miles) south of Vienna.

“He has a great sense for gaming and game content,” he said. “He’s actively involved on the development side.”

The company replaced the springs and gears inside the “one-armed-bandits” slots of yesteryear with algorithms and processors designed and assembled in Austria.

Pathological Gamblers

Still, the employment Graf’s company creates in the Alpine country and his social connections didn’t prevent a younger generation of politicians from taking aim at his company. Novomatic’s machines will be banned from Viennese cafes from 2015, Social Democrat Nikolaus Kowall said in an interview.

Austria’s gambling cafes are often frequented by young, unemployed men who can’t afford their losses, according to a May study commissioned by ARGE, an addiction prevention group. There are 64,000 “problem” slot machine users in Austria, according to the report. Forty-seven percent of Novomatic’s clientele in Vienna are pathological gamblers, according to the study, which used Austrian Gallup survey data.

The betting cafes mix booze, video games and gambling into a high-octane blend for pathological addicts. In Vienna, Novomatic’s Admiral Casinos are forced to operate behind shuttered windows. Youths gamble on titles such as “Reel Riders,” “Time Travel” and “Golden Prophecies” that blend the narrative qualities of video games with high-stakes betting.

Golden Prophecies

Novomatic has honed in on the interests of the more than 20,000 people who visit its Vienna gaming dens every day. From disaffected immigrants to dog-walking widowers, the company is developing niche products to supplement its video-slot-machines.

Novomatic’s Golden Prophecies game lets people “join the gypsy caravan across a musical terrain to the hidden chest of treasure.” Players seek “gold with the aspiring, young girl,” an animated brunette with a silver chain connecting the nose and ear piercings. Its Time Travel game takes players “through history with your friend the Dog,” meeting the “Neanderthal, Medieval Farmer, Baroque Lady, Business Man and Future Woman.”

Novomatic’s leap into international gaming started with the end of the Cold War, when the company expanded into eastern Europe. It attracted gamblers by setting up western-style cafes and bars in ex-communist cities and towns.

It has since moved into markets with laxer regulations in Latin America. Casinos in Paraguay, Peru and South Africa, countries where Novomatic operates, were tagged by the U.S. as money-laundering conduits for criminal bosses and drug barons.

‘Dangerous’ Activity

In Peru, where Novomatic operates 13 gaming locales in addition to selling and renting machines, there are “lax to non-existent regulatory controls, a toothless Gaming Commission staffed by unqualified personnel, and a cursory registration process,” according to an October 2010 U.S. State Department cable released by Wikileaks. “The gaming sector is thus wide open to money launderers.”

Novomatic says it complies with rules in all its markets.

“Regulatory changes aren’t in the first instance, with the exception of complete prohibition, disruptive,” said Wohlfahrt.

When Russian Prime Minister Vladimir Putin banned gambling in all but the country’s furthest reaches in 2009, Novomatic took a 55 million-euro loss, according to Hannes Reichmann, a company spokesman.

In his last public interview, published by Trend in January 2009, Graf called gambling “quite dangerous,” on par with smoking and drinking alcohol.

He can still convince investors to give his company the money it needs, said Wolfgang Matejka, who manages 250 million euros at Matejka & Partner Asset Management in Vienna.

“Anyone investing in the gaming sector would be bound to consider Novomatic if it were listed,” he said.

--With assistance from Zoe Schneeweiss in Vienna. Editors: Vidya Root, Robert Valpuesta

To contact the reporter on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net


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