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Best of Howard Stutz

Gaming Guru

Howard Stutz
 

Gambling beyond Nevada: Eyeing markets and taking chances

20 October 2008

WASHINGTON, D.C. -- Amid collapsing credit markets and sinking stock prices, gaming industry leaders are looking for any piece of positive news. They hope voters in five states will give them a reason to smile come Nov. 4.

Voters in Colorado, Maine, Maryland, Missouri and Ohio are evaluating gaming expansion or changes to existing gaming laws. The measures, different in size and scope, have a common thread: increased gaming opportunities in exchange for the potential of increased tax dollars.

"When revenues decline, jurisdictions look to gaming as a new or additional funding source," said Deutsche Bank gaming analyst Bill Lerner, who thought several of the ballot initiatives stood a favorable chance of passing. "In tough economic times, gaming expansion often becomes much more probable."

The measures don't carry the magnitude of recent elections in California and Pennsylvania, where voters approved thousands of new slot machines and massive casinos earlier in the decade.

Still, the potential spread of legalized gambling into new markets or increasing opportunities in existing jurisdictions are viewed as forward steps by an industry that has been rocked with delayed or canceled projects, reduced revenues, and financial stability questions for much of the past 12 months.

"Any specific measure or proposal is something from which we can all directly benefit," said Chuck Brooke, the senior vice president of government affairs for International Game Technology.

The slot machine maker supports a ballot question in Maryland that would legalize slot machine parlors in five in-state locations, authorizing up to 15,000 slot machines.

"It's a state that could become a new source of revenue and a significant market," Brooke said. "Obviously, that's a place where we are interested in the outcome."

Maryland is the only state asking voters whether they want to approve gambling for the first time. The ballot question has attracted the interest of the slot machine industry. The Las Vegas-based Association of Gaming Equipment Manufacturers, a trade organization, donated $100,000 to the pro-gambling campaign in Maryland.

"One of our organization's missions is to identify opportunities for our members," association executive director Marcus Prater said. "In this particular year, there are not that many. But we're active in Maryland because it's an expansion opportunity that stands a good chance of passing."

Two Las Vegas-based casino operators, Ameristar Casinos and Pinnacle Entertainment, stand to benefit if voters in Colorado and Missouri decide they want to make gaming more freewheeling by increasing wagering limits or eliminating loss limits.

The issue in Colorado would let casinos increase the wagering limit from $5 to up to $100, add craps and roulette tables, and stay open 24 hours. In Missouri, casinos want to eliminate a loss limit that keeps gamblers from betting more than $500 during a two-hour period. The casinos are willing to accept a 1 percentage point increase in the gaming tax and cap the number of state casinos at 13.

In Colorado and Missouri, additional taxes on gaming revenues that would be generated if both measures pass would be directed toward public education budgets.

Mack Bradley, a spokesman for Pinnacle Entertainment in St. Louis, said the state's loss-limit rule has become antiquated in the 16 years that gaming has been legalized in Missouri. Also, the potential of increased competition from across the boarder with legalized gaming in Kansas, necessitates the liberalization.

Pinnacle opened the $507 million Lumiere Place in downtown St. Louis last December and is building a $500 million hotel-casino in suburban St. Louis that is expected to open next year. Bradley said the company needs to protect its investment.

"When voters approved gaming, there were just a handful of casinos in Iowa and Illinois," Bradley said. "Now, there are more than 100 casinos and gambling is in every state bordering us. This measure evens the playing field for casinos in Missouri."

Pinnacle and Ameristar, which operates casinos in Kansas City, Mo., and the St. Louis suburb of St. Charles, Mo., have funded much of the $2.1 million raised by Missouri's Yes on A campaign.

For Ameristar, which also operates a casino Black Hawk, Colo., making gaming more wide-open in Colorado and Missouri would benefit the company's bottom line. The company's Missouri properties account for roughly 42 percent of Ameristar's annual revenues and cash flow.

Troy Stremming, Ameristar's chief government affairs officer who is based in Kansas City, said tying the elimination of a loss limit in Missouri with a gaming tax increase -- estimates are the additional gaming revenues would generate $130 million annually for public education -- gives voters a reason to support the initiative.

"There have been legislative efforts to eliminate the betting limits, but this is the first time it's in the hands of the voters," Stremming said. "It's all about getting the message out and making sure voters understand the issue and that money will go to public education."

Macquarie Capital gaming analyst Joel Simkins said passage of the two ballot measures could easily increase the per-share value of Ameristar's stock, anywhere from 29 percent to 40 percent. The company, he said, is viewed as a potential acquisition target.

"If these measures pass, it will make Ameristar a more attractive takeover candidate," Simkins said in a note to investors. "Favorable legislative changes could provide a springboard for incremental property growth."

Maine and Ohio have single casino approval issues that are backed by individual casino operators. Las Vegas-based Olympia Gaming recently signed on to push the Maine issue. A favorable vote could result in a $100 million casino and resort in western Maine. Minnesota-based Lakes Entertainment is backing a casino in southwestern Ohio that could result a $600 million resort about 60 miles north of Cincinnati.

Justin Sebastiano, a MorganJoseph gaming analyst, said single casino issues benefit one gaming operator, in Ohio's case, Lakes Entertainment.

In a note to investors, Sebastiano said approval of the casino would be a large boost for Lakes, since the resort would draw customers from Cincinnati and other large Ohio metropolitan areas. However, he expects companies such as Pinnacle, Penn National Gaming and Hyatt, which operate casinos in Northern Indiana that draw customers from Cincinnati, to fight the referendum.

"(An) Ohio casino would be a game-changer for Lakes," Sebastiano told investors. "We calculate the Ohio casino would generate roughly $140 million in (cash flow) in year one."

Slot machine makers have to stay somewhat neutral when competing casino operators are on two sides of a ballot referendum. However, they believe that any expansion opportunities benefit gaming as a whole.

"The vote in Colorado doesn't directly affect us," Brooke said. "But an issue that makes a casino more profitable means more money to the bottom line for capital expenditures, such as new slot machines."

Bally Technologies Chief Operating Officer Gavin Isaacs said the slot machine developer is an "interested observer" in jurisdiction expansion. Maryland, he said, is the best opportunity for gambling equipment makers since February, when California residents voted to allow several Indian casinos to add 17,000 slot machines, increasing the nation's largest Indian gaming market by 27 percent.

Isaacs was cautiously optimistic that the Maryland measure would be approved.

"Anything that promotes our customers' business helps us," Isaacs said. "Every four years we see these ballot issues pop up. We watch them very carefully."