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Best of Liz Benston

Gaming Guru

Liz Benston
 

Millennium Gaming Throws its Hat into Pennsylvania Ring

21 November 2005

This month, the owners of the Cannery Casino and the operators of the Rampart Casino in Las Vegas became the latest gaming operators to enter the Pennsylvania market with a deal to develop a racetrack casino.

Millennium Gaming, jumping into Pennsylvania just before a Dec. 28 deadline for casino license applications, joins Harrah's Entertainment, Venetian resort owner Las Vegas Sands, Planet Hollywood founder and Aladdin investor Robert Earl and a host of other casino operators beyond Las Vegas looking to build a casino in the Keystone State.

Millennium and private investor Oaktree Capital Management agreed to purchase 100 percent of the stock in a company that owns the Meadows, a harness racetrack near Pittsburgh. The $225 million deal is contingent on getting a slots license.

The Millennium-Oaktree partnership is hoping to obtain a temporary license and open a casino as early as the third quarter of next year.

The Meadows casino would eventually offer 3,000 slots and has the ability under state law to offer up to 5,000 slots -- more than any single casino in Nevada. The property would be built with amenities such as shopping and entertainment and could eventually offer a hotel, said Bill Paulos, a partner in Millennium with Bill Wortman.

After years of incremental casino expansions in gambling states, the gaming industry declared a major victory in Pennsylvania in July 2004 when Gov. Ed Rendell signed legislation approving up to 61,000 slot machines at 14 casino sites. Seven of those sites will be racetracks and others will be earmarked for standalone casinos and resorts.

The legalization of slot machines has faced numerous challenges and delays, including squabbles over tax money, who will obtain lucrative licenses to distribute slot machines and which cities will host the casinos.

"It's been a very slow-moving process," Paulos said. "Each part of the state wants to get their fair share. But there are things happening behind the scenes. The state is still taking applications. There are still a lot of things they are getting done in a short amount of time."

The Meadows opened in 1964 and has 210 racing days per year, more than many other tracks, Paulos said. The track also offers daily wagering on races simulcast at the track and at its five off-track betting locations in Pittsburgh.

Paulos and his partners bought the Meadows from subsidiaries of Magna Entertainment Corp., a Canadian-based racetrack operator that has experienced cash flow problems. Millennium and Oaktree will be leasing the property back to Magna.

"They needed a casino partner," Paulos said. Millennium has experience running locals casinos -- the kind of properties envisioned in Pennsylvania, he said.

"We will be applying the same principles (in Pennsylvania) that we do here," he said.

Paulos calls Pittsburgh a major feeder market with "great demographics" -- in other words, people who can afford to gamble.

"We don't close until we are licensed, so we're not fronting a lot of money," Paulos added.

Las Vegas-based Boyd Gaming Corp. looked at the Meadows but passed on purchasing the racetrack, company spokesman Rob Stillwell said.

Pennsylvania's gambling law allows tracks with racing licenses, such as the Meadows, to obtain a slots license. Applications for standalone casinos will be competing for a limited number of remaining licenses.

Like many other racetracks nationwide, the Meadows has experienced a decline in track attendance. Yet Rendell proposed taxing slot machines as a way to lower property taxes rather than as a way of rescuing struggling racetracks.

This month, Ameristar Casinos became the first major player to pull out of Pennsylvania when the Las Vegas company abandoned a plan to build a $450 million casino in Philadelphia.

Ameristar said it couldn't pencil out enough of a profit to justify the investment, given the high tax rate in Pennsylvania.

Unlike Millennium, Ameristar wasn't proposing a casino at a racetrack and therefore would have to compete with other applicants for a slots license.

Pittsburgh and Philadelphia are entirely different markets with separate competitive challenges, Jefferies & Co. stock analyst Larry Klatzkin said.

Philadelphia will compete directly with Atlantic City, which levies a fraction of Pennsylvania's casino tax, he said. By comparison, Pittsburgh will compete with West Virginia's existing racetrack casinos, which are taxed at a similar rate, he said.

Klatzkin said he questioned the profit potential of Ameristar's proposed casino, given the kind of money the company planned to spend.

Neither Boyd Gaming nor Station Casinos -- the biggest operators of local Las Vegas casinos -- have lined up deals in Pennsylvania.

Boyd is exploring potential opportunities in Pennsylvania but hasn't found the right deal, company spokesman Stillwell said.

Boyd owns half of Borgata, a luxury resort in Atlantic City that was designed to compete with existing and future gambling venues in surrounding states.

The slots-only casinos in Pennsylvania would be much different from the full-scale Borgata resort and aren't expected to cannibalize much of the resort's business, he said.

Having limited competition from a select number of licenses is a fair tradeoff for the high tax rate, though the decision to enter Pennsylvania "would really depend on the particular opportunity we're talking about," he said.

"There's no question that is a big number," he said, referring to the tax rate.

Station Casinos has also looked at Pennsylvania but is also cautious about the tax rate.

"I think we have some reservations about the tax rate in Pennsylvania," Station Chief Financial Officer Glenn Christenson said. "However, we do believe it is a very intriguing market and that it has potential for growth in the future.

"We continue to believe that focusing on Nevada assets is a better strategy at this time." Pennsylvania is a lucrative opportunity because of limited competition, said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at UNR.

A racetrack slot machine can rake in some $300 to $400 per day compared with the $100 or so per day won by a slot machine in Nevada, he said.

Eadington is skeptical that slot machine casinos will ultimately benefit Pennsylvania. They could end up being fairly unattractive places catering to lower-income people who probably shouldn't be gambling anyway, he said.

The tax rate is likely to deter operators specializing in luxury resort casinos such as MGM Mirage and Steve Wynn, he added.

"I would not be surprised if they ended up being pretty spartan, slot machine warehouses," he said. "The tax rates are so high it's going to be hard to flesh out the nongaming amenities."

Pennsylvania isn't the only place Millennium is looking for deals.

In August, the company signed an agreement with the owner of a racetrack in New Hampshire to develop a racetrack casino should the state legalize slots in the future.

The company also is planning to open a second phase expansion at the Cannery Casino in April that will include a movie theater and is expecting to develop another Cannery-brand casino next year at the site of the Nevada Palace on Boulder Highway.

"We're taking calls all the time," Paulos said. "We're looking everywhere."