Illinois boosts gaming tax; stock prices in nose dive

June 04, 2002 12:32 PM
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When notorious bank robber Willie Sutton was asked why he robbed banks, he replied, "Because that’s where the money is."

That same logic has followed so-called "sin taxes." When politicians are desperately in need of funds to balance their budgets, they more often than not turn to whatever sin taxes are available.

Last weekend, that’s exactly what the Illinois lawmakers did: increase taxes on both a package of cigarettes and the state’s riverboat casinos.

Wall Street investors reacted immediately.

During trading on Monday, gaming stocks plummeted in value from the outset. Hardest hit was Argosy Gaming Inc. (AGY) that fell $7.03 to $27.37 with nearly three million shares traded. On a normal day, the company would see about 300,000 of its shares traded.

Analysts noted that Argosy has two riverboats operating in Illinois and generates about 33% of its EBITDA (earnings before interest, taxes, depreciation and amortization).

Also hard hit was Hollywood Casinos Inc. (HWD) which generates about 60% of its EBITDA from its operation in Aurora. The company is scheduled to open the second half of its new barge in Illinois later this summer. Its share price dropped $2.53 to a close of $10.50 with 493,000 share changing hands.

Harrah’s Entertainment Inc. (HET) was downgraded by Bear Stearns following the Illinois tax announcement. The company has riverboats in both Joliet, which generated $314 million in revenues last year, and Metropolis, which recorded $127 million in revenues. Bear Stearns dropped its rating from a buy to attractive.

In trading on Monday, HET fell $3.67 a share to $43.98. A whopping 3,963,600 shares were traded, nearly four times the normal amount.

Another major firm doing business in Illinois, Mandalay Resort Group (MBG), also felt the sting of the tax increase. Mandalay owns a 50% stake in the Grand Victoria riverboat, the largest revenue producer in the state. In a recent financial report, the company said that the Grand Victoria was responsible for about 10% of the company’s 2002 EBITDA.

In heavy trading, MBG dropped $2.10 during the day to close at 30.50.

Boyd Gaming Inc. (BYD), which operates the Par-A-Dice gaming facility in Illinois, fell $2.11 to $12.50.

Even gaming companies that do not operate facilities in Illinois were infected by the Wall Street flu. Ameristar Gaming Corp. (ASCA) fell $2.19 to $27.11; Aztar Corporation (AZR) down $2.13 at $18.55; International Game Technology, down $1.64 at $60.86; Isle of Capri, down $1.67 at $18.30; MGM MIRAGE Inc. (MGG), down $2.46 at $35.23; Park Place Entertainment Corporation (PPE), down $0.45 at $10.85, and Penn National Gaming Inc. (PENN), down $3.01 at $33.08.

Hard hit by declining state revenues, Illinois lawmakers addressed the problem of finding enough money to erase a $1.35 billion budget deficit and to end its legislative session. In a closed-door session, the lawmakers and Gov. George Ryan agreed to tap future proceeds from a tobacco lawsuit settlement in order to raise about $750 million. Also, cigarette taxes will increase by 40 cents a pack.

As for the riverboat casinos, the bill, expected to be signed by Gov. Ryan, raises the current graduated tax structure by 2.5% up to $150 million, while introducing two new tax structures above the $150 million revenue rate. Between $150 million and $200 million, the rate goes to 45% from the current 35%, while above $200 million increases to a national record of 50%.

Disappointing to the riverboat operators was the legislature’s failure to permit the properties to increase their 1,200 gaming positions by accommodating another 400 customers. Adding gaming positions would have eased the impact of increased tax rates.

Another source of potential fund raising also fell by the wayside. A bill was introduced that would have permitted the state to auction off the controversial 10th riverboat license that has been in limbo since the dispute arose with previous license holder, Emerald Casino Co., and its efforts to berth a riverboat in the Chicago suburb of Rosemont. The bill fell nine votes short in Senate action. Some legislators had estimated an auction could have generated about $500 million.

The new tax legislation will become effective in July, assuming that it receives the expected signature of Gov. Ryan.

Win some; lose some

A court ruling favored Harrah’s Entertainment Inc. (HET) in one case last week but worked against the company in another.

A $50,000 marker payment from a gambler who later filed for bankruptcy must be returned, the 8th Circuit U.S. Court of Appeals ruled last week.

The payment to Harrah’s for a marker issued by its riverboat in Tunica, Miss., was appealed by a bankruptcy trustee who argued that the gambler was insolvent at the time and that a few months later was forced to file for personal bankruptcy, listing debts of $1.5 million. Under the bankruptcy law, the trustee argued that the casino debt should not have been paid from the gambler’s assets.

The court agreed saying that the gaming company "is well aware (that) the odds are clearly stacked against the troubled debtor."

In its battle with JCC Holding Co. over control of Harrah’s New Orleans Casino, HET was favored in a decision by a Delaware court. The ruling said HET had the right to nominate candidates to both board seats of JCC Holding that will be up for election this year.

Success for both of these candidates would give HET control of the New Orleans casino. JCC Holding is appealing the ­­decision.

”˜Downs’ expansion

Armed with approval to expand its slot machine operation, Wheeling Downs Racetrack and Gaming Center in Wheeling, West Virginia, owned by the Delaware North Co. of Buffalo, N.Y., has revealed plans to enter the entertainment business by adding a showroom adjoining a 150-room hotel facility.

The company said the expansion was needed to have the gaming center compete more effectively with Mountaineer Racetrack and Gaming Resort, located 50 miles away in Chester, W. Va. A spokesman said talks were underway with representatives of Jamboree USA to have the entertainment company work with officials of Wheeling Downs.

Previously, Wheeling Downs operated 1,537 machines but plans call for the company to add 550 slot machines.

Adding games

Ted Arneault, president and CEO of MTR Gaming Group (MNTG) operators of Mountain Park and Gaming Center in West Virginia, has seen his company’s fortunes improve by elevating its racing operation to a "racino" with the addition of slot machines. He also has had experience of operating a full-fledged casino ”¦ the Speakeasy Casino in northern Las Vegas.

So, it was only natural that he proposed to West Virginia lawmakers that he be permitted to add table games to his slot operation. He said such a move would satisfy demands of some slot machine players and boost business by 20%.

"There’s no difference other than that one is being done manually and one is being done through the video format," Arneault explained. His proposal would let West Virginia tracks offer live versions of poker, blackjack and other games now being played by his patrons who play on touch-screen machines.

"We’re already there doing these games, but when it’s done live, it’s more of a social atmosphere," Arneault added.

His bill is expected to be introduced in the legislature in 2003.

Unholy alliance

Considering the position professional football, baseball and basketball leagues have taken toward gaming institutions in this country, it seemed strange to Americans that Britain has yawned while a major soccer club and one of the biggest U.K. bookmakers have signed a four-year promotional agreement.

Ladbrokes betting shops, a division of Hilton Groups Ltd., and Manchester United, one of the country’s best known "football club." The two said the agreement will provide Manchester United’s global fan base with betting and gaming services.

The agreement was signed so that it would be in force during the current World Cup soccer matches in Japan and South Korea.

"This partnership with Ladbroke," said a Manchester United spokesman, "enables us to offer our supporters at home and abroad access to the market-leading betting and gaming services provided by the world’s biggest betting brand."

Is the NFL missing something here?

New operators

The Sault Ste. Marie Tribe of Chippewa Indians, owners of the Greektown Casino in Detroit, Mich., has taken over the day-to-day operations of the property, replacing the Las Vegas-based Millennium Group.

The tribe actually has six casinos and now operates each of them. However, the council said it would retain the services of the Millennium Group as consultants through November, 2010.

The Detroit property was purchased by the Chippewas from the original owners who were forced out by state regulators.

Indian officials complimented the Millennium Group noting that Greektown’s market share has grown from 24% in December, 2000 when it opened to 29% in the past April.

The Insider

Scientific Games Corporation (SGMS) has been named the primary supplier of instant tickets by the Kentucky Lottery Corporation.

Isle of Capri Casinos (ISLE) has filed to sell four million company shares. The proceeds will be used to repay debt.

Ameristar Casinos Inc. has named Brighton USA of St. Louis, Mo., to provide public relations services to its facility in St. Charles, Mo.