Stocks rise as Indiana hikes taxes, OKs dockside

Jun 25, 2002 7:30 AM

Investors reacted positively to casino tax increases proposed by Indiana lawmakers over the weekend. It was the exact opposite to the negative reaction to the announcement of tax increases in Illinois.

Awaiting the expected signature of Gov. Frank O’Bannon is a bill that eliminates the previous 20% flat tax on gaming revenues and replaced it with a 15%-35% sliding scale.

But there also were some mitigating features including the highly-desired dockside gaming permission that will eliminate the need for the riverboats to cruise in order to function. Another benefit was the elimination of the provisions that would have permitted slot machines at the state’s racetracks and a casino in French Lick. Also no change was made on the $3 admission tax.

After evaluating the proposed law, analysts came away feeling the impact generally would be modest.

"While we are wary of material changes in tax structures given that significant capital investment was made on less punitive tax schedules," wrote Jason Ader of Bear Stearns in an equity research paper, "the new Indiana structure is more rational than Illinois’ pending tax increase. The ability to go dockside, with a fall-back tax rate for operators who choose not to go dockside makes the tax increase more palatable, in our view, and does not preclude operators from allocating more capital into the state of Indiana."

He agreed, however, that the bill penalizes the largest operators in the state with the graduated tax rate while the smallest operators should fare relatively better. The large operators include Argosy Gaming (AGY), Harrah’s Entertainment Inc. (HET) and Jack Binion’s Horseshoe Empress Hammond. They are expected to generate gaming revenues that will place them in the highest tax categories. Also affected will be Boyd Gaming Corporation (BYD) and Park Place Entertainment Corp. (PPE).

Robin Farley, chief gaming analyst at UBS Warburg, saw the changes as pretty much offsetting.

"We believe if dockside were to generate a 9-12% increase in revenues that it could roughly offset that tax increase and be neutral to operators," Farley wrote in her weekly gaming report.

"The worst case scenario for the operators is limited to paying the tax rate that is only slightly higher (22.5%) if they continue to cruise. In that scenario, Argosy could be impacted by $0.19 per share or $2 to the stock’s valuation; Harrah’s by $0.04 per share or less than a dollar to the stock price.

"In terms of upside, it is within a reasonable range that the operators could more than offset the tax increase with dockside gaming. An increase of more than 12% could be accretive, with the largest benefit to Argosy. If revenues increased in the area of 20-25% (Illinois rose more than 30% in the first year of dockside), that could add more than $0.50 to earnings per share and about $5-$6 to our target price."

Two other casino riverboats to be affected by the new tax schedule are based in Gary, Ind. They are operated by Trump Casinos and Resorts (DJT) and entrepreneur Don Barden, principal owner of the Majestic Star.

Traders Monday moved quickly to take advantage of what could radically improve future price targets. Argosy jumped up $1.45 to close at $27.75. Also showing substantial improvement was Boyd Gaming Corp. Its shares closed at $13.85, a $1.25 higher than at the day’s opening. Moving up modestly was Harrah’s Entertainment Inc. that closed at $46.54, an increase of 27 cents.

Showing little or no increases were Park Place Entertainment with a one-penny improvement while closing at $10.25 and Aztar Corporation which was unchanged at $20.20.

Should Gov. O’Bannon sign the bill into law within the next few days, the new tax rates will take effect on July 1.

Gemstar crashes

Gemstar -- TV Guide, parent company of TVG, the interactive horse wagering company, was hard hit by stock traders on Monday following a report that the International Trade Commission had ruled against it in a patent lawsuit.

By the end of the trading day, Gemstar (GMST) had fallen 39% or $3.20 to close at an even $5.

Gemstar, a provider of on-screen television programming guides, had argued that four companies -- EchoStar Communications Corp. (DISH), Scientific-Atlantic Inc. (SFA), Pioneer Corp of Japan, and SCI Systems Inc., now a unit of Sanmina-SCI Corp. (SANM), had violated their patent on imported television receivers.

The administrative judge disagreed, saying there was no infringement on the three patents. And, he went further to say that Gemstar had misused one of the patents that was unenforceable.

Rupert Murdoch’s News Corp. owns 42% of Gemstar.

Clinton celebrates

Former President Bill Clinton, who helped recognize the Mohegan Indians as a legitimate tribe, joined in the festivities last week when the Mohegans opened a new hotel at their casino in Uncasville, Conn.

Clinton described the property as a "fabulously successful place," and thanked the Mohegans for "not forgetting about your brothers and sisters in Native American tribes that still have not been brought into the circle of opportunity."

Members of the Mohegan tribe were scattered around the country until the federal government recognized the tribe officially on March 7, 1994. At the time there were about 30 members of the tribe residing on the half-acre of land the tribe owned. After recognition, the tribe with the help of Trader Cove Associates, including partner Sol Kerzner of Sun International Hotels Ltd. (SIH), built a $300 million casino on a reservation that had been expanded to 240 acres.

Mohegan Sun Casino Resort shares the gaming market in the northeast with Foxwoods Resort operated by the Mashantucket Pequot Tribal Nation.

Lingering problem

An Illinois gaming license remains in the hands of the controversial Emerald Casino Inc. and the principals hope to present a proposal to state regulators on Wednesday that resolve a lingering problem.

The group will suggest that they will give up the license with no profit for investors and with substantially fewer liabilities than previously included. Also, emerald reportedly will let the state choose both the new owner of the license as well as the location for the riverboat development.

Community officials of Rosemont, which is situated near Chicago’s O’Hare Airport, doesn’t like the idea since Emerald has already started building a riverboat in Rosemont. Even though Emerald has abandoned the project, Rosemont officials want the state to designate that the new licenseholder build in their community.

All of which is pretty much ignored by Atty. Gen. Jim Ryan who opposed any settlement with Emerald and is equally adamant against Rosemont as the riverboat site.

Casino investment

Expanding its involvement in casino gaming, Nevada Gold & Casinos Inc. (UWN) says it has formed a joint venture to provide financing for a new Indian casino to be located about 11 miles west of Albuquerque, N.M.

Being established is Route 66 Casinos LLC with Nevada Gold & Casinos owning 51% and The Gillmann Group holding a 49% interest. The limited liability company will provide financing assistance and gaming equipment to the Pueblo of Laguna tribe. This will be the second casino for the Pueblo Laguna Indians.

Standing on the location is a temporary casino that will be replaced by the permanent facility. Plans call for 1,250 gaming devices to be located in the new casino.

Lobbying help

Before another pitch is made to the Kentucky legislators for permission to install slot machines at the state’s racetracks, shareholders in Churchill Downs Inc. (CHDN) are being asked to help lobby the legislature.

Tom Meeker, Churchill’s president and CEO addressed shareholders at the company’s annual shareholders’ meeting and asked that they become involved in getting legislators to support the slot machine movement.

"To the extent you have contacts with members of the legislative bodies," Meeker said, "I urge you to talk with them about alternative gaming."

During the past legislative session, Kentucky’s track operators made more progress than ever before in promoting slots. Observers now believe that next year will be the time when more favorable legislation will be passed. However, it is expected that the bill will require the voters to approve a constitutional change allowing the gaming devices.

The Insider

GTECH Holdings Inc. (GTK), the world’s largest supplier of lottery equipment and services, reported quarterly earnings of $0.49 a share, easily topping the $0.30 per share reported in the comparable quarter a year ago.

New Jersey officials have approved a $70 million short-term loan being made by Deutsche Bank to Trump Hotels and Casinos (DJT).

President Casinos Inc. (PREZ) has filed for Chapter 11 bankruptcy protection, a move apparently triggered by a report from a New York bank that the company was in default of a $25 million bond issue.

Readers of Midwest Gaming & Travel magazine have chose two Ameristar Casinos Inc. (ASCA) as their favorite casinos in Council Bluffs, Iowa and Ameristar Casino Hotel Kansas City in Missouri.

Riviera Holdings Corporation (RIV) has priced its new offering of $215 million senior secured notes to bear interest of 11%.

Park Place Entertainment Corp. (PPE) has arranged for MKS Inc. to manage and control its software development process.


...the new Indiana structure is more rational than Illinois’ pending tax increase...

Jason Ader,
Bear Stearns