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Ohio, Texas emerge as potential racino states

Apr 16, 2003 9:00 PM

When gaming analysts looked at the landscape early this year, most focused on increased gaming in states such as Maryland, Kentucky, New York and Pennsylvania. Few gave much thought to Ohio and Texas.

But with the passage of a couple of months, the landscape seems to have changed substantially. Expanded gaming at racetracks in both Maryland and Kentucky appears dead for the time being. New York has a law authorizing slot machines at certain racetracks but a squabble continues regarding distribution of revenues.

And, in Pennsylvania, where legislation authorizing slot machines is still being debated, lobbying has become fierce for the state’s remaining track licenses.

The real surprises, however, are the states of Ohio and Texas. Last week, Ohio House members approved a move to send to the Senate a bill that would establish a November referendum permitting the voters to decide whether they would agree to permit the establishments of so-called racinos in order to avoid the imposition of an increase of 1% in the state’s sales tax.

Supporters suggested slots revenue at the state’s seven tracks would generate about $900 million while the 1% increase in the sales tax would bring in $1.2 billion.

Faced with a $363 million in the education budget, a strange alliance of big gambling, small horse tracks and strapped social service groups formed around the state jumping on the bandwagon to expand the state’s racetracks into mini-casinos.

Sensing the possibility of favorable legislation, officials of MTR Gaming Group Inc. (MNTG), operators of the highly-successful racino Mountaineer Park in West Virginia, has offered to pay $19 million to acquire Scioto Downs near Columbus, Ohio, but a closing might have to wait until it is determined whether slots will be available.

Another public company that would benefit from the slots approval is Magna Entertainment Corp. (MECA), owner of the thoroughbred track, Thistledown. The other thoroughbred tracks, privately owned, are Beulah Park and River Downs.

In addition to Scioto Downs, the other harness racing facilities involved are Raceway Park, Northfield and Lebanon.

Magna Entertainment would also benefit strongly if Texans decide to go the racino route. Although Gov. Rick Perry has spoken against expanded gaming, his supporters have indicated that placing slots at tracks, to be operated technically by the Texas Lottery Commission, would not be expanding gaming since the gaming activities are already taking place at tracks and by the lottery.

There are eight racetracks that would be impacted by such legislation in Texas.

GTECH Holdings

Spurred by recent acquisitions, GTECH Holdings Inc. (GTK) expects its revenues to grow by up to $85 million during fiscal 2004 and creating earnings per share of between $2.56 and $2.66. This was an increase from the previous guidance of between $2.50 and $2.60.

The company said its recently completed fourth quarter of fiscal 2003 produced earnings per diluted share of $0.72, "up substantially" over last year’s $0.18 per diluted share.

President and CEO Bruce Turner said he expects the company to benefit strongly from the acquisitions of PolCard and Interlott companies. The company also announced that it had received a 25-month contract extension for lottery and financial services from Caixa Economica Federal in Brazil. The extension is expected to generate between $120 million and $140 million in service revenues.

Also, the company said its subsidiary, GTECH Corporation had become the exclusive provider of e-scratch, an innovative web-based, interactive suite of scratch and reveal games.

And, on Monday, Hughes Network Systems (HNS), announced it had signed two new technology contracts valued at $24 million with GTECH. The Hughes company also said it had signed a 10-year service contract with GTECH.

Another increase?

Last year, the State of Illinois set the gaming industry abuzz with the announcement that it was increasing the gaming taxes whereby the most productive riverboats would pay a total of 50% of their revenues to the state in taxes.

The announcement was followed by months during which many of the state’s nine operating riverboats saw their revenues decline, thus mitigating the state’s attempt to extract more revenue from gaming.

So last week, the industry was doubly shocked when the new Illinois governor, Rod Blagojevich floated the idea of raising the gaming tax bills again. He proposed raising the highest tax from 50% to 70%; increasing the admissions fees to $5 per person from the current $3, and making other adjustments to the boats that paid smaller taxes.

The suggested tax increases caused the shares of Harrah’s Entertainment Inc. (HET), Mandalay Resort Group (MBG), and Argosy Gaming Inc. (AGY) to fall dramatically. However, when much of the reaction to Blagojevich’s proposal was negative, the affected companies saw their share prices recover some of their recent losses.

Coverage initiated

Blaylock & Partners equity analyst Ray Neidl has initiated coverage of Mandalay Resort Group (MBG) with a "hold" recommendation.

In a report titled, "Waiting for Las Vegas," Neidl said he believes Mandalay has several sustainable competitive advantages but that its exposure to Las Vegas, with 62% of its total cash flow coming from the Las Vegas Strip properties, "could continue to overhang the stock."

Neidl said he expects Las Vegas to grow at a modest 2-3% in 2003, and thus sees flattish top-line same-store growth from Las Vegas-centric operators like Mandalay Resort Group. Further, he said, "the timing of a Las Vegas recovery remains uncertain."

As for the new $235 million convention center, Neidl said the center and the $230 million suite-tower "should drive incremental growth."

Hyatt bounced

The parting of the ways will soon happen between Hyatt Gaming Management and the Windsor Woodmont Black Hawk Resort Corp., owner of the troubled Black Hawk Casino in Black Hawk, Colo.

The casino owner will terminate Hyatt Gaming Management 20-year management agreement for the property with the payment of $18.3 million. The payment includes $13 million that Hyatt had invested in the casino.

Windsor Woodmont blames poor management by Hyatt for the casino’s poor performance that caused the owners to file for bankruptcy protection. Actually, officials said the $150 million casino, Colorado’s largest, had struggled since its opening on Dec. 20, 2001.

Hyatt has blamed the casino’s problems on a poor design and a delayed opening.

Disclosure failure

Everything seemed to be going well for newly-elected New Mexico Gov. Bill Richardson and the state’s gambling industry until recently when it was revealed that his top appointee had failed to disclose certain relationships he had with gaming operators.

Richardson has placed Rafael J. Gutierrez, the governor’s state gaming representative, on leave pending an investigation into Gutierrez’s dealings with two gaming machine companies, Lobo Gaming and FamJam.

As part of the process of being appointed, Gutierrez filled out a personal disclosure form that was supposed to list his employment history over the past decade. However, it now appears that he failed to identify employment positions he held with the gaming companies.

Trump voted out

Hoping that the small Paucatuck Eastern Pequots would win federal recognition and be eligible for a casino in Connecticut, Donald Trump lobbied and won an agreement for a gaming contract with the tribe.

Things changed, however, when the Bureau of Indian Affairs decided that the Paucatuck Eastern Pequots were really a part of the Eastern Pequots tribe and combined the two into one tribe of about 1,150 members. Since the Paucatuck’s numbered only about 150 members in the new consolidated group, the Eastern Pequot majority prevailed.

In an earlier transaction, the Eastern Pequots had chosen Fairfield, Conn., Developer David Rosow as its gaming manager. Thus, Rosow prevailed and Trump, who had spent millions of dollars financing casino plans and federal recognition petitions, was left out in the cold.

Still, the loss may be moot since Connecticut state officials have appealsed the BIA’s decision granting the combined tribes recognition since they believe that the only reason recognition was sought was to open a casino, a move that the state vehemently opposes.

Internet lobbyists

Companies attempting to prevent the federal government from banning Internet gaming completely, rather than ordering a study of the problem, have turned, in some cases, to former New Jersey gaming regulators.

Working as consultants for the Interactive Gaming Council of Vancouver, B.C., Canada, are Frank Catania and Keith Furlong, partners in the Catania Consulting Group of North Haledon, N.J. Catania is a former assistant attorney general and director of the N.J. Division of Gaming Enforcement, a post he held for four years, and Furlong worked as the division’s spokesman and legislative liaison.

Recently, Catania spoke before a Congressional committee urging it to appoint a panel to study legalizing, regulating and taxing Internet gambling. Responding, Sen. Richard Shelby of Alabama said, "I describe Internet gambling as an evil, and I do not use that word lightly."

The Interactive Gaming Council, headed by Internet activist Sue Schneider, represents virtual casino operators, online sports books, game developers and electronic commerce companies, many based in the Caribbean or elsewhere other than in the U.S.

Earnings time

This is the time that Wall Street refers to as "earnings period" a time when many publicly held companies report their financial experience for the previous quarter.

Leading the announcements this week will be MGM MIRAGE Inc. (MGG) that is scheduled to release its first quarter financial results on Wednesday, April 16, prior to the opening of the equity markets.

The company said it will hold a conference call at 8 a.m. PDT during which company officials will provide a brief discussion of the quarter.

Two companies said they will report on their quarterly finances on Tuesday, April 22. They are Harrah’s Entertainment Inc. (HET) and Riviera Holdings Corp. (RIV). Harrah’s will host a conference call at 6 a.m. PDT while Riviera Holdings will report at 11 a.m. PDT.

Scheduled to report on Wednesday, April 23, is Aztar Corporation (AZR). The company said a live audio webcast will begin at 1:30 pm. PDT.

The Insider

Alpha Hospitality Corporation (ALHY) announced Monday that it is changing its corporate name to Empire Resorts Inc. and will trade, beginning Wednesday, April 16, on the Nasdaq under the symbol (NYNY). The company is working with the Cayuga Indian Nation to develop a casino in the New York Catskills.

Harrah’s Entertainment Inc. (HET), operators of Harrah’s New Orleans Casino, is eyeing the 35-year-old World Trade Center building as the site of its new hotel. The casino was prevented by law from operating a hotel but that law has been modified permitting Harrah’s to develop a hotel as part of its operation.

Alliance Gaming Corp. (AGI) says its subsidiary, Bally Gaming and Systems, has acquired Micro Clever Consulting, a French casino management systems firm.

Having recently moved from Minnesota where tribal gaming is flourishing, Steve Miller has started a petition drive to get 500 signatures needed to call an election in Northwood, Iowa, asking the voters to approve a riverboat license for their community.