It's Election Day - gaming industry bets on continued expansion

By Paul Deckelman

New York , Nov. 4 - Millions of Americans head for the polls Tuesday to fill local, state and federal-level offices and to vote on ballot propositions and other initiatives. Among those who will be watching the returns with considerably more than academic interest will be people connected with the gaming industry, which over the past few decades has bet tens of billions of dollars on the continued willingness of people to try their luck on games of chance, in venues ranging from humble corner candy stores and groceries selling state lottery tickets to glitzy billion-dollar fantasy-themed gambling palaces in Nevada, New Jersey, Connecticut, Mississippi and a number of other states.

The gamers will sift the results of Tuesday's votes - the election of pro- or anti-gaming governors in various states, and the approval or rejection of gambling-related ballot initiatives - to determine the odds of profitably pursuing the gaming business in various jurisdictions.

Modern-day legalized gambling in the U.S. has come a long way from the first big hotels that sprang up in the late 1940s in a then-dusty, sleepy southern Nevada town called Las Vegas (whose early growth, at least, is generally believed to have been fertilized, to a greater of lesser degree, by money from the Mob).

Presently, legalized gambling in one form or another - state lotteries, horse or dog racetracks, legalized sports betting, riverboat gaming or elaborate full-blown land-based casinos - exists in 47 out of the 50 states.

Only three states - Mormon-dominated Utah, along with Hawaii and Tennessee - are completely without any form of gaming - and that number could drop to two, if Tennessee voters approve a constitutional amendment giving the state legislature the authority to create a state lottery.

But of far more interest within the gaming industry - which includes a number of companies which have subsidized the building of their gaming palaces, on land or sea, via extensive high-yield financing - is the vote in Iowa, where residents of 11 counties will vote whether to allow gaming riverboats on the Mississippi and Missouri rivers to continue to ply their trade.

Iowa, which legalized gaming in 1994, mandated that it be renewed on a county-by county basis every eight years, and this is the first test of whether the locals will be satisfied that the riverboats have, as their operators promised, created jobs and raised sizable sums of tax money for the state, while creating a minimum of the social problems that usually accompany gambling, such as addiction, crime and the like.

The odds are that the locals will say they have. That's the view of high yield gaming analyst Jacques Cornet of CIBC World Markets Corp. "The polls would indicate that gaming will be allowed to continue in all the counties where it currently exists," he said.

In Pennsylvania, the gubernatorial election pits two pro-gaming candidates against one another - Republican Mike Fisher and Democrat Ed Rendell, the former mayor of Philadelphia. Both men have indicated that they favor allowing slot machines at racetracks as a way of raising revenues for the state - a possibility which has raised some concerns in Atlantic City, which gets as much as 45% of its gamblers from Pennsylvania, a relatively short hop down the Atlantic City Expressway from Philadelphia.

Timothy Wilmott, the president of Harrah's Entertainment Inc.'s Eastern Division, who also heads the Casino Association of New Jersey, worries that letting the Pennsylvania tracks put in slots - particularly Philadelphia Park - will cut into the number of gamblers from the Keystone State who will be trying their luck at the New Jersey seaside resort. Most of the loss, however, would be among the small-betting day trippers, many of whom bus down to Atlantic City from larger cities like Philadelphia or New York.

But CIBC's Cornet believes that at least for the moment, there's not too much cause for concern by Harrah's (which operates a casino in Atlantic City's Marina district), Trump Hotels & Casino Resorts Inc., MGM Mirage or the other Atlantic City operators to worry about.

"My view is that with just slots at tracks, the impact on Atlantic City is not going to be significant."

He notes that out of the four current tracks in the state which could be allowed to offer up to 2,500 slots per venue, only Philadelphia Park is really in a position to draw off Atlantic City gamblers - the others are in far-off Pittsburgh, Harrisburg and Wilkes-Barre - and even there, "I don't believe the product will offer enough differentiation to make that trip [to the race track instead of to Atlantic City]. Slot machines at a race track are a much different product than a full-scale casino, with restaurants, hotels and all the amenities that come with it."

In declaring that Pennsylvania's proposed slot gaming plans probably wouldn't be much of a competitive threat, Cornet offered one caveat: "Obviously, that changes if we move into riverboats, but that doesn't seem likely given the current political climate." While Rendell has been more outspoken in his advocacy of riverboat gaming, the analyst noted that "he's backed off that." For the near term, regardless of the outcome of the elections, it would appear that slots at the tracks are going to get a legislative push in the next session."

Just as slot machines at race tracks likely don't pose much threat to Atlantic City's gaming industry, Cornet likewise believes that proposals to allow Indian tribe casino gaming in Arizona won't have any impact on gaming in Las Vegas.

Arizona voters are voting on four gaming-related proposals, three of which would allow tribes to build casinos (Proposal 200 would allow each tribe three casinos with up to 1,400 slot machines and 20 table games, while the more generous Proposal 202 would allow up to four casinos with 1,400 slots and 100 table games; Proposal 201 would allow racetracks to operate up to 95 slot machines, and would let each tribe have up to 2,400 slots and 75 table games. The fourth proposal would extend the state lottery for another 10 years).

There's a huge difference between gambling in a tribal casino somewhere out in the Arizona desert and doing it at the Mirage, the Bellagio, Caesar's Palace or one of the dozen or so other lavish gambling emporiums on the Las Vegas Strip. "The difference in the product is so great that it would be very difficult [to impact Las Vegas]" Cornet said.

"If you wanted to say that there's a market out there that could feel the impact, I'd argue that it's Laughlin [a considerably smaller market, with less-fancy casinos, right at the very southernmost tip of Nevada], as opposed to Las Vegas. But even in that degree, it still depends on the product that's developed, and it's not clear that you're going to have these full-scale products that close that differentiation."

The expansion of slot-machine gaming to such jurisdictions as Arizona, Pennsylvania and, possibly, West Virginia and Maine, as well as the prospect for continued gaming in Iowa and flourishing of gaming in the major existing markets such as Nevada, New Jersey and the Mississippi-Louisiana Gulf Coast certainly bodes well for gaming equipment makers, notably slot machine leader International Game Technologies. IGT shares briefly shot up to a new 52-week intra-day high at $78.40 before succumbing to late profit-taking and closing down 58 cents (0.75%) to $76.46, while its bonds continued to hover well above par; its 8 3/8% notes due 2009 held steady at 110 bid, and its 7 7/8% notes due 2004 were at 103.5 bid.

IGT, said Cornet, is "still high yield from a ratings standpoint - but they've been doing extremely well, outperforming the market - they trade almost like investment grade bonds. The underlying fundamentals are more like a crossover going in an upward direction."

Unless there is a radical result in Tuesday's elections in various states, with gaming expansion proposals defeated everywhere they are being voted upon - and the Vegas oddsmakers say that's pretty much a very, very long shot - local and state governments will likely continue to look increasingly at gaming as means of re-filling their depleted treasuries.

"Predicting politics is almost next to impossible," Cornet observed, "but I think that what you will see is a lot of states looking for alternative ways to raise revenue - and this happens to be one. I think it will get more consideration from a greater number of states, and, I would argue, that we've seen this already in states where gaming already exists."

In New York, for instance, Gov. George Pataki - up for re-election Tuesday - pushed through a major expansion of Indian tribal gaming in the aftermath of the Sept. 11 terrorist attacks, and the anticipated hit that the Empire State's economy would take.

CIBC's Cornet meantime cited the cases of Illinois and Indiana, each of which raised casino gross revenue taxes this past year.

"They have gone back to the industry and increased taxes as a way of adding incremental revenue to the budget, and I think we will see more of that," the analyst said. "And as the economy continues to remain soft, and the longer that goes, the more pressure you're going to see and the more to the forefront gaming legislation will come. It happened in the early 90s [when many states legalized casinos or otherwise expanded legal gambling] and I guess history does repeat itself."

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