Who will Build New Casinos in Pennsylvania, Illinois and Indiana?

Pennsylvania passed a massive gaming expansion bill in 2017.  The bill authorized ten mini casinos, slot machines in truck stops and online gambling.  The legislation required a separate auction for each of the ten mini casinos.  Lawmakers envisioned a lively competition, resulting in a windfall for the state.  The auctions began as the lawmakers had hoped, but with each successive auction the interest waned and the value of the bids declined.  After the fifth auction, the state stopped the process.  There did not seem to be any interest in the additional licenses.  Two years after the legislation passed there are still no mini casinos.  The winning bidders already operate casinos in the state and do not seem eager to get the new mini casinos built and open for business.

The Pennsylvania Gaming Commission has just reopened the bidding process with the first auction scheduled for September.  The commission did not decide to restart the bidding; the state’s budget bill included a requirement for the mini casino process to begin again.  The lawmakers felt the gaming commission wasn’t doing its job and needed a poke in the ribs to get it moving again.  However, in fact, the commission was being realistic not reluctant, there was no interest in the other five licenses.  How could that be when there is plenty of interest in truck stop licenses and in implementing sports betting and online gambling?  It is an interesting question and one that deserves some thought by the lawmakers.

The answer is obvious to most industry observers; the marketplace is too crowded already.  That excess of competitors is not just in Pennsylvania, but the entire region.  It is also visible in Illinois, Indiana and New York.   New York authorized seven casinos and granted four licenses.  Even those four are underperforming producing 50 to 60 percent of the income originally projected.  For the casino operators it is a two-edged sword, the casinos cost more to build than expected and produce less revenue.  Short of bankruptcy, the casinos are removing slot machines and cutting staff to attempt to balance expenses with revenues.  That is exactly what casino operators in Pennsylvania are trying to avoid.  They do not want to add to the competition, spend too much on a license and building a casino for a small return on investment.  It is not good business.

It is too soon to tell, but Illinois is very likely to face the same problem.  In 2019, the legislature authorized six new casinos, an additional VLT for every VLT licensee, sports betting and VLTs in truck stops.  The legislation authorized casinos in Chicago, Danville, Waukegan and Rockford, Williamson County; and one license in a suburban Cook County township.  Danville, Waukegan and Rockford actively campaigned for a license and are eager to get going.  They are busy hiring consultants and preparing to put out RFPs, but to date no casino company has declared its interest.

Chicago is the plumb.  The nearest casino in Illinois to Chicago does about one third of the total gaming revenue in the state.  There is certain to be interest by the major gaming corporations in Chicago.  Wynn Resorts’ CEO Matt Maddox hinted his company’s interest immediately after opening the $2.6 billion Encore Boston Harbor in June.  He said that Wynn Resorts was very interested in major cities and he felt the company had demonstrated with Encore its ability to meet the highest standards.  Wynn is used to a long and convoluted process.  It took eight years from the time the Massachusetts Expanded Gaming Act passed and the opening of Encore Boston Harbor.   That kind of patience is going to be needed.  Chicago has already missed its first deadline; the legislation called for Chicago to hire a consultant by July 8th.

It will be a challenge to find a casino company willing to invest hundreds of millions of dollars in a casino outside of Chicago.  Although, Hard Rock has just announced that it is interested in operating a casino in Rockford.   The casino industry in Illinois is challenged, revenue has been falling for six years due to the growth of VLTs.   The VLTs are set to take another jump due to the same legislation that authorized the additional casinos.   Indiana also passed legislation for one new casino and one casino license to be moved to a better location.   With the expansion in Illinois, it is uncertain if there will be much interest in building a casino in Indiana either.

For certain, there will be casino companies interested in some of those opportunities.  It is equally certain that there will be much less interest than there was when casinos were first authorized in Illinois, Indiana and Pennsylvania.   Casino operators have adjusted their thinking to the saturated markets, but lawmakers have not.  However, over the next couple of years an awareness of the market saturation should eventually reach the halls of government.  In contrast to the interest shown in opening new casinos in crowded markets, casinos in Illinois, Indiana and Pennsylvania have demonstrated a very strong interest in sports and online gambling.  The success of online and sports betting in Atlantic City is attracting the attention of the entire region.  Sports betting may prove to be sufficient inducement for operators to line up to seek a casino license in Pennsylvania, Illinois and Indiana.

Caesars & Eldorado Merge: Icahn and Reno Celebrate.

It happened just as Carl Icahn wanted. Eldorado bought Caesars and is bringing the company formerly called Harrah’s back to where its life began.  The merger was not unexpected. Still, on Monday, June 24th, when the announcement came it pushed all other gaming stories off the front page, even the opening of $2.6 billion Wynn Resorts’ Encore near Boston.  The agreement between Eldorado and Caesars is a cash and stock deal worth $17.3 billion inclusive of Caesars’ debt.  There is a side-deal wherein VICI, a REIT, will acquire some of the real estate for $3.2 billion and lease the operations back to the new company, to be called Caesars.  The board of directors of Caesars, Eldorado and VICI have approved the deal and now the stockholders get to vote.  The deal is then subject to regulatory.  The approvals and final change of ownership should occur sometime in 2020.

The story of the sale has many layers.  The most significant part of the story concerns Carl Icahn and activist stockholders.  The sale of Caesars was the brainchild of Carl Icahn.  Beginning in December, Icahn increased his holding in Caesars to 99 million shares and with 28 percent of the stock, he is by far the largest stockholder.  Icahn criticized the management of Caesars for failing to maximize the value of its assets.  He demanded and received three seats on the board of directors and a voice in choosing a new CEO.  Tony Rodio, who had previously been CEO for Icahn-owned Tropicana, became CEO.  With control of the company, Icahn forced it to be put on the market.  The final price would give Icahn a nearly $500 million profit if he decides to sell his shares.  Wall Street observers are betting he will hold on to his stock until the price goes up again as a result of the Eldorado management’s improvements to operating income.

The transaction could never have occurred without the involvement of a REIT.  Caesars was just too big and expensive for one operator to finance.  Although, MGM and Las Vegas Sands might have been able to find the financing, neither showed any interest.  Tillman Fertitta was another early bidder.  Fertitta owns the Golden Nugget casinos and Landry’s put forth a bid last November, but Caesar was not interested at his price.  And after Icahn increased his position, he said the Fertitta bid was simply too low.  After the Eldorado announcement was made, Fertitta expressed interest in the Strip properties. Phil Ruffin also expressed an interest in purchasing a couple of the assets, but not the entire company.   Boyd was also said to have considered a bid, but in the end did not; Boyd might still be interested in a Strip property.

 The only viable candidate appeared to be Eldorado with at least one major REIT as a partner.  Besides having a partner, Eldorado also has a strategy for selling some of its underperforming assets.  The New York Post speculated that Bally’s Atlantic City will be closed, and the New Jersey Gaming Control Board may force the sale of at least one other casino, claiming the Eldorado would own too many of the city’s casinos.  Some of the Midwestern casinos will be put up for sale either forced by the regulators or to reduce the company’s exposure in any one market.  However, the hot properties to sell will be on the Las Vegas Strip.  Already, Fertitta, Ruffin and Boyd are wondering which properties might be put on the auction block.

The deepest layer of the story is Eldorado’s strategy of acquisitions that focuses on synergies, reduced marketing costs and debt reduction by selling the physical assets to a REIT.  Eldorado has not been able to increase revenue at the casinos it purchases in any significant way.  But it has been very successful at increasing cash flow by reducing expenses.  The most important reduction comes from synergies.  Eldorado estimates there will be $500 million in savings due to synergies in the merger with Caesars.  The new larger company can also purchase many products and services cheaper than the separate companies could; slot machines, insurance and borrowed capital can all be purchased at better prices.

The analysts looking at the Caesars transactions praised Eldorado management for its skill in reducing expenses and increasing cash flow.  However, there will be an additional challenge for Eldorado; Caesars has been struggling under debt and bankruptcy since 2008.  As a consequence, many of its properties are sorely in need of investment.   Some of the casinos most in need of help will probably be offered for sale at bargain prices, the rest will need attention.  The deferred maintenance in some of the older properties is in the hundreds of millions of dollars.  Many of those properties are also sadly out of date with their in-market competitors and will need significant upgrades to compete.

The local media where there is Eldorado or Caesars property has been speculating about the impact of the transaction on their community.  The most interesting for me is Reno.  The local media in Reno is considering the fate of Caesars Harrah’s and speculating on what it will mean for the downtown casino core.  The media is also wondering if there were any other examples of small family companies becoming industry giants.  The answer is yes.  For example, Walmart started with one store operated by Sam Walton and his family.  In Reno, the answer is a double yes; in 1973 when Don Carano and partners opened the Eldorado, Bill Harrah operated Harrah’s just two blocks down the street.  On that day Harrah’s and Eldorado were just small family owned Reno casinos.  On the day of the merger, the former Harrah’s and Eldorado will become the nation’s largest gaming company. And the headquarters will be in downtown Reno.  It was a journey for those two companies on Virginia Street in 1973 to those same two companies in 2020.

Illinois and its Neighbors are Set to Be Transformed

On Sunday, June 2nd, at the last possible moment, the Illinois legislature passed a massive gambling expansion bill.  Adding more gaming is a perennial issue for Illinois lawmakers, politicians and would-be operators.  Each year, the governor, mayor of Chicago, racetrack, casino and VLT operators have a wish list for the legislature. Each list is usually different from the others.   However, not since the Video Gaming Act passed in 2009 has any gaming bill made it to the finish line until this year.  The bill that finally passed in June is pretty much a duplicate of the one that was introduced last year, but failed to make it out of committee.  This year’s bill has not been signed yet by the governor J. B. Pritzker.  But Pritzker has said he is eager to sign the bill as expanded gaming was one of the keys of his revenue plan when he ran for governor last year.

The governor has big plans for spending in the coming year and he needs money.  His 2019-2020 budget is $40 billion dollars.  To fund the budget, legislature authorized new gaming options, raised the tax on cigarettes and gasoline, increased income taxes and adopted a tax on legal recreational marijuana. The governor called the legislative session the most transformative session in recent history.  Whether the entire of state of Illinois is transformed or not, gaming is certainly set to be changed dramatically.

The 800-page gambling act allows new casinos and racetracks, riverboat casinos to build land-based locations and to add gaming positions.  (A gaming position is a slot machine or seat at a table game.)  It also allows sports betting in bricks and mortar locations and online and more VLTs.   Specifically, the legislation calls for six new casinos in the state, including one in Chicago.  Each casino will be allowed 2000 gaming positions, except Chicago where the casino can have 4000 positions.  The city of Chicago will receive 30 percent of the tax revenue from the casino.  O’Hare and Midway airports are authorized slot machines as part of the casino concession.   In typical Illinois fashion, the location and the operator of the Chicago casino is left up the mayor.  Aldermen from varying wards are lining up to fight for the right to house the prize.

The legislation provides for land-based casinos in the cities of Waukegan, Rockford, Danville, Williamson County and the south suburbs of Chicago. Each casino will be entitled to 2000 gaming positions and sport betting. The mayors of Waukegan, Rockford and Danville have been very enthusiastic in their support for a casino. They are each studying the details of the bill before determining how to begin the process of selecting an operator and a site.  All of the communities are eager to get started in the casino business and to begin collecting the tax revenues. Danville has an extra incentive to move as quickly as possible since it is 60 miles from Terre Haute, Indiana where recent legislation has authorized a casino for that city. Now the two cities are in a race to be the first to open and gain a spot in the hearts of the region’s gamblers.

The state’s existing three racetracks are authorized 1200 gaming positions. Tracks will also be able to offer sports wagering.   Two new racetracks with gaming will be allowed.  With table games, slot machines and sports betting, the tracks will be very much like casinos; which means the total legal casino locations will go from the current 10 to a potential 21 in Illinois.

The existing VLT locations can add one game for a total of 6 VLTs per location, increase the maximum wager from $2 to $4 and have progressive jackpots. The VLT tax was increased from 30 percent to 34 percent over a two-year period.  Truck stops which sell 50,000 gallons of fuel can have 10 VLTs.  Sports betting licenses are permitted to casinos, racetracks and sports facilities that seat more than 17,000 people; online sports wagering is allowed in connection with an authorized gaming operator.  After 18 months, online operators will be able to purchase an independent license.  The lottery is allowed 2500 sports betting locations in the first year.

It is a complicated jumble of ideas, taxes, conditions and requirements.  Each segment of the expansion has different regulations, fees and taxes.  And there are no clear timelines, except the lottery operating 2500 betting kiosks within a year.  It is too early to predict just when a casino might open in Chicago. The racetracks will add slot machines, or the existing casinos will move onto land and add capacity.   In fact, there are no guarantees that some of the increases will ever happen.  Casino revenue in Illinois has been falling steadily since 2011 when the first VLTs hit the market.  Few of the existing casinos are even using the full 1200 gambling positions authorized, the average is 1000 positions per property.  Those properties are unlikely to pay for extra gaming positions when most will be losing even more revenue under the new conditions.  It also seems highly unlikely that anyone will be willing to build two additional racetracks.  The casinos in Chicago and several cities will probably get built, but the process of choosing a location and operator and building a facility will take two to three years at a minimum.

The quickest and most certain portion of the legislation to be implemented will be the additional VLTs.  There are 31,000 VLTs located in 7000 establishments around the state.  Adding one game to the existing VLT locations is easy to implement.  That alone would add 7000 VLTs.  The number of VLTs has grown by about 10 percent a month for the last year, that number is certain to jump up in the short-term.  Everything else in the legislation will have to be negotiated, financed and constructed before the state sees any tax money.   The dramatic changes in Illinois will influence the actions of the all casinos in the region.  This is going be a transformative time for the gaming industry in the Midwest.

Win, Profit and A Front-Man: Finding the Correct Words

The casino industry gets its fair share of media coverage.  At times, the coverage is very good and factually correct. The newspapers in Las Vegas, Atlantic City, Springfield, Massachusetts, Hartford, Connecticut and in the major cities in California have become expert observers of the industry.  In other locations, the coverage is less consistent and often misleading.  Even in major gaming markets reporters new to the industry are constantly being assigned to cover gaming.

Experienced gaming reporters understand and use the appropriate terms when writing about the gaming industry. Casinos report revenue monthly to state regulatory authorities for the purposes of taxation; the number is the gross gaming win.  The win is the amount of money the casino retains after paying all winning bets; casinos pay a gaming tax on the win.  The win is not profit; it is gross revenue before expenses.   However, inexperienced reporters choose words that reflect a misunderstanding of the terms.  They misuse the terms, which can be confusing.

It is also common to read that the casinos “raked in” the money or even “hauled in the dough.  The implication is clear, casino revenue is the result of a nefarious, barely legal, sleezy, money-grubbing activity.  Another confusion comes between wagers and win.  Handle, sales or coin in is the gross amount wagered.  Handle is not revenue.  That mistake has become more common now with the spread of sports betting.  The numbers are larger and make for more attractive headlines.  The handle is important in analyzing business volume, but it is not a revenue number or an indication of cash flow.

There was an article recently from New York stating the lottery was the first in the nation to top $10 billion.  The article stated VLTs recorded $2.08 billion in 2018 and the lottery $8.2 billion, a record! Now that is an impressive number, except the $8 billion is sales not win and the $2 billion is win.  If the reporter had used comparable terms, the VLT coin-in was $39.9 billion.  After paying expenses, the lottery passed $3 billion on to the state, which would suggest the lottery win was probably between $4 and $5 billion.  The headlines could easily have read, New York Lottery tops $48 billion, or New York Lottery reports $8 billion in gross gaming revenue. Industry insiders understand the nuances, but the majority of readers are confused.  Most people form their opinions of the gaming industry from such misleading statements.

The misleading and misunderstood terms can also lead to some humorous outcomes.  In a last-minute rush to expand gaming in Illinois and get bills on the floor of the state legislature, a wrong word crept into a bill.  The bill had to be pulled back and corrected by its sponsor.  As originally written, the bill proposed some additional riverboat casinos.  However, that is not what the sponsor wanted.  He wanted land-based casinos.  The person drafting the bill thought all casinos are on riverboats, so to him riverboat was the correct term.  No harm, no foul, the mistake was corrected.   The damage was to the bill’s sponsor who was more than a little embarrassed.

Those examples are minor compared to a recent article from the Las Vegas Sun.  In the Sun article Bryan Horwath interviewed Kenny Epstein of the El Cortez casino in downtown Las Vegas.  Horwath wrote about the upgrades the El Cortez was making to its casino and hotel.  The article outlined the property’s history and the history of Epstein’s involvement with it.  All-in-all, it was not a bad story, except for one very unfortunate choice of words.   Horwath called Epstein a front-man for a group of investors.  I don’t know how old Horwath is or how much he knows about the history of Las Vegas.  But it is clear he does not understand the word in the context of Las Vegas and organized crime.

A front-man in the days of the mob, was a person that could be licensed while the mob remained unseen behind the curtain.  While in truth, the mob really owned the casino and took its share of the cash off the top, before paying taxes.  The front-man was portrayed as the owner to the public, a savvy businessman who operated the casino.  In some cases, he may have been the casino operator, but never the owner.  Kenny Epstein is the CEO of the El Cortez and the majority owner.  He is not a front for anyone.  The Sun not only implies that Epstein is a front, a figure head, it implies the ownership group is somehow hidden.  Hidden ownership was a fact in the mob days, but that was a long time ago, as is the skimming they practiced.  Since the 1970s the Nevada casinos have been very strictly regulated.  All key personnel have to be licensed and the process is intense.  Organized crime figures from Chicago don’t slip in unnoticed.  And since the 1970s, casinos are guided by a system of internal controls.  The counting of the money is done under tightly controlled circumstances.  Nevada demands and gets its tax money first.  If the owners of a casino want to distribute cash among themselves, they cannot before the state’s share is counted.  The improperly used word suggests that Epstein is involved in suspicious acts and that Nevada and its casinos are still living in the mob past.  Nothing could be farther from the truth.

Wynn and MGM: Life in a Glass House

The biggest news in the gaming world for five days in May was the sale of Wynn Resorts’ Encore Boston Harbor to MGM Resorts International.  The Boston Globe broke the story on May 17th, a Friday, in the late afternoon.  By Wednesday morning, May 22nd, both companies had released statements saying the discussions had stopped and no sale was being contemplated.  In between those days, hundreds of articles appeared around the country with different slants on the possibilities and implications of the sale.

There were many theories about why Wynn would give up just short of the opening day.  CDC columnist John L. Smith compared it to a marathon runner quitting with the finish line in sight.  The marathon metaphor is apt.  Encore is very close to Boston, the home of the world-famous Boston Marathon.  Wynn resorts has indeed been engaged in a marathon-like process to build and open Boston Harbor.

It has been five years since Wynn was awarded a casino license.  The license was to “develop and construct” a casino resort in the town of Everett; the fee was $85 million.  The competitive bidding process was long and contentious.  But even with the license in hand, building the resort has not been a simple straightforward construction project.  The construction was delayed by lawsuits and other conditions caused by the unique situation in Massachusetts.  Wynn finally broke ground and started construction in August 2016.  All seemed to be going well until the Wall Street Journal published an article accusing company founder and chairman of the board, Steve Wynn, of sexual misconduct.  Within weeks Steve Wynn resigned from the company and sold his stock.

Wynn’s resignation did not end the issue for Massachusetts.  The Massachusetts Gaming Commission immediately began its own investigation into the behavior of Steve Wynn and Wynn Resorts.  A year later, on April 30th, the commission announced it had found Wynn Resorts and CEO suitable for licensure.  However, there were some conditions.  Wynn Resorts was to pay a $35 million fine and employ an outside firm to audit the company’s compliance to the conditions.  In addition, the CEO Matt Maddox was personally fined $500,000 and forced to undergo leadership training.  Wynn Resorts reacted cautiously and is said to still be considering its options, including an appeal.

Wynn Resorts was clearly dissatisfied with the commission’s conditions.  In the atmosphere of that discontent, the Boston Globe article was published.  The article was followed by another article questioning the motives of Wynn Resorts and CEO Matt Maddox.  The Globe speculated that Maddox was angry, implying he was looking for a way out of Massachusetts and the hassle.  The Globe made Maddox seem like a temperamental child who quits a game and takes his ball with him. Although, it now appears the Globe had an ulterior motive for its articles condemning Wynn Resorts.  Stephanie Solis of the Springfield Republican reported on May 24th that Boston Globe owner John Henry has twice tried to buy Encore; once in 2018 and again recently.

Articles in other publications wondered if MGM was the driving force behind the talks, reasoning that MGM wanted out of Springfield due to the poor performance of the MGM Springfield casino.  MGM could only have one license in Massachusetts so buying Encore would mean selling MGM Springfield.  Investors in both companies criticized a sale as being bad for Wynn and MGM.

The negotiations also fired up some politicians in Massachusetts.  The mayors of Boston, Everett and Springfield all warned MGM and Wynn that no deal was possible without their permission.  The mayors did not say what the price of approval would be, but there is an implication they intended to ask for some compensation.  The gaming commission and the governor were equally displeased. Both promised to monitor the situation, letting observers know that the deal would not be easy to accomplish.  The speculation and dissatisfaction might have influenced the decision by MGM and Wynn to cease the talks.

A statement was issued by each company explaining the decision to break off negotiations. MGM said it wasn’t really interested in Encore and was very happy with Springfield.  Wynn said it wanted to focus on Encore and get the property open.  So why were they talking in the first place and why did they let anyone know they were in negotiation?  The answer to both parts of the question is in the nature of public companies.  One of the statements from Wynn said that when an overture is made the company and board of directors have a fiduciary duty to consider it.  MGM and Wynn are also bound by SEC regulations, under which, anything that might have a material impact on the company and its stock has to be disclosed to stockholders.

Operating a public company is not like operating a private company.  It is more like living in a glass house.  Privately owned companies do not have to disclose any discussions.   A private company is not even required to publicly announce a sale.  A sign in the window: “Under New Management” might be the only official announcement.  Neither MGM nor Wynn has that luxury.  Any major action either company contemplates is open to public scrutiny.  Wall Street, the media, the regulators and banks are informed.  Because those things are public, speculation, criticism and even ridicule are common.  The five-day tale of a very short negotiation illustrates just how brutal that public exposure can be.  Ironically, that was one of the reasons Steve Wynn gave for selling Mirage Resorts to MGM in 2000.  Steve was tired of quarterly conference calls and the unrelenting criticism and second-guessing.  He was tired of living in a glass house.  There is no word yet about how Jim Murren, CEO of MGM, feels about it.

 

A Derby to End all Derbies

The May 4th Kentucky Derby was first of three horse races that constitute the Triple Crown.  It was squeezed into a very busy weekend that included Cinco de Mayo, the beginning of Ramadan, the National Hockey League championships and the NBA finals.  Horse racing seldom makes the national news, except for the Kentucky Derby, Preakness and Belmont Stakes.  There are other stakes, cups and derbies that make news in their neighborhood, but do not rise to national notice.

The Kentucky Derby, Preakness and Belmont are exceptions because they are connected by a trophy and a mystique.  Only 13 horses in the last 145 years have won all three races in the same year.  That fact has created the mystique.  Every year, the Kentucky Derby aficionados are on the lookout for that special horse with the potential to win the coveted trophy.  This year was no exception.  After the Arkansas Derby on April 13th a very promising candidate surfaced, Omaha Beach.  He looked very strong in the win and it was his third win in a row.  That was enough to make him the favorite for the Kentucky Derby.  People immediately started predicting Omaha Beach would go on to win the other jewels in the crown. 

Sadly however, the day after Omaha Beach became the favorite to win the Kentucky derby he was scratched due to a breathing obstruction that required surgery.   Immediately the odds makers put Game Winner into the favored position with Roadster and Improbable close behind.  And thus they stood when Derby Day dawned. Unfortunately for the fans, jockeys and horses, it was very wet day at the track.  The track was wet, muddy and slippery.  Rain is not great for racing, but it doesn’t call for cancellation.  It was wet and muddy last year when Justify won the Derby and went on to win the Preakness and Belmont Stakes.  Justify became the 13th horse in history to win the Triple Crown.

This year, County House won, but he will not follow in Justify’s footsteps.   Country House is sick and was pulled from the Preakness, ending any chance of a Triple Crown this year.   Still, without or without a candidate for the crown, the Preakness and Belmont will be run.  Thousands of people will be there to see the horses run.  For the fans, the major races are pure theater.  It is an opportunity to wear interesting hats, drink a little too much and place a wager or two.  They are the horse racing version of the annual Met Gala.  The races will be televised, but they will not attract the attention afforded to this year’s Kentucky Derby.

The 2019 Kentucky Derby set records for wager and viewing.  The wagering reached $250 million and 150,729 people were in the stands.  The attendance was not a record, but the television audience was gigantic.  The television audience this year was 20 percent larger than last year and the most since 1992.  Even without a strong favorite, viewers were primed for a potential Triple Crown candidate.   The race did not produce what fans wanted, but it did deliver drama.

The Kentucky Derby was won by an unlikely 65.1 underdog.  At least that is what the stewards determined after looking at the tapes for 21 minutes.  The actual winner on the track, Maximum Security was disqualified for veering widely across the track and nearly causing a pile up.  It was the first time in Derby history that the winner of the race was disqualified.  Maximum Security was clearly the best horse in the race and led the entire race.   All of the jockeys in the race were covered with mud from the horse in front of them, except Maximum Security’s rider, Luis Saez.  He was squeaky clean and mud-free as no horse was ever in front of him.  Saez is a seasoned jockey with 12,576 starts, 2,162 wins and $101.9 million in winnings.  However, Saez was not so good or clean in the mind of some of post-race analysts. It is thought, he might have pulled his horse in sooner.   Gary West, the owner of Maximum Security is furious; he appealed, but was rejected.  Now he is threatening to sue.

West may or may not prevail in a court of law.  But Maximum Security will not be in the Preakness and cannot become the 14th horse to win the Triple Crown.  County House did run a very good race.  He appears to be a much better horse than handicappers thought before the Derby.  But he too will not be at Pimlico seeking the middle jewel of the crown.  The best racing fans can hope for now is a horse that wins the Preakness, Belmont and goes on to win the Breeder’s Cup.

Although, it is not the Triple Crown, it would mark a horse for greatness.  Alternatively, the Preakness might end with a disqualification, creating another major media event.   The disqualification at the Kentucky Derby created more theater than any of the hats, outfits or outlandish behavior.  It has generated more debate, replays and speculation than any Derby winner.   The debate and analysis promise to continue right up to race time on May 18th in Baltimore.  The odds have not been posted yet, not for horses or for a disqualification.

What Is A Regulator’s Job?

Gambling regulators in Louisiana, New Jersey and Massachusetts have some big issues on their plates and no one is quite sure what to expect.  Big issues in regulation are not uncommon in gaming.  Casino gaming is a highly regulated industry and regulators play very prominent roles.  As conditions change and the industry evolves, regulators are faced with adapting to new circumstances and that can be challenging.

Every casino jurisdiction has its own, unique set of regulations based on the requirements of the enabling legislation.  For years there were two major models from Nevada and New Jersey that states used to write their own regulations.   Both states had two priorities –  protecting the integrity of the games and collecting taxes due to the state. Nevada has a broad general approach dictating the result, but not the specific methods while New jersey took the opposite tact, creating exact requirements.   Nevada requires the outcomes of all games to be random and the revenue accurately recorded.  New Jersey expected the same, but in the process specified how many table game supervisors a casino must employ and what percentage of its slot machines could come from any one manufacturer.

New states developing regulations wanted both integrity and accurate revenue reporting.  In addition to those requirements, other states had additional goals; some specified the minimum investment in building a casino, others the number of employees and some dictated the number of slot machines required.  One case in point is Louisiana and the license for the Harrah’s casino in New Orleans.  A land-based casino in New Orleans was the single exception to the riverboat casinos authorized by voters in 1991.  Harrah’s outbid and out-promised all other prospective licensees for the New Orleans license.  Harrah’s got the license; Louisiana required Harrah’s to maintain a minimum number of employees and to  guaranteed $100 million a year in taxes to the state.  The conditions were onerous and twice the casino filed for bankruptcy.  The state relented to reducing the number of employees and the annual taxes.

Louisiana and Harrah’s have just come to an agreement to renew the license for 30 years.  To get a 30-year extension Harrah’s agreed to pay a minimum of $60 million in taxes annually, to be increased to $65 million over time, to increase its guaranteed employee count by 500 and to invest $325 million in a hotel by 2024.  Lawmakers in Louisiana were eager to get a deal done, they wanted the additional investment, jobs and tax revenue.  The state and Harrah’s parent company, Caesars have resolved the issue to the satisfaction of the state, but Harrah’s is not as satisfied.  A spokesman called the conditions the worst ever imposed on a license renewal; indicating Harrah’s does not like the deal, but sees no choices.

Based on a recent study, New Jersey is considering a major change in its regulation for the second time.  When Chris Christie was first elected governor, he pushed for easing regulatory requirements and reducing the cost of regulation.  The study recommends that the state should limit the number of casinos in Atlantic City to nine, the number now operating.  Since 2006, Atlantic City has lost over half of its gaming revenue to neighboring states and even with the addition of online gaming and sports betting, the situation is still difficult.  The competitive pressures on the borders are not easing and in fact can be expected to increase over the next couple of years.

Limiting the number of casinos in Atlantic City might help protect the existing casinos, the employee base and the tax revenues. And there is a possible license application pending, so the issue is pressing.  Regulators will be facing tough choices, should they risk losing jobs and taxes by allowing more casinos to come in to further destabilize the market, or protect what exists.  This is new territory and it is not covered by existing regulations.

The final big issue of the moment comes from Massachusetts.  Wynn Resorts is in the final stages of development of Encore Resort Boston Harbor.  The cost of the property is approximately $2.4 billion.  Encore is scheduled to open in June, less than two months away.  However, the Massachusetts Gaming Commission has yet to issue a casino license.  The parent company, Wynn Resorts is stuck in the aftermath of a me-too affair.   The company founder, Steve Wynn was accused of sexual harassment and assault.  That was a year ago, Wynn resigned and sold his stock and the company restructured its management and board of directors.   Massachusetts investigated and held hearings, but has not announced a decision. The commission has been delayed for over a year, but it has run out of time.  If the gaming commission finds Wynn Resorts or some of its employees unsuitable, what then?

It is very likely that regulators in Massachusetts will grant a license to Wynn Resorts.  There is a lot at stake.  Everyone in the state is eager for Encore Boston Harbor to open and to begin to pay its employees and state taxes.  However, it is equally likely the commission will impose a very large fine and some additional conditions.  The Boston Globe is calling for a $100 million fine.  But the paper has stopped calling for any additional resignations or a license denial.  The decision on the company’s suitability is expect soon.  But do they really have a choice?

That is the regulator’s dilemma; in unique situations not covered by existing regulations, what is the role of regulators?  Is it to protect the jobs and investment in existence?  Or is it simply to license, tax and oversee the integrity of operating casinos?  If that is the case, regulators should not consider the fate of individual companies; it should allow the market place to sort out the winners and losers.  Either the company is suitable or it is not.  If on the other hand, the task is to protect the investment, jobs and taxes, the decision is much more complicated.  It is soul-searching time, the regulators will have to carefully read the enabling legislation and the regulations to decide what role they should be playing and thus what decisions to make.   Integrity and taxes are important, but they are not the only important things to take into consideration. The gaming industry is evolving rapidly and regulation is being forced to adapt to the changes.


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