Penn Hedges Its Bet in the Land of Lincoln

Penn National is a company on the move. Arguably, Penn is the most dynamic casino operator in the country in 2015. It just opened a racino in Massachusetts, has a $390 million-Indian casino under construction in California and purchased the Tropicana on the Las Vegas Strip. Add those operations to the 26 it already operates and Penn is an industry force. It is also on the leading edge of the industry’s latest financial trend – REITs. Penn does not own all of the casinos it operates; in 2013 it sold 17 of its operations to GLPI and leases them back. Penn paid about $45 million to lease those properties during the last quarter. Penn’s latest purchase is a bit different from anything else it has done to date. In July, Penn bought a chain of VGTs in Illinois; it is hedging its bet and trying to protect its considerable investment in the state.

Penn National Gaming Inc., a casino operator based near Reading, said it agreed to buy Prairie State Gaming, an Illinois company with 1,100 video gaming terminals at 270 bars and other locations in that state. The price was not disclosed, but Penn National, which operates three casinos in Illinois, said Prairie State had $10 million in operating cash flow in the 12 months ended June 30. Overall, Illinois had 20,730 gaming terminals at 4,965 establishments in June, according to the Illinois Gaming Board. Harold Brubaker, Philadelphia Inquirer, 7-31-15

Over the last decade or so, Penn bought or built casinos every jurisdiction possible. In some markets Penn owns multiple properties and therefore is competing against itself. Its casinos and racinos in Ohio certainly challenge the ones it has in West Virginia, Pennsylvania, and Indiana. That may work in the short-term, but in the long-term Penn will probably be forced to either sell or close some of its casinos. That is another national industry trend, selling or closing under performing assets. The national gaming market has changed drastically since the time when Penn, Harrah’s, Boyd and MGM were gobbling up every small casino company they could get; now they are being forced to reassess and right size in each market.

However, owning too many casinos in one market is not the issue for Penn in Illinois. It faces a much bigger challenge in Illinois, a state fraught with difficulties for casino operators. Illinois has been a loose cannon for operators since the Riverboat Gambling Act passed in 1990. There has been a constant stream of problems for the industry rolling out of the state legislature annually; tax increases, a smoking ban and an additional license have all managed to catch the industry off guard and to cause a great deal of pain. But, as difficult as each of those was, the addition of slot machines outside of casinos has been worse. In 2009, Illinois authorized up to five Video Gaming Terminals (VGTs) in licensed retail establishments, truck stops, veteran and fraternal establishments. The growth of VGTs started out slowly, but now there are over 20,000 VGTs in the Land of Lincoln. In June, those VGTs generated $72 million in revenue, up 43 percent from June 2014. For the casinos the situation is already bad, but it is likely to much get worse. Annually, the legislature considers expansion of gaming and that includes more casinos, slot machines for the race track and an online lottery. In Illinois one never knows what may happen next. But while the lawmakers may take years to act, the expansion of VGT licenses continues unabated and now an Indian casino is on the horizon.

The St. Charles City Council is re-opening the debate on whether it should allow video gaming in the city…the finance director, said that depending on how many eligible St. Charles establishments received a license, the city’s take would range between $173,900 and $695,000 a year, Alexa Aguilar, Chicago Tribune, 8-5-15

After a seven-year hiatus, the county and the Prairie Band Potawatomi Nation tribe are moving ahead with a plan to bring a casino to DeKalb County. It would be the first Native American-run gaming facility in the state – and a boom for the local economy, officials said. Rhonda Gillespie, DeKalb Daily-Chronicle, 8-5-15

Those 20,000 VGTs in Illinois will have an increasingly adverse impact on the state’s casinos. Of course, not all of that revenue would have gone into casino slot machines. But enough would to make a significant difference in profitability for the state’s ten casinos. Hedging your bet by buying some of the lost revenue might not be a perfect solution. But as those VGTs continue to eat away at casino revenue, it might be the only remedy available for Penn or any other operator in Illinois.


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