When Churchill Downs Inc. spent $160 million in cash to buy the Oxford Casino in the first quarter of 2013, Chairman and CEO Robert Evans characterized it as an appealing investment that met four essential conditions for the Louisville-based racetrack and casino company.It was a “newer” property in a “gaming-friendly” state, he said in the […]
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When Churchill Downs Inc. spent $160 million in cash to buy the Oxford Casino in the first quarter of 2013, Chairman and CEO Robert Evans characterized it as an appealing investment that met four essential conditions for the Louisville-based racetrack and casino company.
It was a “newer” property in a “gaming-friendly” state, he said in the company's March 29 press release announcing its purchase agreement with Black Bear Realty Co. LLC, the local investment group that opened the casino in June 2012. Likewise, he said, the casino's location — two hours south of the competing Hollywood Casino in Bangor and that much closer to gambling customers in southern Maine, New Hampshire and Massachusetts — was viewed as a “competitively defensible” market.
With three aces in hand, Churchill Downs looked at Oxford Casino's financials and determined the $160 million purchase price would be approximately 7.5 times the casino's year-end earnings before interest, taxes, depreciation and amortization, indicating, said Evans, “significant future free cash flow generation at rates of return attractive to our shareholders.”
In other words: Four aces … seemingly, a safe bet.
Nine months later the Oxford Casino purchase is paying off handsomely for Churchill Downs. In an earnings report issued on Oct. 30, the company credits Oxford's $17.7 million in Q3 earnings as the biggest contributor to a 61% increase in the company's $30.3 million gaming net revenues for that quarter. It also noted that the expansion of the company's gaming segment through its purchase of Oxford and a casino in Vicksburg, Miss., helped drive the company's record third quarter net revenues of $185.6 million, up $20.8 million, or 13% more than its Q3 2012 revenues.
But as any serious poker player knows, four aces are not unbeatable. For Oxford Casino, looming competition from several proposed large resort casinos in Maine, New Hampshire and Massachusetts could be the hand that trumps Churchill Downs'. In Maine, alone, at least seven gaming expansion proposals will be considered by lawmakers in this legislative session. Ground zero is the Veterans and Legal Affairs Committee, which oversees gambling in the state and decides which gaming bills move forward.
“We're in a hot seat,” says Rep. Louis Luchini, D-Ellsworth, co-chairman of the committee, who also served as co-chairman of a special legislative study group charged by 125th Legislature with creating a competitive bidding process for any additional casino or slot machine gaming in Maine.
Power play
The Gaming Commission was supposed to issue a report with recommendations by Feb. 15 to the Veterans and Legal Affairs Committee, but after only three meetings it was disbanded a month after a contentious Sept. 27 vote recommending a massive expansion of gambling in Maine.
“The biggest thing I was hoping for to come out of the commission was to establish more of a regulatory structure for gaming in Maine, and that didn't happen,” says Luchini, co-chairman of the Gaming Commission along with Sen. John Patrick, D-Rumford.
What did happen at the commission's third meeting, was a 10-8 vote approving a sweeping endorsement of seven proposed gambling projects in Maine. In a departure from the scheduled agenda, the motion was introduced by Peter Connell of Ocean Properties Ltd., the Portsmouth, N.H.-based company partnering with Scarborough Downs to build a $120 million destination resort casino in Biddeford.
Connell's motion called on the committee “to support changes in statute that would allow the following”:
- A southern Maine destination resort casino with table games [i.e., Biddeford Downs].
- Slot machines and table games to be operated by the Passamaquoddy Tribe in Washington County.
- Slot machines and table games in Aroostook County to be operated by the Houlton Band of Maliseets.
- High-stakes electronic beano, to be operated by the Penobscot Nation, the Houlton Band of Maliseets, the Aroostook Band of Micmacs and the Passamaquoddy Tribe.
- Advance deposit wagering for harness racing at existing off-track betting facilities and commercial harness racing tracks.
- Slot machines to be operated by qualified nonprofit and veterans organization.
- Expanded gambling opportunities for persons or groups who are eligible for existing gaming licenses.
Luchini says he opposed the motion, calling it premature since the commission had not completed its research or developed a bidding process for applicants seeking approval “of a slot machine facility or a casino.”
Luchini and Patrick disbanded the commission at the end of its next meeting on Oct. 24, with Patrick posting a letter on the Maine Senate Democrats' website condemning the Sept. 27 vote as “a simple power grab on the part of a few self-serving individuals who were willing to undermine an entire process for their own personal gain.”
Majority members justified their vote, alleging the Gaming Commission was created simply to delay any expansion of gaming in Maine. They also argued that protecting Maine's two existing casinos from additional competition is unfair.
Cannibalizing casinos?
Patrick, who also serves on the Veterans and Legal Affairs Committee, says he is “pro-gaming.” But he says he's beginning to have misgivings about Maine's capacity to support additional large-scale casinos, given the state's relatively small population and the likelihood that overlapping gaming markets will simply diffuse the spending and make each casino less viable.
“Does it make any sense for Maine to have a casino every 100 miles or so? I don't think it does,” he says.
A Maine casino market analysis commissioned by Churchill Downs Inc. and prepared by Clyde Barrow, director of the Center for Policy Analysis at the University of Massachusetts Dartmouth, gives credence to Patrick's misgivings. Among his findings:
- Oxford Casino has cannibalized approximately $11.9 million (19%) of net slot machine revenue from Hollywood Casino from June 2012 to July 2013, despite there being more than two hours of driving time between the two facilities.
- After Oxford Casino opened in June 2012, Hollywood Casino's year-to-year net slot machine revenue immediately turned negative and had not recovered as of July 2013.
The proposed Biddeford Downs casino with its 1,000 slot machines and 25 table games, he writes in his September 2013 “The Maine Casino Gaming Market” report, would have a similar cannibalizing impact.
“A Biddeford Downs Casino will be strategically located within the most lucrative segments of Oxford Casino's primary (31 to 60 minutes) and secondary market areas (61-120 minutes),” he writes, estimating the diverted gross gaming revenues from Oxford at $34.6 million (or 47.1%) and from Hollywood at $17.4 million (or 29.1%).
“This means that 95.5% of a Biddeford Downs Casino's gross gaming revenues will be pure displacement and cannibalization of existing casino gaming revenues,” Barrow concludes.
Those effects will be compounded, he adds, if the $1 billion Suffolk Downs casino resort for the greater Boston area and two other casino resort proposals for the western and southeastern regions of Massachusetts ranging from $800 million to $1 billion each — as well as the $600 million resort casino and race track proposed for Rockingham Park in Salem, N.H. — all come to fruition.
His conclusion that new casinos will simply divide smaller revenues in a saturated market mirrors earlier findings related to Connecticut's Foxwoods and Mohegan Sun casinos. Both opened in the 1990s and have posted almost two years of declining revenues due to increased competition in the Northeast.
In an August 2013 report looking at the potential impact of Massachusetts' three casino resorts on the two Connecticut casinos, Moody's Investors Service analyst Peter Trombetta says expanded competition in the Northeast casino market is forcing Foxwoods and Mohegan to expand with non-gaming amenities to attract more patrons. He also notes that the operators of those casinos have put in bids to operate at least two of Massachusetts' regional casinos.
Patrick expects Barrow's market analysis will be reviewed closely by lawmakers in the weeks ahead. He also expects proponents for each of the gaming proposals will come armed with their own analyses.
“It's going to be an interesting session,” he says. ”The lobbying is going to be incredible.”
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