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Bidding for a Privilege
(Originally Published in The Adams Analysis)
By Ken Adams
Strategic Analyst
email

Although each jurisdiction is different, in every jurisdiction a gaming license is costly to acquire and valuable to possess. In some states licenses are not limited by statue, but rather by the market place. In other states gaming licenses are limited by statue. So, for example, in Nevada if you qualify and have the funding, you can get a gaming license and open a casino. However, in Michigan there are only three licenses available and all for Detroit, Illinois is limited to 10 and Pennsylvania is going to allow 14.

The concept of limiting licenses had a couple of different reasons at its foundation. Lawmakers often felt that limiting the licenses and locations would help protect the general population from the dangers and side effects of casino. They also sought to profit from the competition for one of the limited licenses. When Louisiana limited New Orleans to one license, that license became very valuable. For more than a year the industry watched as the competition for New Orleans heated up; no NFL season provided more excitement and dramatic stories than New Orleans. In the end, Harrah’s won the contest and the cost of license, the tax rate, the limitations on operations; the limitations and costs seemed almost enough to undo Harrah’s. Harrah’s survived, but not without considerable pain, difficulty and concessions on the part of the regulators.

Bidding for casino licenses should make all of us shudder. Besides New Orleans, do you remember Illinois where Isle of Capri bid $500 million to trump Harrah’s? Regardless of the logic or intent of any bidder, once a second party enters into the process and starts the bidding there is no going back. Take Rhode Island, for example. Harrah’s (no. every bidding story is not about Harrah’s, but as the largest company in the industry, Harrah’s does try to establish a presence in every market.) has been working with the Narragansett Indian tribe for several years trying to get a casino authorized in the state that would belong to the tribe, but be managed by Harrah’s. After several defeats, Harrah’s and the tribe are back again this year with a new proposal, when suddenly up jumps the Donald.

Donald Trump seems always to be standing on the sidelines watching and then at the last minute he jumps in and offers a bid. It worked in Indiana, twice. The Donald certainly is entertaining; even if he hasn’t been particularly success at operating casinos, he has often been a successful bidder. And, of course, once he starts a bidding war, even if he doesn’t win the bid, the price will have been driven up significantly. In Rhode Island the governor has been against gaming, but the idea of a bidding war appeals even to the anti-gaming politicians. In this case, Trump may have helped the cause though driving the licensing cost up.

Bidding is not the only element in the process of selecting a licensee that can have a negative effect on gaming. Public input is more and more becoming a part of the process, often making it more of a politician campaign than anything else. Indian gaming, in theory, is immune to public input – only it isn’t. Where tribes are trying to put casinos into areas other than their traditional reservations, public hearings are a regular part of the process. In California legislation has been introduced that would require local approval in the form of a vote before a tribe could open an off reservation casino.

Pennsylvania is holding public hearings in every community scheduled to receive a casino license. The hearings, like the ones envisioned in the California legislation, would be advisory. The intent is for citizens to have input into the licensee, type of operation and location and to give the gaming authorities some guidance in making their decision. In fact they have proven to be political reality shows.

Reality show is the current metaphor of choice, but the Pittsburg Post-Gazette has another metaphor that may be more apt, “dog show.” It conveys the idea of competition without any interaction between the contestants, merely a show for the judges.

Considering the number of celebrities, football players, politicians, hockey players and others dancing in the center ring, dog show may be more apt. Donald, yes the very same Donald Trump, sent a successful Apprentice Show-winner-turned Trump employee to prepare the ground for a Donald entry.

The gaming license itself in Pennsylvania is not subject to bidding; the cost of the license is fixed by the enabling legislation. The costs that are being affected by competition and public hearings are the actual casino and other amenities. The proposals are in the half a billion-dollar category, sometime with kickers like the Isle of Capri’s offer to rescue the Pittsburg Penguins.

And there is no guarantee of success: take the example of Boyd in Pennsylvania. Boyd thought it had done its homework and had a good shot at one of the licenses until the local community council voted against them. The vote isn’t binding on the state gaming regulators, but it certainly will influence their thinking.

There is another bidding process taking place currently, the war for Aztar. It isn’t really a bidding war for a license, but it is. There are five separate casinos in the Aztar portfolio: Atlantic City, New Jersey; Caruthersville, Missouri; Evansville. Indiana; Las Vegas, and Laughlin, Nevada. Ameristar, Columbia Sussex and Pinnacle have been bidding for more than a month; trying to outdo each other they have driven the price of Aztar stock from where it was a year ago, $28 a share to over $50 today. Ameristar joined in for a while and then gave up, much to the relief of its stockholders. All of the properties are viable on their own, but the real plum is the Las Vegas Tropicana. The Trop is a long under-performing casino sitting on a very, very valuable piece of Las Vegas Strip real estate. Most observers think all of the excitement is for the Vegas real estate, but if that were true one would think that Riviera would generate a little more interest; the Riv only has one suitor and when its stockholders insisted they hold out for more money, nothing happened.

Someone will win the Trop prize. Someone will win the Riviera and licenses will be awarded in Pennsylvania for each of possible locations. Rhode Island may or may not vote to allow for a casino and it may or may not hold an auction for license. And in each case the corporation that wins the license (or properties) in question will survive the process, as will the gaming industry. So what is the point?

The current round of contests and bidding wars are driving up the costs – too much. Gaming is a difficult business; it is capital intensive, expensive to enter, highly competitive and expensive to operate. Gaming has extremely high tax rates, almost always higher than any other business or industry in the jurisdiction pays and has the additional costs of extensive regulation.

There is something about bidding, buying at auction that leads bidders to spend more than the object of their desires normally costs or often is worth. It has a secondary effect as well; it drives the normal price up and that is true in art, rare books, estate goods or casinos. And it changes the way potential sellers or administrators think about what they own or supervise – and in the case of gaming it changes the value that regulators and lawmakers place on casinos licenses. What it does not change is the market or potential revenue that a potential casino can generate, but it does lower the profit and make a given jurisdiction, indeed the industry in general, more unstable and risky.

Why should we (the industry insiders: employees, owners, managers and stockholders) care? It is after all an industry built on calculated risk and that is the point: the risk moves from mathematical calculations to political uncertainties. As industry insiders we ought to resist to the best of our ability contributing to increasing the risk of an already risky business.

But, then that is just my opinion, isn’t it?

Ken

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