The fine print in an unusual and seemingly lucrative offer for a now-dormant Illinois casino license would virtually ensure the bidder a quick profit while saddling the state with payments on more than $700 million in new debt, gambling industry analysts said Wednesday.
Penn National Gaming Inc., the Pennsylvania company that already owns Aurora’s Hollywood Casino, says it is willing to pay $761 million to buy the license from the bankrupt Emerald Casino and then build a casino and hotel in Rosemont.
Once the casino is completed, Penn National, one of seven companies bidding for the Emerald license, says it would transfer ownership of the complex to the state in return for a 20-year management deal worth about $40 million annually.
Gov. Rod Blagojevich has expressed interest in the idea of a state-owned casino, and the Penn National proposal also comes with a promise that the deal would net the cash-starved state a quick $350 million. It also dangles the prospect that Blagojevich could swiftly raise $2 billion more by selling rights to anticipated revenue for the next decade.
None of the other bids for the casino license, which are structured more traditionally and would not involve state ownership, offers as much money up front for the state.
But analysts say that beneath the bold and enticing financial offer from Penn National is a proposal that anticipates the firm chipping in only $50 million in cash for the casino. It intends to borrow the other $711 million it would need to buy and build the casino, and the debt would be paid off by revenue from the facility once it is transferred to state hands, the analysts say.
Under terms of the management contract it proposed, Penn National could recoup its $50 million investment in little more than one year.
“The only risk I see [for Penn National] is whether it’s legal under the proposed bidding process,” said Marc Falcone, gaming analyst for Deutsche Bank Securities in New York. “You’re looking at a one- to two-year payback . . . That’s pretty good.”
In a report issued earlier this week, Falcone and another Deutsche Bank analyst said, “On the surface, the bid seems quite aggressive at $506 [million for the license alone], but the rationale is in the details. We believe the bid is quite innovative and potentially very lucrative [for Penn]. . . . While we are not big fans of state-owned casinos, the potential return for Penn on its $50 million could be substantial.”
Minimal cash outlay
Cezar Froelich, legal counsel for Penn National, acknowledged Wednesday that the company’s cash outlay would be minimal under its proposal and the state-run casino would be obligated to pay off the debt at a cost of $60 million to $70 million annually.
Even so, he said, Penn National would still bear ultimate responsibility for the debt.
“While the casino is in fact paying the debt, there’s no risk to the state,” Froelich said. “It’s my client’s credit. If something goes wrong, my client is responsible. . . . It’s our credit, but the state gets all the profit.”
Of the bids now under consideration by the Illinois Gaming Board, three would locate site a casino in Rosemont and the others would build in other suburbs. But state officials have long said they would expect a casino in Rosemont to be Illinois’ most lucrative, making it an unlikely candidate to have to struggle to pay off debts.
The casino would be the first in Cook County, close to O’Hare International Airport and a short walk from the Stephens Convention Center and many of Rosemont’s 5,700 hotel rooms. Its annual revenue could surpass $400 million, gambling company officials estimate.
Penn National’s management proposal would entitle it to 10 percent of the casino’s revenue plus incentive fees. Under management contracts, casino managers run a casino, contributing their expertise. Casino owners pay the expenses, such as salaries, gambling equipment, maintenance and advertising, Falcone said.
Penn National’s unorthodox bid is the latest twist in the state’s battle to put its long-dormant 10th casino license into operation.
Emerald officials announced in 1999 that they planned to open a casino in Rosemont. But the Gaming Board voted in 2001 to revoke the Emerald license, after concluding that officials of the company had lied to state investigators and sold shares to two investors with ties to organized crime.
Emerald officials denied the allegations and appealed to a state administrative judge. Before the appeal was resolved, Emerald was forced into bankruptcy.
Under a deal with the Gaming Board and Illinois Atty. Gen. Lisa Madigan, Emerald is now auctioning off the license.
Immediate money
The deal could be attractive to the state because it would bring a huge infusion of money immediately, with payments to be made by the casino in the future. But several uncertainties remain.
Penn National’s proposal would have to pass legal muster. Some rival companies argue that the state can’t own a casino or can’t do so unless it revokes Emerald’s license–a process that regulators began but never finished. Other bidders for the license argue that if the state wants to own the casino, it must launch a new bidding process and make it clear that it is looking for a casino manager, not an owner.
Another unknown is how the board views Rosemont as a potential site. In a hearing in 2002, a board lawyer alleged that Emerald officials had sold 5 percent of the casino to friends of Rosemont Mayor Donald Stephens and the deal “ensured the infiltration of organized crime into its operation.”
Stephens denied having links to organized crime and insisted he had no control over who Emerald sold shares to.
Falcone said it was hard to know if Penn National’s bid represents the market rate for the management services it is offering. Most casinos in the U.S. are owned and managed by the same company, he said. “I think it’s a very unique proposal that the industry really hasn’t seen before,” Falcone said.
