LOOKING A GIFT HORSE IN THE MOUTH IN OHIO AND KENTUCKY

Talk about looking a gift horse in the mouth…consider what is transpiring in Ohio and its next-door neighbor Kentucky.

Daniel Gilbert is one of the two sponsors of Issue 3 in Ohio that would change the state constitution to allow for four full-scale casinos. They would be located in Cincinnati, Cleveland, Columbus, and Toledo. The Cincinnati and Cleveland licenses would be controlled by Gilbert and the Columbus and Toledo casinos would be owned by Penn National Gaming. The most recent poll, conducted by the Institute of Policy Research at the University of Cincinnati, found that 57% of voters are in favor of authorizing the four casinos, 39% are in opposition, and 4% are undecided. Ohio voters have turned down expanded gambling four times since the early 1990s, but this time they appear likely to approve, in spite of the fact that Ohio’s governor and both U. S. Senators are on record as being against Issue 3. The public opinion polls have never been this in favor of expanded gaming this late in the election process. The vote takes place on November 3rd.

Gilbert, age 44, is the founder of Quicken Loans, Inc. in Detroit. He is ranked number 354 on the Forbes 400 list of richest Americans with a net worth of $1.1 billion. This self-made entrepreneur became active in Ohio business when in 2005 he became majority owner of the Cleveland Cavaliers National Basketball League franchise. He also operates the Quicken Loans Arena in which the Cavaliers play and owns a minor league hockey team that uses the facility.

Since 2005, Gilbert, through his various companies, has created or moved several thousand jobs to Cleveland. Moreover, if Issue 3 passes, Gilbert must spend (per the ballot language) at least $250 million on building a casino in Cleveland and the same amount in Cincinnati. He has pledged $600 million for the downtown Cleveland casino,  plus he will pay the state a $50 million license fee in each city and his casinos will contribute 33% of their revenues to the state of Ohio; this is reportedly the fourth highest state takeout for commercial casinos in the United States.

Three percent of casino revenues would go to the Ohio State Racing Commission, although Ohio racing interests are strongly campaigning against Issue 3. The main exception is Penn National, which owns a racetrack in Toledo. Unfortunately, passage of Issue 3 could be the death knell for any number of Ohio’s seven racetracks unless voters soon approve racetrack slots. The earliest that could happen is likely November of 2010.

To say that Michigan resident Gilbert has been a provider of jobs and tax revenues to Ohio is an understatement. He has been one of the few bright spots in the economic downturn. Part of his reward is that opponents of Issue 3 (funded mostly by MTR Gaming Group, which tried to join the Gilbert/Penn National partnership, but was turned down) have been running advertisements portraying Gilbert as an unsavory character. His supposed sin: when he was a 19-year-old student at Michigan State University, he was convicted of bookmaking. A state senator in Ohio piled on by raising questions about Gilbert’s character, so far as his suitability to own casino licenses  is concerned.

PuH..leeze!  As John McEnroe might say, “You cannot be serious.”  Gilbert was 19 years old.  Since then, he  has built a major company employing thousands of people and passed the background checks necessary to own a bank as well as an NBA team. Gilbert has done more for economic development in Ohio than all its current elected officials combined, as evidenced by the fact that he has been bringing jobs to the Buckeye state while the Ohio unemployment rate has been rising.

Meanwhile, to the south, the leader of the Kentucky senate and his allies continue to do everything in their power (which is considerable) to make sure that Kentucky’s flagship industry—Thoroughbred breeding/racing and bluegrass tourism—shrinks. They have posed one roadblock after another in legalizing video lottery terminals at racetracks while the industry is downsizing…and doing so in a hurry. Talk about fiddling while Rome burns…or while the horse vans head from central Kentucky to Pennsylvania and greener purses if not greener pastures. Owners and trainers are dancing to the Pennsylvania Polka rather than singing My Old Kentucky Home and following a different type of Phillies than the equine Kentucky variety.

Like all states, Kentucky cannot afford to lose jobs for its citizens and tax revenues for its coffers, or so it would seem. In addition, if Issue 3 passes in Ohio, video lottery terminals in Kentucky would be tame fare, to say the least, as compared to the table games that will operate across the Ohio River from Kentucky in Cincinnati. Is it bye-bye Turfway Park? 

Pitting video lottery terminals against full-scale casino offerings is like taking a knife to a gun fight. Just ask the executives at Churchill Downs about the futility of trying to compete against a commercial casino–offering a full complement of gaming products and located only miles way on the banks of the Ohio River in Indiana–with one product.

This past week, the University of Kentucky announced that some donors who made their fortunes in the state’s coal fields have put up $7 million to finance a new residence for the University of Kentucky men’s basketball team, provided that the word “coal” is part of the building’s official name. In no time whatsoever, some dissenters complained that putting coal in the name implied that the University had a partnership with coal interests and, worse yet, coal is so yesterday in this age of renewables. You know, how to say it…coal is so filthy and embarrassing.  A Kentucky-based sports and turf writer joined the fray by calling members of the University of Kentucky Board of Trustees “whores” for accepting the deal with the coal barons. Never mind that coal is a leading industry in Kentucky and that coal supplies over half of the electricity in the United States.  Never mind that colleges and universities have all kinds of things named after ethically-challenged individuals and unfashionable companies and products.

Folks, you can’t make this stuff up.

Undermining incumbent industries and/or disparaging local entrepreneurs seem to be de rigueur in Ohio and Kentucky. Maybe this is the start of a trend. The next thing we hear about could be a protest and corrective legislation in Wisconsin concerning the state’s polluting cow population.  Or, how about reining in those irresponsible people in cheesehead costumes at Green Bay Packer’s games, who glorify an artery-clogging food?

Copyright © 2009 Horse Racing Business

CANTERBURY PARK HOLDING COMPANY–BUY, SELL, OR HOLD?

Canterbury Park Holding Company is traded on Nasdaq under the symbol CPHC. The Company was founded in 1994 as a racetrack conducting pari-mutuel wagering on live Thoroughbred and Quarter Horse racing and full-card simulcasting. The live racing season runs from May to September and simulcasting is held all year. Although Minnesota law requires CPHC to schedule a minimum of 125 days of live racing annually, the Minnesota Horsemen’s Benevolent and Protective Association can agree to a lesser number of live racing days. Since 1995, the MHBPA has permitted the CPHC to run a live meet of at least 50 days each year.

In 2000, CPHC added Canterbury Park Card Club. Presently, CPHC has about 34 poker tables and 16 tables offering casino games, which is the maximum number of 50 permitted by Minnesota law. The Card Club is open 24 hours per day all year. CPHC deducts 5% or 10% from card-game bets, depending on the pot limit, but has no interest in the outcome of a game (a so-called “unbanked” operation). It also imposes charges for hosting the games.

The Company is located on 380 acres in Shapokee, Minnesota, 25 miles from downtown Minneapolis. Until 2005, CPHC was the only pari-mutuel facility in Minnesota. Then the North Metro Harness Initiative opened Running Aces Harness Park in Anoka County, Minnesota, 50 miles from CPHC. CPHC management stated in its June 30, 2009 10Q report: “The Company believes patronage at Running Aces card room has had a material adverse effect on the Company’s card room revenue.”

In 2008, card games accounted for 52.3% of CPHC revenues, pari-mutuel wagering contributed 28.8%, 12.9% came from concessions, and the rest derived from parking/admissions, publications, special events, and a recreational vehicle park.

CPHC’s net revenues for the past three years were: 2008, $46.0 million; 2007, $52.9 million; and 2006, $55.8 million. Net income was $438,000 in 2008, $2.6 million in 2007, and $3.1 million in 2006. Earnings per share on a diluted basis were 11 cents in 2008, 62 cents in 2007, and 74 cents in 2006. For the first six months of 2009, net revenues were $19.4 million, net profits were $291,575 and earnings per share were 4 cents per share.

The Company has a strong balance sheet. Only about 25.1% of its capital structure is represented by debt and its debt-to-equity ratio is 33.5%. These ratios increased from December 31, 2008, when debt was 17.3% of the capital structure and the debt-to-equity ratio was 20.8%. As of June 30, 2009, CPHC had a current ratio of 1.29.

As for CPHC strategy, the Company states:

“We have a strong commitment to live racing and have been particularly successful in attracting new customers and providing a quality live racing experience for our horse racing fans as well as the horsemen who participate in the live racing at Canterbury Park. The success of the Card Club has greatly enhanced our ability to offer a more competitive purse structure for live racing and has allowed us to make significant improvements to our grandstand and the backside stabling and training facilities. As a result, we have been near capacity for horses stabled at Canterbury Park during our recent live race meets.

 We continue to believe that our best option for long-term growth is to gain authority under Minnesota law to offer additional gaming options, which would enhance horse racing with increased purses, provide growth and development opportunities, and produce significant new tax revenues for state and local governments. The effort to obtain legislative authority for these initiatives has required, and will continue to require, substantial expenditures. Due to the inherent uncertainty of the outcome of legislative activities, there can be no assurance that any bills favorable to the Company’s interests will be enacted into law, and it is possible, as a result of the legislative process, that legislation directly or indirectly adverse to the Company may be enacted into law.”

In the most recent 52 weeks, CPHC has traded in a range of $5.20-$7.58 and its current price-to-earnings ratio is 175. On Friday, October 23, 2009, the stock closed at $7.00.

CPHC is a financially strong company in a good competitive position because it is one of only two pari-mutuel facilities in Minnesota. In addition, its gaming options are diversified between the card room and the horse racing. The judgment here is that investing in this company does not have a lot of upside potential, as CPHC does not have scalability: the number of poker and casino tables it can install is limited by law. Moreover, the pari-mutuel business at CPHC is not a high-growth enterprise. On the other hand, CPHC has a strong balance sheet and is a relatively safe investment for the individual who is seeking steady but unspectacular returns.  Further, there is the possibility that the state of Minnesota will authorize CPHC to offer additional gaming options, such as slot machines, and in this case the value of CPHC will increase dramatically.  An investor’s task in evaluating CPHC is to research and weigh the probability that Minnesota will legalize more gaming options.

Bill Shanklin is not a shareholder in Canterbury Park Holding Company.

Copyright © 2009 Horse Racing Business

WEALTHIEST THOROUGHBRED OWNERS IN THE USA

The annual Forbes magazine ranking of the 400 wealthiest Americans is in the issue dated October 19, 2009. Following are members who are currently or have recently been prominent Thoroughbred racehorse owners. If I overlooked a major owner on the list, please let me know (wls@horseracingbusiness.com) and I will update.

Current Thoroughbred Owners:

Bradley Wayne Hughes

Lexington, KY (richest person claiming Kentucky residency)

Age: 76

Wealth: $3.5 billion

Rank on Forbes 400: 85

Main source of wealth: Public Storage

Jess Jackson

Geyserville, CA

Age: 79

Wealth: $1.85 billion

Rank on Forbes 400: 193

Main source of wealth: Kendall-Jackson Vineyard Estate

John Kluge

Palm Beach, FL

Age: 95 (oldest on Forbes 400)

Wealth: $6.5 billion

Rank on Forbes 400: 35

Main source of wealth: Metromedia

Kenny Trout

Dallas, TX

Age: 61

Wealth: $1.0 billion

Rank on Forbes 400: 371

Main source of wealth: Excel Communications

Thoroughbred Owners Who Left the Sport in Recent Years:

Robert McNair

Houston, TX

Age: 72

Wealth: $1.2 billion

Rank on Forbes 400: 326

Main source of wealth: Cogen Technologies and Houston Texans National Football League franchise

Carl Icahn

New York City

Age: 73

Wealth: $10.5 billion

Rank of Forbes 400: 22

Source of wealth: leveraged buyouts

An interesting sidebar to the Forbes 400 list for 2009 is that almost coincident with its publication was the bust up of what U. S. authorities say is the biggest insider trading case in a generation. The accused mastermind of the criminal activity is Raj Rajaratnam, 52, founder of hedge fund Galleon Group. Forbes estimates his net worth at $1.5 billion. Rajaratnam and five others, including upper-level executives at IBM, Intel, and McKinsey & Company, are alleged to have conspired to profit on Google, Hilton, and other well-known stocks.

Copyright © 2009 Horse Racing Business