Governor Ted Strickland of Ohio, a Democrat, was steadfastly opposed to expanded gambling in the Buckeye state as recently as June 2009.   Since his election in 2006, he has promised to veto any bill that the legislature might send him permitting racetrack slots.   In addition, he campaigned against a 2008 ballot initiative that would have installed a casino in Clinton County.   The Ohio Senate, with the Republicans in the majority, has also opposed alternative gaming, while the Ohio House has supported racetrack slots since the Democrats gained control in 2008.   The Ohio State Racing Commission, whose members are all Strickland appointees, have strongly supported racetrack slots.

With a huge budget deficit and a looming cut in state services, Strickland had a 180 degree change of mind if not of heart.   In a compromise agreement with Senate Republicans to break a budget deadlock, the legislature crafted language enabling the governor to permit Ohio’s seven racetracks to each install 2,500 video lottery terminals.   The operation is to be under the auspices of the Ohio Lottery Commission.  

This rapid turn of events has created flux and questions and the fallout is likely to greatly affect the fate of racing entities in Ohio and states surrounding it.   The many “what ifs” and “what will they do” would perplex a soothsayer in predicting how things will eventually shake out.   Here are the major contingencies.

1.  The governor and the legislature are about to be challenged in court, mainly on the basis that any expansion of  gambling must be sanctioned by Ohio voters in a statewide referendum.   A nonprofit named the Ohio Roundtable and a couple  of church groups have already promised as much.   Ironically, the United Methodist Church is a leader in the anti-slots movement and Governor Strickland is an ordained Methodist minister.   The Ohio Supreme Court may quickly dismiss legal objections or the justices might agree with the plaintiffs.   Even if the constitutional authority of the governor and the legislature is ultimately upheld, the case could drag on.   Moreover, there is the possibility that the antigambling forces will sponsor and win a statewide vote repealing the work of the governor and legislature.   In that event, racetracks would have to give up slots and take a heavy loss in the process owing to the machines that were purchased and the facilities that were remodeled or built from scratch  to accommodate slots.

2.  A casino initiative is planned for Ohio for  the November 2009 ballot.   It would allow for a total of four casinos–in Cincinnati, Cleveland, Columbus, and Toledo–and 20,000 slot machines.   A key player is Dan Gilbert, who is the founder of Michigan-based Quicken Loans and the majority owner of the Cleveland Cavaliers NBA franchise.   Should the casino referendum be approved, then the quasi-geographical monopoly on slots enjoyed by the racetracks would disappear.     Six of Ohio’s seven racetracks are located in the metropolitan areas of Cincinnati, Cleveland, Columbus, and Toledo and the other track, Lebanon Raceway, is considering a move to near Dayton.   The racetracks would still have a lucrative franchise, just not as valuable.

3.  Prior to the slots authorization by the governor and the legislature, Penn National Gaming (owner of Raceway Park harness track in Toledo and an Indiana casino near Cincinnati) was reported to be in favor of the November casino initiative.   Now, with its harness track in line for slots, Penn National Gaming’s top management has a decision to make regarding supporting or not supporting the November ballot initiative.   (Penn National Gaming hugely funded the campaign to defeat the 2008 ballot referendum on the casino in Clinton County because it would have competed against its Indiana casino.)   Interestingly, Penn National Gaming  did not join with management of the other six Ohio racetracks when they recently wrote to Governor Strickland to embrace his slots plan.   If Penn National Gaming assists in funding a winning marketing campaign for passage of the casino ballot initiative and then does not secure the casino license for Toledo, it will have seeded competition for its own racetrack.

4.  MTR Gaming Group owns Mountaineer Casino Racetrack and Resort in Chester, West Virginia, Presque Isle Downs and Casino in Erie, Pennsylvania, and Scioto Downs (harness track) in the Columbus, Ohio, area.   MTR Gaming Group is no doubt opposed to the proposed November Ohio casino ballot issue.   On the other hand, the slots authorization is a two-edged sword.   Scioto Downs will gain slots but MTR Gaming Group’s West Virginia and Pennsylvania properties will be damaged financially by slots at  Cleveland’s Thistledown (Thoroughbreds) and Northfield Park (Standardbreds).   MTR Gaming Group’s racinos in Chester and Erie are very dependent on Ohio customers.  Whether stock market investors see slots in Ohio as a net gain or a net loss for MTR Gaming Group looks to be the former.   On July 10, 2009, the day when Governor Strickland and the legislature came to an agreement on slots, MTR Gaming’s stock opened at $2.35 per share and closed at $3.48 per share for a 48% gain.

5.  River Downs in Cincinnati could be a big winner and Kentucky’s racing industry a big loser.   River Downs is only 14.7 miles away from Kentucky’s Turfway Park, across the Ohio River, 90 miles from Keeneland, and 107 miles from Churchill Downs.   A racino at River Downs might be the death knell for Turfway Park (thanks to the gift from the Kentucky Senate in keeping slots out of Kentucky) as racing and slots customers in the Cincinnati metroplex, including Northern Kentucky, gravitate to the River Downs racino.   At the moment it is uncertain how much Ohio purses will be augmented by slots.   If the horsemen are treated well and purses increase dramatically, then convenient River Downs will likely be a favored place for Kentucky stables to race.   Incredibly, a down-on-its-luck River Downs reinvigorated by slots could detract significantly from the quality of summer racing at Churchill Downs.   Think about the lure to sports and racing fans from Louisville and Lexington of a day at River Downs followed by a Cincinnati Reds game at night.

6.  Thistledown near Cleveland is soon to be auctioned off  by the bankrupt Magna Entertainment Corporation.   Suddenly, with the prospect of slots, Thistledown’s market value has escalated.   Thistledown is likely to recover from the verge of extinction to become a healthy going concern once it is able to compete on more even terms with racinos at Mountaineer Casino Racetrack and Resort (which has both slots and table games) and Presque Isle Downs and Casino.   However, a buyer has to value Thistledown not knowing whether a new casino is coming to Cleveland, depending on how the November ballot comes out.

7.  The Cleveland-area racetracks–Northfield Park and Thistledown–are within seven miles of one another and the Columbus-area racetracks–Beulah Park and Scioto downs–are nine miles apart.   This proximity should assure a battle royal.   If Ohio voters in November 2009 approve casinos for Cleveland and Columbus, the competition will escalate even more.   

8.  Assuming that the slots installations are not slowed by legal challenges, how soon the racetracks can get them up and running remains to be seen.   The governor’s goal is to have them functioning by at least May 2010 so that the state can apply its slots revenues to the budget, which would be much quicker than other states (e.g., Pennsylvania) were able to do so.   One of the racetracks is planning on temporarily housing slots in its grandstand while it builds a state-of-the-art slots/hotel complex adjacent to the track.   It ambitiously wants to have slots open to the public by the end of 2009.

How these matters turn out should have a profound effect on horse racing in Ohio and contiguous states.   Fortunes will be enhanced and impaired in the process.

Copyright © 2009 Horse Racing Business


Specifics of the slots legislation:

• Each racetrack must pay a $100,000 nonrefundable application fee and a $65 million licensing fee.   The first payment on the licensing fee is due in mid-September 2009 with four installments thereafter.

• Licenses will be awarded for a 10-year period.    A racetrack must agree to make at least $80 million in facility improvements within the first five years of operating slots.  The initial year’s investment must be at least $20 million.

• Half of the net revenues generated by the slots will go to the state of Ohio, which is one of the largest percentage cuts in the United States.   Part of the state’s revenues will be used to cover operational costs and the remainder will go to school funding.    Horsemen’s groups will negotiate directly with racetracks to determine the portion of slots revenues that will go to purses.


At the close of 2008, in the United States there were 44 racetrack casinos operating in 12 states.   According to the American Gaming Association, these racinos were a bright spot in an otherwise dismal year for gaming.   While casino revenues in 2008 decreased for the first time in this decade, racino revenues bucked the downturn.   In 2008, racino revenues tripled 2002 revenues, to $6.19 billion, and soared by 17.2% over 2007 revenues. 

Racino gaming has fueled racing purses.   As a result, horse owners and trainers are increasingly leaving racetracks without gaming in search of a better payout at racinos.   In Kentucky, the center of Thoroughbred breeding in the United States, the lack of slot machines (video lottery terminals) at the racetracks has had a deleterious effect on purses, so much so that Churchill Downs has found it difficult to fill some of its races.   Many owners and trainers have taken their horses to the greener pastures, pun intended, in nearby states with racinos.

The long-term issue, or the overriding question, is how long lawmakers in racino states will continue, or should continue, to subsidize racing purses.   Imagine addressing an audience of taxpayers or legislators, who want to hear your reasoning as to why horse racing should be subsidized by gaming.   What is the rationale, or the justification?  What would you say?

Suppose, for example, you had to craft a rebuttal to a questioning editorial about slots revenues subsidizing racing that appeared on the Philadelphia Inquirer’s on June 19, 2009.   In part it read:  “If you’re one of the 3,000 owners/operators of a race horse in the state, or holder of one of 10,000 related jobs, saving the state’s horse-racing industry is important.   If you’re someone who likes to bet on horse races in your home state, growing the industry is convenient.  But if you’re a child whose Head Start funding is about to be cut . . . or a parent who has kids in public schools . . . or a senior citizen facing cuts in health-care coverage, all of which the Senate-proposed budget would affect, maybe it’s time to be a little less generous to the horse-racing industry.”  [click here to read the full editorial]

Arguments for Subsidizing Racing with Gaming Profits

The reasoning for subsidizing racing purses with gaming revenues is “tip of the iceberg” logic.   The economic impact observed at a state’s racetracks–the jobs and tax revenues– is what is readily visible.   Because of the multiplier effect, racetracks create demand for secondary and tertiary suppliers.

Note that this logic is identical to the justification that the federal government used to bail out Chrysler and General Motors.   Not only would an untold number of auto workers lose their jobs in a severe downsizing or liquidation of these companies but so would hundreds of thousands more people who were employed by their vendors. 

Similarly, cities often help to build stadiums and arenas to entice or keep professional sports franchises largely because of the money the community receives from fans attending games and patronizing area businesses such as restaurants and parking lots.   The subsidies are justified accordingly.

Ohio has seven racetracks that are struggling mightily to remain in business  because the Buckeye state is surrounded by states with casinos and/or racinos, except for Kentucky.   According to a study by Deloitte that was done for the American Horse Council Foundation, the total estimated annual economic impact of horse racing in Ohio is $731 million and $81 million in state and local taxes.  Thoroughbred and Standardbred racing account for 8,200 direct jobs and 16,000 total jobs.   If the racetracks disappear, so do the bulk of these benefits.   In spite of this impact, the only reason that Ohio’s governor, a longtime adamant foe of slots in the Buckeye state,  is now a reluctant convert to racinos is that he is facing a $3.2 billion budget deficit and slots at racetracks can offer some relief.    The alternative–raising taxes and drastically cutting services–is not the ideal way for the governor to prepare for a 2010 re-election campaign.

Proponents of gaming at Kentucky racetracks, like the Kentucky Equine Education Project, accurately use the same genre of evidence, citing, for example, “2.3 million estimated attendance at Kentucky Thoroughbred and Standardbred tracks, $217 million economic impact of the Kentucky Derby, and $8.8 billion economic impact of the state’s tourism industry, which features the horse industry as its signature promotional attraction.”    Notwithstanding the indisputable importance of the bloodstock industry to the Bluegrass state, 45 representatives in the Kentucky House recently voted in a special session of the legislature against allowing the state’s racetracks to install slots (52 voted yes) and the Senate Budget Committee apparently killed the initiative altogether–by a 2-to-1 margin.

Another justification for gaming subsidies to racing is that they provide the wherewithal to fix up the dilapidated structures at many racetracks, or to build new facilities, improve food offerings, and cater to customers.   With the legalization of slot machines in Pennsylvania, The Meadows Racetrack & Casino south of Pittsburgh was transformed from a deteriorating Standardbred track into a modern complex encompassing a casino, entertainment, a bowling alley, and improved harness racing.   This new and inviting ambience might encourage more racing fans to attend in person.

Arguments Against Subsidizing Racing with Gaming Profits

The standard operating procedure in corporate strategy is for top management to redirect cash flow from product lines that are either mature or declining to product lines with the growth potential to become the cash cows of tomorrow.   A cash cow is a mature business that earns more than it needs to maintain its market share position.  For instance, at General Electric, some of the profits from slow-growing mature product lines like major appliances are put to work in GE’s most promising nascent businesses.  

The main argument against using gaming cash flow to enhance racing purses is that pari-mutuel wagering is a mature product and should be able to stand on its own.   Taking cash flows from a growing product line like gaming and diverting it to a mature product line like pari-mutuel wagering is normally contrary to conventional corporate strategy.

Consider MTR Gaming Group.   For the year ended December 31, 2008, the Company increased revenues over 2007 by 13.2%–from $415.8 million to $470.8 million.   Gaming comprised 88.8% of revenues and pari-mutuel commissions accounted for 3%, with the remainder coming from food, beverage, lodging, and other.   Pari-mutuel wagering is such a mature product and such a small part of the corporate portfolio that the rationale for subsidizing purses is difficult to fathom…unless one can convincingly make the “tip of the iceberg” argument.   A West Virginia legislator has suggested that MTR Gaming Group’s Mountaineer Casino Racetrack & Resort abandon live racing and become a simulcast facility only.

The situation is much different at Canterbury Park Holding Corporation in Minnesota.   In 2008, revenues from racing constituted 29% of total revenues.   Card club revenues were 52% and most of the remainder of total revenues came from concessions, admissions, and parking.   In this instance, advocates of horse racing would have a much sounder argument than they would at MTR Gaming Group.


The strength of racing’s position, in a given state, for receiving purse subsidies from gaming will depend on its ability to show factually that it is responsible for many jobs, significant tax revenues, and the well-being of a large number of ancillary businesses.   Horse racing interests in Kentucky, Maryland, and New York, for instance, would have a strong argument in this regard, whereas the case would be harder to defend in states where horse racing is not a consequential agribusiness.   However, as the situtation in Kentucky demonstrates, irrefutable hard facts about horse-racing’s importance as an economic contributor do not always persuade government officials.

If management of a racetrack can get alternative gaming, by all means it should do so.   In the near term, enhanced purses, larger breeder funds, and other benefits will be forthcoming.  But racehorse owners and breeders are chasing fool’s gold if they expect alternative-gaming subsidies to last forever.   History is clear as can be that governors and legislators covet additional revenues, especially when times are difficult, and gaming revenues are an easy target.  With the explosion in Medicaid and other social services, the future looks to be one in which a budget crunch is a perpetual problem, as in California, New York, and most other states.

The pari-mutuel industry needs to use whatever monetary largess it receives to modernize its facilities, improve customer amenities, figure out how to attract more fans, and come up with innovative bets that do not take an expert handicapper to understand.   Otherwise, subsidies will further weaken a patient already reeling by rendering them even more dependent.   At some point, the patient will have to stand on its own.   

In addition, there is the very real risk that slots and table games will decline in popularity, as they proceed through  their  product life cycles.   In particular, slots may not be of much interest to today’s Internet-oriented younger generations as they age. 

Also look for some of the states to rathchet up the competition by expanding gaming even more.  States with slots will seek table games (e.g., Pennsylvania) and states with casinos will try to install sports betting (e.g., Delaware).  Then there is always the possibility that Internet gaming will be legalized.  The end result is that, in this competitive milieu, slots will be pretty tame fare and certainly not a long-term solution to racing’s problems.  

However, as renowned economist John Maynard Keynes famously observed, the “long term is a misleading guide to current affairs.  In the long run we are all dead.”   Racing’s dire straits in many venues indicates that the only realistic course of action is for racing interests to seek slots revenues to survive in the here and now and live on to fight for customers in the unknowable future.

The July 11, 2009 edition of Horse Racing Business examines the subject “Can Slots Players Be Attracted to Pari-Mutuel Wagering?”

Copyright © 2009 Horse Racing Business


MTR Gaming Group, Inc. owns Mountaineer Casino Racetrack and Resort (formerly Waterford Park) in Chester, West Virginia, on the Ohio River.  It offers slots, table games, poker, and Thoroughbred racing at this facility. The Company opened Presque Isle Downs in Erie, Pennsylvania, in 2007 with a casino complex, restaurants, and a racetrack with a Tapeta synthetic surface designed by former trainer Michael Dickinson. The cost of Presque Isle Downs was approximately $294 million.  MTR Gaming Group ‘s Scioto Downs is a harness track in Columbus, Ohio. The Company is a 50% owner in Running Aces Harness Park in Minneapolis, Minnesota. In 2008, the Company closed Jackson Harness Raceway in Michigan and sold two Las Vegas properties: Ramada Inn and Speedway Casino and Binions’ Gambling Hall & Hotel.

Mountaineer Casino Racetrack and Resort has 3,220 slot machines (located in both the casino and the nearby racetrack), 55 table games, 40 poker tables, 359 hotel rooms, a spa, a fitness center, dining facilities, including an upscale steak house, bars, a 69,000 square-foot theater and events center, and a 13,500 square-foot convention center.

Mountaineer is 35 miles west of Pittsburgh, Pennsylvania, and 40 miles south of Youngstown, Ohio. Pennsylvania recently legalized slot machines and The Meadows Racetrack and Casino in Washington, Pennsylvania, is only 40 miles from Mountaineer. The Meadows has slots but is not permitted table games.

Presque Isle Downs is located on 272 acres (58 of which are open space) and has a 140,000 square-foot clubhouse that offers 2,000 slot machines with authorization for 3,000. The racetrack is situated adjacent to the casino. Presque Isle Downs has fine and casual dining. Erie, Pennsylvania, has 3,000 hotel rooms. Living within 90 miles of the complex are 2.2 million people and the nearest competitor is 75 miles away.

Scioto Downs in Columbus, Ohio, is a pari-mutuel harness racing track. Running Aces in Minneapolis, Minnesota, has harness racing and a 50-table card room in which players bet against one another rather than the house.

For the year ended December 31, 2008, MTR Gaming Group increased revenues over 2007 by 13.2%–from $415.8 million to $470.8 million. Gaming comprised 88.8% of revenues and pari-mutuel commissions accounted for 3%, with the remainder coming from food, beverage, lodging, and other.

Operating income increased from $26.6 million in 2007 to $38.2 million in 2008, or by almost 44%. However, because of losses from the discontinued operations in Michigan and Nevada, the Company had a net loss of $17.7 million in 2008 ($.65 per share), compared to a net loss of $11.4 million in 2007 ($.41 per share). MTR Gaming Group had net income of $7.8 million and $4.5 million in 2005 and 2006, respectively.  By agreement with its lenders, MTR Gaming Group cannot pay a dividend on its common stock unless the creditors approve.  The Company has stated that it intends to retain all earnings.

In 2008, EBITDA (earnings before interest, taxes, depreciation, and amortization) was positive for Mountaineer ($51.4 million) and Presque Isle Downs ($33.5), but negative for Scioto Downs (-$1.4 million).

At the close of 2008, MTR Gaming Group had a capital structure comprised of 81.9% debt; in 2007 the corresponding figure was 81.5%. This debt load was up significantly from the previous three years–73.2% in 2006, 63% in 2005, and 58.4% in 2004–because of the building of Presque Isle Downs. In its most recent 10Q filing for the first quarter of 2009, the Company states as a major risk: “Our substantial indebtedness could adversely affect our financial health.”

The Company had a positive cash flow for 2008 from operations, but interest on its debt resulted in a negative cash flow overall. Another risk factor is that  the company is being sued by a jockey injured during a race at Mountaineer. Management believes that its liability insurance is sufficient to cover an adverse court decision but is not certain.

In May 2007, MTR Gaming stock was trading at about $16 per share.  Its 52-week range is $.73-$7.23 per share. The stock closed at $1.08 per share on April 9, 2009.

MTR Gaming Group had the unfortunate timing of taking on huge debt to build Presque Isle Downs in 2007, just prior to the downturn in the U. S. economy. Compounding matters, The Meadows Racetrack and Casino added slots at its harness racing track, and this decreased the attraction of Mountaineer Casino and Racetrack to Pittsburgh-area customers. Still, Mountaineer has the advantage of having table games and poker, which, under Pennsylvania law, The Meadows cannot offer. Even so, MTR Gaming’s indebtedness, coupled with the economic malaise, prevents the company from taking on more debt to build the additions needed at Mountaineer to offer first-class facilities for poker and table games. An additional stock offering is not practical to raise funds to pay down debt because of the Company’s depressed stock price and the economic uncertainties that are affecting all gaming firms in the United States.

Scioto Downs is an underperforming property that could be closed or sold when better times come around. It is highly unlikely that Scioto Downs will be permitted to to install slot machines, at least any time soon. The casino ballot initiative that Ohioans will likely vote on in November 2009 will be for casinos only in four major cities (Penn National Gaming’s Raceway Park in Toledo is a proposed site).  There is a bipartisan move underway in the Ohio legislature to allow the state’s racetracks to install slots without a voter referendum, but the governor has indicated that he would likely exercise his veto.

MTR Gaming Group has pursued the same debt-financed path to rapid growth that most of the leading casino companies have employed.  Now, with the slowing economy and worldwide credit freeze, MGM Mirage, Harrah’s, and Las Vegas Sands are in danger of defaulting on their debt and Trump Entertainment Resorts and Magna Entertainment Corporation are in bankruptcy. 

The view here is that MTR Gaming Group stock is a risky play but one with plenty of upside potential. The Company has gotten rid of several subsidiaries that were incurring losses or barely earning a profit. If the Company can survive the present economic situation, business at its casinos in Erie, Pennsylvania , and Chester, West Virginia, will pick up. These are both facilities with a lot to recommend them in terms of market advantages. The Company would then have the cash flow to begin to get out from under some of the debt. This would probably not be enough, however, given the sizeable interest on the debt, and a stock offering would also be necessary.  Another option for MTR Gaming Group is to try and sell either Mountaineer Casino Racetrack and Resort or Presque Isle Downs to raise cash.  Other gaming companies have pursued this path, such as MGM Mirage, which sold Treasure Island in Las Vegas and may sell its casino operations in Michigan and Mississippi. 

By contrast, there is a troubling probability that if the economic situation does not improve dramatically in the next year, MTR Gaming Group would be unable to cope with its mountain of debt. In that case, the Company’s common stock would be subordinate to the debt holders in any court-supervised reorganization plan.

From an investor’s viewpoint, MTR Gaming Group’s stock is similar to casino stocks in general:  potentially lucrative turnaround plays fraught with risk.  It is uncertain whether the Company can continue to make the payments on its debt during the current economic slowdown.  A prolonged pullback in consumer spending and increases in unemployment could push the Company into bankruptcy.  Conservative investors who need their portfolios to live on now or in the near future should stay away from this stock.  However, aggressive investors could see a great deal of price appreciation in MTR Gaming Group stock once consumers are willing and able to spend more on entertainment.

Copyright © 2009 Horse Racing Business

Disclosure: Bill Shanklin is not currently a shareholder in MTR Gaming Group but has owned shares in the past.