Pinnacle gamble pays off in Ohio

RIVER DOWNS, Ohio -- It appears Pinnacle Entertainment's $45 million gamble on a racetrack in Ohio is about to pay off.

The Las Vegas-based regional casino operator stands to benefit from Ohio Gov. John Kasich's announcement Wednesday that will allow the state's seven racetracks to add casinos with slot machinelike video lottery terminals.

Pinnacle bought the River Downs Racetrack in Cincinnati last year, betting that the casino additions would be approved. In an interview last month, Pinnacle Chief Executive Officer Anthony Sanfilippo said the company would act quickly to add the casino to River Downs.

Under the agreement, Ohio racetrack operators can acquire a 10-year casino license for $50 million and are required to invest at least $150 million in each facility.

The tax rate on revenues produced by the video lottery casinos will be 33.5 percent. Ohio will consider allowing racetrack operators to move their facilities to other in-state locations.

Macquarie Securities gaming analyst Chad Beynon thought Pinnacle would generate a 17 percent return on its investment in River Downs.

"The River Downs project adds to the growing development pipeline for the company, which includes Baton Rouge, Vietnam and now Ohio," Beynon told investors.

Five of the seven racetracks are owned by casino companies, including Pinnacle, MTR Gaming, Penn National Gaming (two racetracks) and Caesars Entertainment Corp.

Penn National and Caesars are involved in four casinos that were approved by Ohio voters in 2009. Caesars, in a joint venture with a company owned by Ohio businessman Dan Gilbert, is building Horseshoe-themed casinos in Cleveland and Cincinnati. Penn National is building Hollywood-themed casinos in Toledo and Columbus.

Analysts have speculated whether companies with racetracks that will compete with the planned casinos would apply to move the facilities.

Penn National operates Beulah Park in Columbus and Raceway Park in Toledo, which could compete with its new casinos.

"Penn previously noted that it considered relocating its Beulah Park racetrack in order to maximize its Ohio opportunities," JP Morgan gaming analyst Joe Greff said.

Beynon told investors that Penn National might petition the state to move its racetracks to Dayton and Youngstown.

"It is clear that Penn will be among the biggest beneficiaries of the new VLT deal," Beynon said. "If all goes as planned, Ohio will be a main driver of Penn's business going forward, with two full-service casino projects in Columbus and Toledo and now development opportunities with Beulah Park and Raceway Park."

The other big winners in light of the Ohio announcement are slot machine makers. Sales of new games have slowed in recent years due to the recession, but Ohio provides one of the strongest prospects for a new domestic market.

Analysts estimated between 10,500 and 17,500 new machines could enter the market.

"This is an obvious positive for the equipment manufacturers, as it would add games to the new supply pipeline," Janney Montgomery Scott gaming analyst Brian McGill told investors.

Video lottery terminals are similar to traditional Las Vegas-style slot machines, but the games are connected to a central server that determines awards and jackpots.