By Amanda Fung and Daniel Massey
And down the stretch they finally come.
After months of unexplained and often confounding delays, the state’s leaders are expected to select a winner to develop a slot parlor at Aqueduct Racetrack in Queens within two weeks.
“By now, this decision should have been made, shovels should be in the ground and money should be flowing into the coffers of the state,” says state Sen. Joseph Addabbo, whose district includes Aqueduct.
Two bidders—Penn National Gaming Inc. and SL Green Realty Corp.—emerged as front-runners, a source close to the process says, after casino mogul Steve Wynn withdrew his bid. Mr. Wynn bailed last week, allegedly out of frustration with the ever-changing parameters of a process that is largely playing out behind the closed doors of Gov. David Paterson, Assembly Speaker Sheldon Silver and Senate majority leader John Sampson.
The remaining five bidders—which also include Aqueduct Entertainment Group, Delaware North’s Aqueduct Gaming and R. Donahue Peebles/MGM Mirage—say they’ll agree to the governor’s latest request for a $200 million up-front payment to help close the state’s widening budget gap.
Penn National Gaming, which operates regional gaming facilities across the country, was the only bidder that met the $200 million threshold in its bid before last week. It offered $250 million up front. Its low-cost, no-frills approach could appeal to the decision-makers given these recessionary times.
Analysts agree. The firm has $764.4 million in cash on hand and is projected to generate an additional $300 million this year, despite the toll that the economic downturn has taken on the gaming industry. The company is also underleveraged: It has net debt of $1.62 billion, just three times its earnings.
“Penn is in the best position out of all the gaming companies,” says Dennis Farrell, a senior analyst at Wells Fargo Securities.
But Penn’s big plans in the Midwest have some critics questioning whether the company is spreading itself too thin. It expects to spend $600 million to build two gaming facilities in Ohio and about $175 million on a joint-venture casino in Kansas.
“We have the ability to do all of them,” says Christopher McErlean, VP of racing at Penn. “We are prepared to sign a check tomorrow.”
Penn’s checkered dealings with organized labor may be another drawback. State officials are likely to be concerned by Penn’s cozy relationship with the Seafarers Entertainment and Allied Trades Union. Labor insiders charge that Penn and the Seafarers agree to substandard contracts in order to boost the company’s reputation as a responsible employer and keep other unions at bay. Penn denies this.
SL Green, Manhattan’s largest commercial landlord, is the other perceived favorite. The company was the runner-up in the previous round of bidding for the Aqueduct project. After a difficult year in which its stock nose-dived, the company has rebounded. The firm’s financial position is relatively strong; it has $634 million in cash on hand.
Issues with core business
But a continued deterioration in the commercial office market could hurt SL Green. And upcoming bond obligations mean it will need more cash in years to come, says CreditSights analyst Craig Guttenplan.
SL Green’s chief executive, Marc Holliday, insists that having a team of six partners means his firm can bid “without taking undo risk on our balance sheet.”
Regardless, it has to explain to investors why it wants to expand outside of its bailiwick.
“There’s a little bit of trepidation about why it makes sense for an office-focused landlord to get into a racino development deal,” says Michael Knott, a senior analyst at Green Street Advisors. “It’s a little bit of a head-scratcher.”
Despite the front-runner status of Penn and SL Green, the remaining three bidders should not be ignored. AEG, Aqueduct Gaming and Peebles/MGM all claim that they can deliver the racino faster than their rivals, which would start an expected flow of $1 million a day to the state that much sooner. AEG has strong New York partners such as Turner Construction Co. and Levine Builders, as well as key minority ties. Meanwhile, MGM/Peebles boasts that it is the only minority-led group.
Aqueduct Gaming is struggling to get beyond Delaware North’s tarnished past. A year ago, it won the right to revive Aqueduct, but it didn’t come up with the $370 million it had promised—kicking off a seemingly never-ending new round of bidding.
“Ultimately, a franchise is going to be picked,” says Assemblyman J. Gary Pretlow, chair of the Committee on Racing and Wagering. “They’re going to make a lot of money, and the state is going to make a lot of money. The question is, when is that ultimately going to come?”