Any Takers for Pennsylvania’s Next Mini-Casino License?
Hurting for revenues in the Covid age, Pennsylvania lawmakers will be peddling yet another mini-casino license—the proposed Penn National Hollywood Casino in Morgantown at left—next month. A new report from GGH Morowitz says there may yet be opportunity in the Keystone State—but only for the strategic, prudent investor.
Pennsylvania’s 2017 Gaming Expansion Act authorized up to 10 Category-4 (satellite) slot operations, or “mini-casinos,” in the Keystone State.
Since then, only four of the licenses have been snapped up, with diminishing returns for the state in each round of bidding. To wit:
- First, regional juggernaut Penn National paid $50.1 million for a license in York County.
- Then Stadium Casino (aka the Cordish Co.), which is now building a casino in Philadelphia’s Stadium District, paid $40.1 million for a location 40 miles east of Pittsburgh.
- Airy paid $21.2 million for a location in New Castle, between Pittsburgh and Youngstown, Ohio, but its financing fell apart and the license was rescinded.
- A fourth bid was submitted by Greenwood Gaming and Entertainment Inc., operator of Parx Casino, which coughed up just $8.111 million to construct a satellite casino in Cumberland County. That project is in limbo because of geological issues at the site, and Parx is scoping out possible new locations.
- Finally, last June, Penn National won a second license for a Hollywood-branded mini-casino in Morgantown, which bisects both Berks and Lancaster counties, paying just $7.5 million.
Subsequent rounds of bidding aroused no interest, and the auctions were supposedly shut down forever. On September 2, however, lawmakers will return to the well once more, hawking a fifth license in hopes of generating cash for Covid-starved state coffers.
According to a new report from Atlantic City-based consultancy GGH Morowitz, all current Pennsylvania casino operators and licensees are eligible to participate, subject to certain limits.
Some things remain the same: the minimum bid is $7.5 million for up to 750 slot machines, and winning bidders may pay $2.5 million to offer up to 30 table games at opening, with the option to add 10 more after a year.
And some things have changed. “The winning Cat-4 bidder may offer sports betting on-site at the new location or through online/mobile channels inside the state,” states the report by Cory Morowitz and William Allsup, “provided they purchase a $10 million sports betting license.”
Amid the upheaval caused by the virus—which shut down construction on the origina mini-casinos—“the gaming industry is adapting and looking forward,” the report states. “Whether it’s the white-hot online gaming and sports wagering markets or the few remaining greenfield markets that exist, the industry is looking to deploy capital.”
Looking Back, Looking Ahead
In January 2018, when the Pennsylvania Cat 4 licenses were first put out for bid, GGH Morowitz identified 15 desirable sub-markets ripe for the bidding, based on proximity to population density, a right-sized investment, promotional strategies and branding. That initial report was prescient, and predicted that Cat-4 bid amounts “would decline with each succeeding bid as marginal returns declined.”
Originally, GGH Morowitz concluded, “Cat-4 casinos could cannibalize existing markets, but would ultimately grow the total PA gaming market over time.” Each potential location would require careful analysis, and be “considered from the lens of a defensive acquisition or a strategic growth acquisition.”
“All of these conclusions remain valid,” the firm now states.
But given the recent lack of interest, will investors show up for the third round of bidding next month?
Could be. The Morowitz report points to four markets that are “still viable as potential Cat-4 locations,” located “mostly in the center of the state (Altoona, State College & Williamsport),” along with “the highest value location,” the New Castle/northern Pittsburgh market.
“Despite its competitive dynamics,” Morowitz writes, Newcastle is prime “simply due to its concentration of nearby population relative to the other markets.”
The other markets benefit from “significantly less competition, and all have relatively similar population and income characteristics,” the report states.
“One positive for the three smaller markets is that they have the potential to draw patronage from other smaller, underserved markets, as there are no casinos near the geographic center of the state” (prospective casino sites can’t be located within 40 miles of another casino location).
Will Covid Affect Values?
With the economy hammered by the coronavirus, along with a high state tax rate, plenty of existing competition, a steep cost of entry and the current state of the capital markets, “any Cat 4 bid will be constrained and the license fee will likely skew towards the minimum,” Morowitz writes.
Among the risks, of course, is “the continuing unknown impact of Covid,” and concerns that a second viral wave could again shut down the gaming industry. Add to that the “continued overhang of the prospect of VGTs at retail establishments in PA, something that has been bandied about for some time.
“As a benchmark, VGTs in Illinois, while growing the overall market, ultimately cannibalized casinos by 17 percent to 20 percent. Typically, this uncertainty is managed through a higher cost of capital or discount rate applied to cash flows associated with an opportunity.”
All these speed bumps notwithstanding, the report states, “The new availability of a New Castle location, reasonable demographics of other locations, and optionality to enter with a smaller right-sized offering, while keeping potential expansion into other forms of gaming available for future consideration, would seem to outweigh the risks associated with a bid in the current environment, Covid aside.”
In the opinion of the authors, “there should be demand for this license, and that demand should result in a price that exceeds the bid floor.
“Bottom line, for some, this is a bid worth making and winning.”
For additional information, contact Cory Morowitz at [email protected] or call (609) 226-9426.
Sources: GGH Morowitz analysis, ESRI data