In the past year alone, national casino operator Penn National Gaming has become a dominant player in Maryland's horse racing and gambling industries.
Penn National opened the state's first slots parlor and acquired an ownership interest in Maryland's two major thoroughbred racetracks. And with last week's purchase of shuttered Rosecroft Raceway in Prince George's County, the company has positioned itself to win big if gambling is expanded in the state.
"We planted a large flag in Maryland, and we're there for the long haul," said Peter Carlino, Penn National's chairman and CEO, during a conference call with analysts last week.
Over the past decade, Penn National has grown from an operator of a single racetrack into a gambling powerhouse in the United States. While most of its properties are casinos, the Wyomissing, Pa.-based company has retained its horse racing roots.
Penn National's racing strategy is clear: Tracks cannot survive without slots. So the company has snapped up properties in markets where opportunities exist to legalize the machines.
While Annapolis lawmakers are considering legislation to add gambling venues and table games, legislative leaders and Gov. Martin O'Malley say they intend to hash out a plan for the future of Maryland's slots program over the summer. Thus, any action on gambling bills would likely take place during next year's session.
And Penn National will be ready.
Penn National has mounted a lobbying effort for slots at Rosecroft, where slots have not been authorized, and at Laurel Park, a thoroughbred track in Anne Arundel County. The Cordish Cos., a Baltimore-based developer, won the single slots license designated for the county and plans a slots facility at Arundel Mills mall.
"There's no future for these racetracks in the absence of slots," Carlino said. "No one should be surprised that that is our sole focus in trying to get the racing industry back to a healthy level."
Penn National also is part owner of Pimlico Race Course in Baltimore, home of the Preakness Stakes, the middle jewel of the Triple Crown. Penn National officials have not expressed interest in putting slots at Pimlico, which is profitable because of the Preakness. Slots have been designated for a site near Baltimore sports stadiums, but no one has won that license.
Penn National's foray in Maryland follows a pattern established in other states. In West Virginia, Penn National's Hollywood Casino at Charles Town Races is one of the country's best-performing racinos, or racetrack paired with a casino.
Penn National agreed in 1996 to buy the financially beleaguered Charles Town racetrack contingent on a major condition — that voters in Jefferson County approve a referendum on slot machines. At the time, the track was on the verge of bankruptcy, having lost $2 million that year amid declining wagering and attendance. Management said the track would close if the slots measure failed.
With horse owners and other racing supporters, Penn National ran an aggressive campaign, contending that slot machines were crucial to saving the track. After the referendum passed, the track underwent a $20 million renovation and reopened as a glitzy casino in 1997.
"They took a chance with Charles Town and Charles Town took a chance with them," said Ken Lowe, president of the Charles Town Horsemen's Benevolent and Protective Association. "Prior to being successful with slots, horse racing was done there."
Last year, Penn National rebranded Charles Town under its Hollywood theme with the addition of poker, blackjack and other table games after winning voter approval though a second referendum.
Penn National has set its sights on other states, where the company hopes to succeed in legalizing slots at its racetracks.
In Texas, the company is awaiting regulatory approval of a joint venture to own and operate Sam Houston Race Park in Houston and Valley Race Park in Harlingen. In the meantime, Penn National executives say they hope slots gambling will gain support from Texas lawmakers as they seek to close the state's budget gap.
Penn National recently acquired its second racing property in Ohio, where the governor is studying a proposal to put slot machines at the state's racetracks.
Steven Wieczynski, an analyst at Stifel Nicolaus in Baltimore, said Penn National's investments in recent racetrack acquisitions are minimal for a company that generated nearly $2.5 billion in revenue last year. Penn National, for instance, paid $26 million for its stake in the Maryland Jockey Club, which operates Laurel Park and Pimlico.
The concern for investors, Wieczynski said, is that Penn National's tracks continue to lose money. The company took a $14.4 million charge in the fourth quarter to reflect the lower value of the Maryland Jockey Club and lobbying costs to fight — unsuccessfully — the Cordish Cos.' planned casino at Arundel Mills mall.
"It does drag on your income statement," Wieczynski said.
While Penn National's racetrack strategy is a "long-term play," Carlino said, the company will not continue to operate the tracks at a loss. As a result, Penn plans to cut costs at its tracks.
"We will be very tough and brutal about that because we have to," he said. "We're not running a public charity. We have made those statements publicly. We're going to right-size those businesses over the next year or so because we must."
Efforts to significantly reduce the number of live racing days at the Jockey Club properties late last year were met with what Carlino described as a "violent reaction" from regulators and horse owners, breeders and racing supporters. MI Developments, a Canadian real estate development company, is the Jockey Club's majority owner.
O'Malley broke an impasse by negotiating a last-minute deal that allows the Jockey Club to continue year-round racing, at least for 2011. The horsemen and breeders associations agreed to contribute $1.7 million while the state is providing $3.6 million from its slot program.
Despite Penn National assurances, the company's actions did not endear it to owners and breeders who accused it of trying to kill Maryland racing to prop up its Charles Town casino and racetrack. Some racing boosters called for Penn National to sell its stake in the Jockey Club.
Maryland lawmakers have expressed frustration over Penn National's role in the Jockey Club's campaign to block construction of the casino at Arundel Mills. Lawmakers also have criticized what often appeared to be a fractured relationship between Penn National and MI Developments.
But opinions differ widely on the future of the state's gambling program.
House Speaker Michael E. Busch, an Anne Arundel Democrat, said recently that he thinks any gambling expansion would likely take place next year. Senate President Thomas V. Mike Miller, a Prince George's Democrat, has been more supportive, including for expanded gambling at Rosecroft.
O'Malley wants to focus on ensuring that slots facilities are in operation at each of the state's five approved locations before discussing any expansion of gambling, said spokesman Shaun Adamec. In summer discussions with lawmakers, the governor would revisit a state law that limits a casino operator to one license and seek ways to make the approved slots sites in Baltimore and Rocky Gap in Western Maryland more attractive to potential bidders, Adamec said.
Penn National faces hurdles to putting slots at Laurel Park and Rosecroft. Adding new locations to the state's slots program would require passage in a referendum to change the Maryland Constitution.
State Sen. E.J. Pipkin, an Eastern Shore Republican and the new minority whip, said he plans to introduce legislation Monday to preserve the gambling program but remove it from the state Constitution so that modifications such as new casino sites or the addition of table games could be made more easily. Such legislation would likely require voter approval in a referendum.
"If we want Maryland to be competitive and Marylanders to have the best opportunity to generate the most revenue, you have to make it more flexible," Pipkin said.
Despite the uncertainty surrounding any expansion of gambling in the state, Penn National appears resolute in sticking around to see what happens.
"But we can make no prediction about how and when, or if, anything positive will happen," Carlino said.
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