Cannery Casino Resorts Sells Meadows Racetrack: Was Saturation to Blame?

May 23, 2014

Last Wednesday, Penn National Gaming Inc. real-estate investment trust spin-off Gaming and Leisure Properties (GLP) purchased The Meadows Racetrack and Casino for the rather exorbitant sum of $465 million.

That brings the total number of casino properties owned by the aggressive new company to 22, of which all but two are leased directly to Penn National.

GLP does not oversee the daily operations of its casinos, and will not run the The Meadows either. A third party provider is currently being sought to fulfill that role.

Before the deal can be finalized, both the Pennsylvania Gaming Control Board and the Pennsylvania Racing Commission will first have to approve the sale, which shouldn’t be an obstacle seeing as Penn National already operates one racino within Pennsylvania’s confines. Until then, Cannery will retain operational control over The Meadows.

Cannery co-CEO Bill Paulos has gone on record citing that all proceeds will be used to pare down the company’s debt.

But why exactly did Paulos spring at the opportunity to sell The Meadows? Was it because GLP’s $465 million evaluation exceeded the casino’s market value, or were there other underlying factors at play; namely the fear that Pennsylvania’s casino market is becoming supersaturated and therefore less profitable?

Pennsylvania casino revenue down since 2012

From 2006 to 2012, Pennsylvania’s casino market exhibited remarkable year-over-year growth. Part of that can be attributed to the novelty of the industry, while the inclusion of table games and poker in early-2010 gave the burgeoning industry an additional push.

But since peaking in 2012, revenue margins have begun to taper off. And Meadows, more than most PA-based casinos, has been hit particularly hard by the windfall.

Gross revenue at the Meadows trailed off more than 2 percent, from $287.1 million to $280.7 million, in fiscal year 2012-13. The outlook for this year is even worse, as thus far the casino is showing a 9 percent year-over-year revenue loss.

With a casino floor boasting 3,317 slot terminals and only 61 table games and 14 poker tables, the casino clearly relies on its slot junkets to bolster its earnings. But today’s Pennsylvania gambler seems more interested in casinos that spread a more varied selection of card and dice games, then it does ones that treats it table game junkies as an afterthought.

To illustrate this paradigm shift, slot revenues among PA casinos are down nearly $7 million this April compared to last. Over a similar time period, table game revenues exhibited modest gains.

Given this, Cannery could have conceivably reinvented itself as a more balanced casino. But it didn’t. And I’m of the mind that saturation had something to do with its departure from the market.

Competition may have influenced Cannery to sell

Let’s remember, that when the Meadows first opened its casino doors in 2007, it was the only casino located in the greater Pittsburgh area.

It wouldn’t be until 2009 that standalone casino Rivers Casino would become the Meadows first legitimate rival.

Since launching, the conveniently located Rivers has managed to edge out its long-standing competitor in both terminal and table game revenue. Complicating matters further, Rivers has all but managed to circumvent the current industry downtrend, with gross revenues holding relatively steady over the past two years.

And with the passage of Issue 3 in Ohio in late-2009, The Meadows was suddenly faced with the prospect of even more competition.

Today, The Meadows faces a competitive threat from six nearby casinos, and possibly more should a casino be built in New Castle.

With so many casinos littering the area, saturation may have motivated Cannery to get out before its profit margins fell even further. Paulos himself acknowledged that competition was wrecking havoc on the Meadows profit margins.

But maybe GLP’s offer was just too good to refuse

Although market saturation likely played a role in Cannery’s decision to sell, it’s possible that the company would have accepted GLP’s offer regardless of whether the Meadows was performing well or not.

Consider this: The casino industry values companies based on its annual earnings (minus taxes, depreciation and a host of other nominal factors). Generally speaking, a casino is worth approximately seven to eight times this number.

At $465 million, GLP offered to purchase Meadows at roughly nine times its annual earnings figure. According to Fitch Ratings analyst Alex Bumazhny, GLP’s offer was “a little on the high end for regional assets.”

And with Cannery apparently carrying around substantial debt, accepting GLP’s offer may have been the company’s best bet – regardless of whether its plan to sell Meadows was premeditated or not.

How will saturation affect Pennsylvania’s land-based casino industry?

Even if it wasn’t Cannery’s primary motivation to depart Pennsylvania, saturation likely dampened the prospects Paulos and the company’s other execs held for the Meadows.

For the Pennsylvania Gaming Control Board, the recent turnover should serve as cautionary tale regarding growth, with the lesson being that 14 casinos is more than enough to satiate the needs of a state with only 12.8 million inhabitants – especially if its neighboring states also tout a burgeoning casino market.

The influx of casinos also doesn’t necessarily bode well for the future prosperity of regulated online poker, as New Jersey has already proven that states of similar size cannot realistically sustain more than two or three poker networks.

Should each PA casino latch on with an online gaming provider, the sheer enormity of poker sites will leave players confused and scattered – and that’s no way to operate a nascent iGaming business.

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