Deutsche Bank financial analysis of value of 10th Illinois casino license, impact of gaming proposals on state tax base

OVERVIEW

Gaming, lodging and leisure analysts Marc Falcone and Eric Hausler conducted an independent financial analysis of gaming proposals on the value of Illinois' 10th casino license and the State of Illinois' tax revenues from gaming. The analysts measured the impact of: (1) restructuring the state's gaming taxes implemented July 1, 2002; (2) increasing the number of gaming positions allowed to 2,000 positions from the current 1,200 positions; (3) adding 1,000 slot machines each to the state's six racetracks.

CONCLUSION

An expansion of gaming through slots at tracks would drop the potential value of the 10th license by at least $525 million and would achieve only marginal tax gains, while potentially putting the stability of Illinois casinos and therefore long-term state revenue prospects in jeopardy.

The optimal solution to the state's budget crisis is to do the following:

• increase the number of gaming positions at casinos to 2,000
• restructure tax rates to stimulate investment
• rule out the expansion of slots at tracks to avoid a sharp drop in casino values and revenues

Adoption of these recommendations would increase the value of the 10th license to $750 million from its current value of $350 million (before the legislature voted to raise the top gaming tax rate to 50-percent a year ago, the license was worth nearly $600 million).

On the other hand, the addition of slot machines at racetracks - creating the equivalent of five new casinos in the state - would make the 10th license worth only between $75 million and $225 million because of the prospect of diminished casino revenues.

The creation of "racinos" would produce approximately $85 million more in taxes than casinos would generate on their own with 2,000 positions. This figure of $85 million is marginal compared to the gain in the value of the 10th license, which is worth $525 million to $675 million more without slots at tracks.

This gain in taxes with the addition of slots at tracks is also predicated upon investment and long-term stability by the casino industry in Illinois, which could be uncertain in an environment where racinos, high taxes and casinos coexist.

Slots at tracks would mean the four casinos in northern Illinois could generate less revenue, and thus less taxes, than they did over the last 12 months, even if they went up to 2,000 positions - either way, a net loser that will threaten the industry's viability and dampen investment in the state.

By putting the long-term financial health of the casinos in question, the Legislature would threaten the stability of a tax source that has been a reliable source of revenue for the state.

CREDENTIALS

Deutsche Bank Securities' gaming, lodging and leisure unit covers gaming and lodging companies, as well as a variety of leisure and land-based entertainment companies. Prior to joining Deutsche Bank, the authors of the analysis, Marc Falcone and Eric Hausler, worked at Bear Stearns & Co., Inc., where they covered gaming, lodging and leisure, earning the No. 1 Institutional Investor ranking for four consecutive years.