Making the News

Quad-City Times

Originally Published:Sunday, September 13, 2009

Davenport leaders bullish on selling gaming license

By Tory Brecht
Quad-City Times

It's been a little more than a month since Davenport leaders started looking for a new casino operator, and already there have been some nibbles.

"There are gaming operators who have already contacted us and told us they are interested," City Administrator Craig Malin said. "I expect, near the end of the year, the council will be working with multiple interested parties."

Malin remains optimistic and continues to push for an aggressive sales job.

"We are preparing promotional materials and accumulating lists of leads," he said. He declined to disclose the names of any interested parties.

"I expect that later this month, we will be sending out information on the opportunity here in Davenport to hundreds of operators nationally and globally," he said.

However, national casino industry analysts warn that the current economic climate and the Quad-City market may conspire to make the sales job a tough one.

"The Quad-Cities' market is relatively small and competitive," said Joe Weinert, senior vice president of Spectrum Gaming Group, a research firm headquartered in Linwood, N.J. "I can't imagine many major players in the industry being interested in going into such a market at this time."

The chilly economy is also a major factor, experts said. Credit markets, while no longer frozen, remain tight.

Jane Pedreira, an analyst with Clear Sights Research, said finding third-party money for a major casino investment would be tough. Pedreira's company provides advice on a proprietary basis to mutual funds and hedge funds seeking to invest in gaming and leisure industry securities.

"The cost of financing has gone through the roof," she said. "The guys who are getting financing right now are generally paying an arm and a leg for it.

"It's probably one of the worst times to be seeking a new operator. The only transactions getting done right now are distressed companies being forced to sell an asset, but even then, you're not seeing a lot of buyers step up right now."

Not all the analysts see the landscape so grimly, however.

Bill Lerner, a gaming analyst with Union Gaming Group, noted that Iowa has a relatively low tax rate on gaming revenue at 24 percent. Other states that allow gambling collect at a significantly higher rate, such as Illinois at 50 percent, Maryland at 67 percent and New York at 78 percent. Union Gaming, headquartered in Las Vegas, is an independent research firm that advises government and industry on the global gaming business.

"There is a limited license environment in Iowa as well, so it makes a tremendous amount of sense to invest new capital there rather than in some of these new markets that are just too prohibitive from a tax standpoint," he said. "The question is, what level of investment is worth going into in an already-competitive market? Frankly, I don't know if it's hundreds of millions of dollars."

And that's likely to be the level Davenport is seeking.

After feeling shortchanged by the Isle of Capri's 2008 announcement that it would build a multimillion-dollar, land-based facility in Bettendorf while rebranding Rhythm City as a Lady Luck property - traditionally the company's brand for smaller casinos serving local markets - the city hired a consultant to determine the value of the city's license.

The report by Cummings Associates pegged the value at $149 million to $169 million, depending on location, and said an investor could expect $82 million to $88 million annually in gambling revenues. By comparison, Rhythm City posted revenue of $58.2 million for fiscal 2009 and $56.7 million for fiscal 2008.

Although a new licensee will be actively sought, the city remains open to discussions with the Isle of Capri on future investments by that company in

Davenport, city officials said. Meanwhile, the current Rhythm City casino will continue operation on the downtown Davenport riverfront.

"Since city officials indicated that they were looking for a significantly larger investment, we agreed not to stand in their way if they were successful in finding a company willing to work with them on a project of this magnitude," Jill Haynes, senior director of corporate communications for Isle of Capri, said. "It was never our desire to leave Davenport, and we would welcome the opportunity to continue our dialogue with city officials should this situation change."

Malin said he thinks aldermen are willing to listen to Isle if it comes back with a plan that would include a more sizeable investment than the $9 million rebranding effort proposed.

If that fails to materialize, many issues will have to be resolved in what would be an unprecedented handover of a gaming license in the state of Iowa.

Both city and Isle officials have been tight-lipped about the deal they have worked out.

Jack Ketterer, administrator of the Iowa Racing and Gaming Commission, said that board has not been a party to those discussions but will play a role in any potential transfer of license.

"There are a lot of licensing requirements," he said. "Any change that would take place would have to be brought to the commission for approval. It's difficult to comment on hypothetical situations because there are a lot of different scenarios that could happen. It's hard to say anything until we have something before us."


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