By Peter Schnitzler, The IBJ
pschnitzler@ibj.com
Indiana's
two horse tracks could change hands as investors race to come up with the $250
million required to add thousands of slot machines.
The
steep cost of a state license combined with the potential of a lucrative payoff
has stakeholders in Shelbyville-based Indiana Downs and Anderson-based Hoosier
Park jockeying for position.
On
June 6, Carmel-based LHT Capital LLC-the minority owner of Indiana Downs led by
local home builder Paul Estridge Jr.- filed a proposal with the Indiana Horse
Racing Commission to buy out its partners, South Bend-based Oliver Racing LLC
and Chicago-based Equine Investments LLC.
Oliver
Racing rejected the $130.2 million deal just
two days later, but negotiations between the two camps are still alive.
Meanwhile,
50 investors in Centaur Inc.-Hoosier Park's Indianapolis-based owner-are
attempting to cash out. On June 7, Centaur filed an IHRC petition seeking to buy
back the interests of many of the firm's original shareholders. Together, the
shareholders hold about half of Centaur, said Chairman Rod Ratcliff. Centaur
would not disclose the financial value of its stock buyback, which is still
subject to regulatory approval.
"Right
now, we're sorting the wheat from the chaff," said State Sen. Luke Kenley,
R-Noblesville, who oversaw much of the Legislature's slots debate. "We're
finding out who really wanted to make the investment and understands it's
going to take some time to
make a return, and who thought, 'Slot machines [with] no licensing fee? That's
an opportunity to print money.'"
The
stakes are high, and not just for the players involved in the separate track
deals. Indiana's General Assembly approved up to 2,000 slots at each track
because the state needs the $500 million in license fees to underwrite property
tax rebates. If Indiana Downs' or Hoosier Park's negotiations should fail, the
state won't get the money and homeowners won't get the relief checks
they're expecting. Instead,
they'll suffer average property tax increases of 24 percent.
"Hopefully,
it's a good sign that these folks are getting their pencils out and trying to
work things out now," Kenley said. "[But] obviously ... there are all kinds of
possibilities of what could happen."
Indiana
Downs
Led
by Estridge, LHT offered Oliver Racing and Equine Investments $60 million cash
plus a $30 million subordinated note, which would be worth $70.2 million in
2015. LHT additionally offered to shield the sellers from any taxes or fees
related to the transaction.
Estridge
is president of Indianapolis-based custom-home builder
The Estridge Cos. Anticipating success at the bargaining table, he's assembled a
whole team to redevelop Indiana Downs as a "racino," a racetrack with slot
machines. His team includes Indianapolis-based Browning Investments Inc. as lead
developer; Greenwich, Conn.-based gambling financing company Plainfield Direct
Inc. for investment capital; Credit Suisse Securities LLC for
debt financing; and Innovation Capital LLC as investment banker and
gambling consultant.
According
to Estridge's June 6 offer letter, the Indiana Downs racino upgrade project
would cost $480 million, including $250 million for the license fee. Factor in
the buyout costs and that leaves
$140 million for redevelopment, or $40 million more than the state requires as a
minimum investment in facilities upgrades.
"While
we have had our differences of opinion over some aspects of our project, I would
hope that this substantial offer will allow us to come together and reach an
agreement," Estridge wrote.
But
Oliver's reply made it clear a takeover by the Estridge group won't be easy.
"We
have no interest in selling our membership interests or change in majority
control," wrote Oliver Racing Managing Member Ross Mangano in a June 8 letter to
LHT. "Please cease your efforts as you, your lenders, investment
advisors and equity partner are creating confusion in our market and are
negatively impacting Indiana Downs LLC in its efforts to operate its business
and secure financing for its slots operations."
Oliver
Racing is attempting to convert Indiana Downs to a racino on the cheap, said
Innovation Capital Managing Director Matt Sodl. Sodl called Oliver's strategy
"underfunded," but he declined to share more detail.
"Let's
just say it's a 1950s approach to finance and project development. It's being
devised by folks that have no idea what they're doing," Sodl said. "You open up
a half-assed product, you're going to lose customers, and it's going to impact
the financing and cash flows of the entity. And that ultimately goes right to
value."
Oliver
Racing's Mangano referred IBJ to Indiana Downs General Manager Jon Schuster for
comment.
Schuster,
who isn't involved in Oliver's negotiations with LHT, said Oliver Racing is
still considering a wide spectrum of scenarios for financing and redeveloping
Indiana Downs as a racino. They range from erecting a temporary facility, which
would allow slots play quickly, to construction of a large permanent structure,
which would require acquisition of nearby land.
Oliver
Racing is committed to Indiana Downs' success, Schuster said, and he promised
the state will receive its slots license payment on time. He didn't think the
company had hired a developer or investment bank yet.
Estridge's
buyout deal might not be dead, even though his initial offer was rejected. Sodl
said LHT has already made a counterproposal. He declined to share its terms. And
Mangano's rejection letter
suggests Oliver Racing is willing to continue discussion of Estridge's vision
for the track even if talks don't result in a transfer of majority control.
"I've
just called Michael Browning and advised him if you were to bring this proposal
as a board member of Indiana Downs to the board, we would consider this proposal
at that time for all of us," Mangano concluded his note.
Hoosier
Park
The
situation in Anderson is less complicated than in Shelbyville, because Centaur
doesn't have to vie for control of Hoosier Park. Centaur Chairman Ratcliff said
the company's stock buyback plan germinated when a handful of the company's
original investors who are now in their 60s or 70s asked for the chance to sell
as they contemplate retirement. Centaur was obligated to present the same
repurchase terms to all its shareholders, and the offer ballooned to include 50
investors.
To
help it finance Hoosier Park's conversion into a racino, Ratcliff said, Centaur
is considering bringing in a major new equity investor. And Centaur is also
fielding offers from investment
bankers who want to provide debt financing. Ratcliff declined to offer more
detail about fund raising or the scope of his construction plans for the Hoosier
Park project.
But
Jeffrey Smith, Centaur's CEO of Horse Racing, noted that Hoosier Park isn't
Centaur's only asset. Complicating matters, the company now has operations in
Colorado it wants to improve. Centaur is also attempting to build a racino
northwest of Pittsburgh.
Pennsylvania
regulators haven't yet ruled whether to approve Centaur's proposal, but the
company is one of only two remaining applicants there under consideration.
To
generate all the capital it needs for the three projects, as well as the
exploration of potential new markets elsewhere, Centaur is considering raising
up to $900 million all at once.
"It's
all part of the puzzle we're working on now, to put it all together," Smith
said. "We can't put a financing plan in place [for Hoosier Park] when, in a
month from now, we need another $400 million. It's nothing different than what
any global operation goes through."
But
the first payment for Hoosier Park's racino license is fast coming due. Ratcliff
said Centaur is committed to meet the state's Nov. 1 deadline.
"That
payment will be made ... no matter what," he said.
Special
session?
Property
tax rebates are riding on the outcome of Indiana Downs' and Hoosier Park's
ownership shakeouts. But Kenley isn't worried yet. He said the flurry of
activity is a sign that all the players are working out their differences. Now
that everyone knows the price of the slots licenses, impatient investors who
thought they were in line for a quick windfall are moving on. Remaining will be
those committed to making the two racinos viable businesses.
"It's
not just a lay-down-easy deal now," Kenley said. "Instead of an oil well wildcat
or gold mine, it's more of a standard business deal. But it's still a viable
transaction."
Indiana
should be able to issue property tax rebate checks and avoid a special session
of the General Assembly, Kenley said, as long as at least one of the tracks
makes its slots license payment.
Ed
Feigenbaum, publisher of the newsletters Indiana Legislative Insight and Indiana
Gaming Insight, said negotiations could still go either way. The horse tracks'
owners might fail to resolve their internal disputes. But it's more likely
they'll settle their differences and turn both sites into cash cows.
"The
Legislature knew full well what they were getting into. They were the ones that
set up, I hate to call it a house of cards, but this structure," Feigenbaum
said. "If it becomes a house of cards, they should not be surprised, nor should
they be surprised if this becomes a thriving venture."