Eric Gillin

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Pennsylvania Jockeys for a Slot

Eric Gillin

After years of falling short, Pennsylvania legislators appear to have reached a handshake deal that would allow slot machines at as many as 15 sites across the state, giving machine makers and casino operators yet another avenue for growth.

Pennsylvania legislators reached an agreement "in principle" to allow up to 3,000 slot machines to be placed at racetracks, off-track betting sites and resorts, helping make good on Gov. Ed Rendell's campaign promise to use gaming revenue to cut property taxes. But although the informal deal has been reached, it must be officially ratified by the legislature, and it faces strong opposition from community groups.

Analysts say this time will be different. A year ago, a similar agreement fell apart over disagreements on revenue-sharing and whether table games would be allowed at racetracks. Unlike last year, the bill's biggest supporters -- State Sen. Vincent Fumo and State Sen. Robert Tomlinson -- have compromised in order to get the deal done so upwards of $1 billion in gaming revenue can flow into the state's coffers.

With a compromise in place, the bill is in caucus, so votes can be counted before it is voted on in the chamber, and time, not necessarily ideological opposition, could be a major stumbling block.

"Our contacts indicated that this bill should see a vote on Tuesday, June 29, one day before the end of the legislative session," said Eric Hausler, gaming analyst at Susquehanna Financial Group, in a note. "Our channel checks indicate there are 28 to 30 votes in the Senate -- needs 26 -- and more than enough votes to carry the bill in the House. We would expect Gov. Rendell to sign the bill."

If successful, the expansion would be another windfall for slot-machine makers such as International Game Technology (IGT Quote), Alliance Gaming (AGI Quote) and others, who received a boost this week when California signed an agreement with five tribal casino operators to allow for unlimited slot expansion. Hausler estimates that Pennsylvania could add between 35,000 to 50,000 slots over the next two to three years.

The spread of slot machines to Pennsylvania could have a big impact on fiscal 2006 earnings for gamemakers. Susquehanna estimates that IGT could see 2006 earnings increase between 20 and 25 cents a share, while Alliance -- which could use a catalyst now that the deployment of its slots has been delayed in New York -- could see earnings rise by as much as 10 cents.

The move is also good for some casino operators, namely Penn National (PENN Quote), which owns two racetracks in the state, and Harrah's Entertainment (HET Quote), which Thursday received approval from the Pennsylvania State Harness Racing Commission to acquire a 50% stake in Chester Downs and Marina. But it could be bad for others, especially those who are concentrated in the nearby Atlantic City market, namely Trump Hotels and Casino Resorts (DJT Quote).

"While this may be a negative to the Atlantic City market, both Harrah's and Caesars are well positioned to capitalize on any expansion in Pennsylvania," said Marc Falcone, analyst at Deutsche Bank Securities, in a note. "Caesars owns 32 acres on the Delaware River outside of Philadelphia, while Harrah's is well positioned in Pittsburgh."

And with neighboring states considering similar legislation, the spread of gaming to Pennsylvania could be the tip of the legislative iceberg, so to speak.

Committees in the Rhode Island Senate and House of Representatives this week approved bills to allow a state referendum to allow Harrah's to build a casino in West Warwick, R.I. The Rhode Island effort is expected to fail because Gov. Don Carcieri is opposed to gaming and likely to veto the bill, but as Pennsylvania's effort proves, persistence pays off.

With Ohio, Maryland and Delaware all giving serious consideration to legalizing slots, Pennsylvania's move could be the start of a trend.

"In addition, we would expect the pressure will now be on neighboring Maryland to call a special legislative session on slots, as well as pushing Ohio to reconsider slots next year, leading to a domino effect in the Northeast," said Falcone.