Dover Downs Expansion a Tough Bet

When Dover Downs(DDE) surged in price this spring and became one of the most highly valued gaming stocks, short sellers took notice.

The action in the stock was confusing, because the company operates just one racetrack/slot operation in Delaware that wasn't seeing any major catalysts.

However, according to one market rumor floating around at the time, Dover Downs was eyeing a bid on the seventh and final harness racing license in Pennsylvania. This license, if received, would provide a shortcut to the coming slot machine boom in Pennsylvania -- just the type of opportunity that could fuel significant growth at small-cap Dover Downs.

Though investors may be excited, it's not clear whether Dover Downs is even interested in expanding into Pennsylvania. Moreover, even if the company were interested, legal battles surrounding the license would prevent an application from being submitted.

Pennsylvania's legislature legalized slots gambling in 2004, but the 14 licenses to be granted must still be approved. The voting will come in two time periods.

The state's gaming control board is set to vote on "category one" slot applications from six approved racetrack operators in the state in late September. Among these applicants are Harrah's(HET) and Penn National(PENN).

The remaining "category two" licenses, for racetrack-free slot operations, likely will be voted on by the end of the year, says Nick Hays, a spokesman with the Pennsylvania Gaming Control Board.

The seventh and final harness racing license is currently in legal limbo and up for grabs -- and possibly being eyed by Dover Downs.

Last year, the state's harness racing commission rejected two applications for the seventh license.

The application of privately held Bedford Downs was tossed because the grandfather of one of the company's executives had alleged financial ties to organized crime. Valley View Downs, the other applicant, saw its proposal rejected because of design issues.