The White House and Congress weren't the only things on voters' minds last week. Gambling measures showed up on the ballots in a handful of states. Gaming equipment makers could emerge as winners from the mixed bag of results, according to Wall Street analysts, although some casino operators could also see modest benefits in specific locales. Voters approved measures expanding gaming in Florida, Oklahoma and Wisconsin. Among the states with significant defeats were California and Nebraska. In a nail-biter in Florida, voters approved a proposal paving the way for the legalization of slot machines at racetracks and Jai Alai establishments -- known as frontons -- in Miami-Dade and Broward counties. The proposal passed after election officials found 79,000 absentee votes that were originally overlooked in electronic counting on Tuesday, according to The Associated Press. The Florida results could benefit gaming equipment makers such as International Game Technology ( IGT), wrote Merrill Lynch analyst David Anders in a research note. Existing owners of the seven racetracks and frontons also would stand to gain, he added. Those owners include Isle of Capri Casinos ( ISLE), Florida Gaming ( FGMG.OB), Churchill Downs ( CHDN) and Magna Entertainment ( MECA). (Merrill Lynch does and seeks to do business with companies covered in its research reports.) Still, hurdles remain before the first slot-machines ring. Voters in the Miami-Dade and Broward counties need to approve local referendums, which J.P. Morgan analyst Smedes Rose expects will be held in March or April. A legal challenge focusing on the validity of the signatures used to put the proposal on the ballot is scheduled to be heard in January, Rose noted. Meanwhile, gaming proponents will be submitting legislation to pass an amendment to the state constitution. "We expect Gov.
Jeb Bush to oppose, but tax revenues are dedicated to state education, so he may be hard-pressed to oppose," Rose wrote in a research note.
Assuming everything goes smoothly, Rose expects the first slot machines to begin operating in south Florida in the middle of 2006. Isle of Capri would likely open a temporary facility with 1,500 slot machines at that time, followed by a permanent casino by the middle of the next year. In such a scenario, Isle of Capri could earn an additional $30 million to $35 million in its 2007 fiscal year, which begins in May 2006, according to Rose. (J.P. Morgan does and seeks to do business with companies covered in its research reports.) Across the country, in California, voters overwhelmingly opposed two initiatives that would have expanded gambling. More than three-quarters of voters rejected Proposition 70, which would have allowed Native American tribal casinos to operate an unlimited number of slot machines and would have given them exclusive rights to casino-style gaming. Proposition 68, opposed by 84% of the electorate, would have allowed card clubs and racetracks to operate slot machines if tribes refused to pay 25% of slot revenue to the state. The defeats were likely negative for gaming-equipment makers. Nevertheless, Wall Street had expected the results. "With the defeat of both propositions, tribes in California are likely to continue negotiating/renegotiating individual compacts with the governor," wrote Michael Rietbrock, a Citigroup Smith Barney analyst, in a research note. "The defeat is a slight positive, albeit temporary, for regional gaming markets in Nevada such as Reno, Tahoe and Primm that rely on California as a feeder market. While Propositions 68 and 70 would have been opportunities for the gaming-equipment manufacturers, investors had anticipated the defeat, in our view." (Citigroup does and seeks to do business with companies covered in its research reports.) In Oklahoma, voters said "yes" to Question 712, which permits three racetracks to install electronic games and allows tribal casinos to install "skill games" such as video poker. The result is likely to help electronic game makers.
"Passage of Question 712 levels the playing field of the existing slot providers and is a positive for International Game Technology and Alliance Gaming ( AGI)," wrote Citigroup's Rietbrock. "Implications for Multimedia Games ( MGAM) are somewhat mixed. Although Multimedia will benefit from the level playing field, the passage of 712 further opens the market to competition from Alliance and IGT. Legalization of video poker should be a specific positive for IGT, which has a dominant share of that segment." Elsewhere, Wisconsin voters approved setting aside land for a large tribal casino. Rietbrock wrote that it could pave the way for an $800 million casino by 2008 -- a modest positive for gaming equipment makers but a slight negative for casino operators with facilities near Chicago, particularly Mandalay Resort Group ( MBG). In Nebraska, voters rejected Amendment 3, which would have allowed two casinos anywhere in the state, and Initiatives 417 and 420, which would have allowed two casinos in Omaha and slot machines and video poker elsewhere. "Passage of either proposition would have been meaningfully negative for casinos located in Iowa, especially for operators with exposure to the Council Bluffs or Sioux City markets," wrote Rietbrock. Those operators include Harrah's Entertainment ( HET) and Argosy Gaming ( AGY). "If the Amendment or Initiatives had passed, we believe Omaha (large feeder market into Council Bluffs) would have been a very likely site. We do not believe gaming expansion in Nebraska is likely to be revisited in the near term following the defeat of both propositions."