Sidebar: Thinking outside the box
Sidebar: It was a very good year...
Through key acquisitions, Penn National Gaming Chairman and CEO Peter Carlino has quietly grown his company into an industry giant
Back in 1972, when Peter M. Carlino essentially began his gaming industry career as president of a small, family-owned horse racetrack company in Pennsylvania, he never imagined he'd wind up in the driver's seat of one of the largest gaming companies in the United States.
Since helping take Penn National Gaming public in 1994, Carlino has seen his company grow by leaps and bounds through strategic acquisitions, including Hollywood Casinos in 2003 and Argosy Gaming in 2004. He has received numerous accolades on Wall Street. His company has graced Fortune Magazine's "100 Fastest Growing Companies" list an astounding four years in a row. In 2004, Carlino was named HVS Executive Search's "Best Performing CEO" for the gaming industry and he was a natural choice for this year's Gaming Executive of the Year by Casino Journal.
Carlino, however, would just assume the spotlight be placed on his executive and management teams and performances of his company's frontline casino employees rather than himself.
"They're the real reason why this company has done well," he said.
But Penn National's performance and growth under Carlino's leadership has been hard to ignore. The company's acquisition of Argosy, when completed, will make it the third-largest gaming company behind MGM Mirage and Harrah's Entertainment-assuming those companies' mergers with Mandalay Resort Group and Caesars Entertainment respectively, are approved (Boyd Gaming would be a very close fourth). Analysts meanwhile routinely point to Carlino's assemblage of a management team that is considered among the best in the business.
"What Peter's done with Penn National over the last 10 years is a testament to his ability to create value strategically, smartly and successfully," said Deutsche Bank gaming analyst Marc Falcone. "As a gaming executive I think Peter really flies below the radar screen. He's not as visible as other gaming executives, yet he's taken a very small racetrack operator and created the industry's third-largest gaming company."
In 1994, Penn National's first year as a public company, it recorded revenues of approximately $46 million and its total market capitalization was less than $50 million. In 2003, Penn National reported revenues of $1.16 billion
and equity market capitalization that exceeded $1.6 billion. Adding Argosy to its portfolio will essentially double to company's size, analysts have noted.
"What we have done from (1994) until now has been a fairly steady but inexorable move from the position we held then as a small regional racing company in Harrisburg, Pennsylvania, to what clearly is now a larger multi-jurisdictional gaming company," Carlino said. "We've done that step-by-step and through having the good fortune in the end of just assembling the right properties and the right company to make this happen."
Kevin DeSanctis, Penn National's president and chief operating officer, said that under Carlino's leadership, the company has been very transactional in nature. Every casino property in Penn National's portfolio has been acquired rather than built, and the company is always looking at new opportunities.
"When I first came to work for Penn, Peter and I had a long discussion about where he wanted to go with the company and what my thoughts on it were. I said to Peter that I really want us to take our time-make sure we build the infrastructure and thoughtfully work through how the company is going to grow. He said 'absolutely, that's what we're going to do.' And then we did just the opposite," DeSanctis quipped. "The reality is that since I've been here, we've made at least one acquisition a year. Between acquiring, integrating, trying to grow the management talent in the company, trying to instill a common thought process, we just haven't stopped. But it's been an incredibly exciting time and we've created an exciting company. I think Peter is the driving force behind all of that."
From tracks to casinos
Penn National Gaming's roots began very inauspiciously as one of the six original thoroughbred racing licenses in Pennsylvania.
"Racing was a family business. My father, Peter D. Carlino, started the company that began Penn National, which was Mountain View Thoroughbred," Carlino said. "It was really he who single-handedly developed all of the racing legislation that occurred over the years, through great imagination and tremendous amounts of hard work. He was,
in essence, the racing industry in Pennsylvania."
At the time the Carlinos' Mountain View Thoroughbred facility opened, there was only one other track operating-the Penn National Turf Club. Carlino said his company ran Mountain View for almost a decade before acquiring the Penn National racetrack and its license.
Carlino was president of that family business, which included a variety of companies up until 1981, when he left to begin building houses in Philadelphia suburbs, in Reading and central Pennsylvania. That company-Carlino Development Group-still exists today and develops housing and commercial office space. It's the largest office developer in the Reading market. Steve Najarian, Carlino's partner and president of Carlino Development Group and Carlino's son, Peter W. now help run the company.
In 1994, Carlino returned to Penn National Gaming to help take it public. By that time, Penn National had pioneered use of telephone wagering (1983) and opened off-track wagering facilities in Pennsylvania (1991), which Carlino was instrumental in helping develop.
"(The off-track wagering facilities) were so successful that it struck me that this company might have some small public opportunity," Carlino said. "That was on the strength of our racetrack itself, but principally the success of our first two off-track facilities in Reading and Chambersburg. They were very successful, so we launched an IPO. We put gaming in our name, though at that time I scarcely knew all that it entailed, because there was a certain cache that flowed around gaming in the early 1990s when the first of the riverboat properties came on line. We said in our offering document that maybe someday we'll get into the broader spectrum of gaming, but at that time, it was the faintest of dreams."
Just two years after the IPO, Penn National acquired Pocono Downs, which netted the company a harness license in Pennsylvania. A year later, the company moved to Charles Town, W.Va., where it helped pass a previously-failed referendum to allow video lottery terminals at the old Charles Town Racetrack, which the company had purchased. That began Penn National's foray into gaming machines and by September of 1997 the company had renamed the property Charles Town Races & Slots.
"That obviously was a very important milestone for us, though at that time, we couldn't have guessed how important it might become," Carlino said.
Two years later, the company acquired a 50-percent stake in the Freehold Raceway in New Jersey.
But perhaps Penn National's boldest move to date came in 2000, when it acquired its first full-fledged casino properties-Boomtown Biloxi and Casino Magic in Bay St. Louis, Miss.-from Pinnacle Entertainment.
"That was truly a step outside our racing roots and frankly it was a courageous move for our board and all of us because at that time, there was not a single gaming operative in the company. But I felt pretty strongly that that was where our future lay and that we'd buy these properties and figure out a way to run them well. Of course that all came to pass and then with a core of good properties, we were able to attract the kind of executive talent we would need to carry on further," Carlino said.
In 2001, the company acquired two Carnival Resorts & Casinos properties-Casino Rouge in Baton Rouge, La., and a contract to operate Casino Rama in Canada for the Canadian government and the Hundred First Nations, which are its owners. At the beginning of 2002, Penn National bought the Bullwhackers Casino in Black Hawk, Colo. It then spent the rest of the year expanding properties; hotel expansions at Casino Magic and Casino Rama and the addition of casino space, restaurants and a parking garage at Charles Town.
In March of 2003, Penn made its biggest splash by acquiring Hollywood Casinos and expanding its casino reach into Aurora, Ill., Shreveport, La. and Tunica, Miss.
"At the time, we were looking for a brand. We had the idea that what we did not want to have was just an assemblage of unrelated properties, but rather to try to develop a brand. Hollywood is certainly an excellent name and one we would be happy to use. But it turns out, as we've discovered and concluded, that all markets are local and in acquiring established properties, you also have a client base that is quite comfortable with where they are," Carlino said. "These things are not built from the ground up by us, so they each have their own personality and theme which might or might not lend itself to, for example, a Hollywood name. At least for now, we're content to leave our properties branded as they are."
Despite larger mergers that have taken place in the last year, the Argosy Gaming deal has been widely recognized and lauded by gaming analysts and industry observers. It has also cast Penn National directly into the industry's spotlight.
The $2.2 billion deal (including the assumption of $805 million in Argosy debt) adds the Alton Belle Casino in Alton, Ill., Argosy Casino-Riverside in Kansas City, Mo., Argosy Casino-Baton Rouge in Louisiana, Argosy Casino-
Sioux City in Iowa, Argosy Casino-Lawrenceburg in Indiana, and Empress Casino Joliet to its portfolio. According to both Carlino and DeSanctis, the deal was a natural fit.
"Argosy is a marriage made in heaven for Penn National. They are about our size. They are a well-managed company with some outstanding properties in very good markets," Carlino said. "Argosy also gives us the opportunity to enter three states where we presently are not doing business-Missouri, Iowa and Indiana. So when you start to look at a map and the distribution of our properties around the company and superimpose the Argosy properties over what we have today, it's a pretty exciting picture. We clearly would be the dominant riverboat company in the center part of the United States. That certainly was, and is, a goal."
"We have looked at every potential transaction that we'd be capable of doing in the United States," DeSanctis added. "We're constantly reviewing what's available and what's not. Argosy has always been on the top of our list of transactions that would make the most sense for Penn."
The Argosy deal creates a combined company with estimated annual revenues in excess of $2 billion, over 20,000 slot machines and approximately 700,000 square feet of casino space. Penn National's portfolio will include thirteen gaming facilities; four parimutuel horse racing facilities and seven off-track wagering sites; a 50 percent interest in a fifth parimutuel horse racing facility; and its management contract for Casino Rama.
Analysts point to the diversification of Penn National created by acquiring Argosy as one of the company's key strengths.
"It truly diversifies them," said Jeffries & Co. gaming analyst Larry Klatzkin of the Argosy deal. "It adds quality assets and helps diversify the company's earnings. I think the two companies are similar enough that there will be some synergies and savings in combining the two."
"When you combine Penn National and Argosy, it's a very powerful combination with respect to its diversification," Falcone said. "Look at the diversification from an asset as well as a geographic standpoint and look at the tremendous free cash flow generating capabilities out of this transaction. You can see this deal makes a tremendous amount of sense."
DeSanctis said Penn National currently has over 1 million customers in its database and that he expects that figure to greatly rise once Argosy's players are brought into the fold.
"That's a very solid regional gaming company. With one transaction, you accomplish that and it's very hard to duplicate. We've become sort of an index company. If you're an investor and want to invest in riverboat gaming, then you now probably want to invest in Penn National. That was very important to us."
So how exactly does a transactional company like Penn National view its acquisition strategy?
"We think very simplistically," DeSanctis said. "If a transaction doesn't have a free cash flow return greater than 5 percent, we pass on it. Free cash flow is the engine that drives this company."
DeSanctis said Carlino and Steve Snyder, the company's senior vice president of corporate development are constantly looking for new opportunities to acquire gaming properties. Carlino, DeSanctis said, is never afraid to pull the trigger on the right opportunity.
"If you look at some other companies in the gaming sector, they have a much different approach in how they get to their decision making. We're very lean in terms of structure," DeSanctis said. "We present the facts, we discuss it as a group and we make a decision. It's very deliberative and thoughtful, but we can also come to a decision much quicker than some other folks in the business."
Since Penn National doesn't focus heavily on things like branding strategies, it helps clear the way for whether a potential deal makes sense financially for the company. As long as the financial metrics make sense, DeSanctis said, pretty much any property or company in the middle market can make sense for Penn National.
"It's a strategy of good properties, bought fairly," Carlino said. "But more critically, these are properties where we think we can add value. We had, for example, looked at the Binion properties. I had taken a walk around one of Jack's properties with him. After just a half-hour of time spent with him and recognizing how strong and personal was his involvement and his persona in his properties, I concluded very quickly that these were well-run properties where we probably couldn't add value. We couldn't do better."
Timing is also of the utmost importance, Carlino noted. Courting the right company for an acquisition can take years, but if studied right and carried out right, it can make deals all the more attractive.
"We've been fairly patient in trying to bring these properties on in a metered, sensible way. I had an interest in Hollywood for a couple of years. But like everything else, it's timing that makes the difference. I talked to (Hollywood Chairman) Jack Pratt about our interest in his company at a time when I'm sure he had no intention of selling," Carlino said. "But you might recall, and this is public information so I'm not giving away any secrets, that there was kind of a coup at Hollywood. Other family members took over and there became an opening for us to make a proposal. That went to an actual open bid. We had the winning bid, I think, because we were best prepared. We looked at it for a longer period of time than anyone else."
Once a deal is done, Penn National has made it a point to focus chiefly on the combining of company assets, resources and staffs before it considers future deals.
"Our goals then are first, to assimilate this (Argosy) acquisition well and then to continue to grow and expand these assets to maximize their potential," Carlino said. "Then, and only then will we look around and see what comes next. Certainly Argosy is not the end of our ambitions. But we're patient and take the long view.
"The equity and debt markets have recognized that we're very focused on sound fiscal operations. We're very careful with our investments and we'll continue to be as Argosy comes into play. Debt reduction is kind of a mania here."
Analysts note that Carlino has maintained that acquisition focus, not wavering in his efforts to be thorough with each deal he and his management team examines.
"Peter and his team have remained disciplined in its acquisition strategy-walking away from overpriced assets (Mountain High Casino, President Casino). In each instance, the price didn't justify the return," Falcone said.
Those that credit Carlino's success with Penn National point to his ability to amass a proven and successful management team. At the top of that list is DeSanctis, who joined the company in 2001 after the acquisition of Casino Rouge and Casino Rama.
"I think (Carlino) hired one of the better managers in the gaming business by hiring Kevin DeSanctis and I think he's developed a good team behind him, which is important," said Klatzkin.
DeSanctis has worked in a variety of roles in almost every gaming jurisdiction in the United States. He was a key player in Mirage Resorts and Trump Hotels & Casino Resorts. He helped manage the development of Mohegan Sun resort from inception to completion for Sun International. He worked in the Bahamas on the Atlantis Phase II project, again from inception to completion. He's worked in both the Reno and Lake Tahoe markets. Through Penn National, he's had exposure to regional riverboat gaming markets and the racing business.
"I've been fortunate in that I've been able to work in a lot of different markets. I've had the exposure to many different types of operations," DeSanctis said. "Where that helps here is that I think we look at things as one size doesn't fit all. When we're looking for managers, we try to make sure the fit of the manager is appropriate to the type of operations they're going to run. My management style is incredibly decentralized. Everything we do here focuses on making sure that every person understands their role and responsibilities."
That reflects Carlino's management and corporate structure philosophies.
"We have a very decentralized view of management in general. These are large businesses," he said. "If you look at each one in every market we operate, a business that does $100 million, $300 million or $400 million is a large business. Each of those businesses has capable management in place. We can't begin to guess how that business ought to respond in a local marketplace on a day-to-day basis. We have certain core principles and values by which we like to operate-and those we share. But in the end, the front line is where our management and properties do business.
"My focus is largely strategic here. What you have with Penn is a company that is committed to doing the absolute best with our people and our properties that we can. My effort is directed to trying to get the most out of everybody. But our job is to facilitate. Our job is to aid. It certainly is never to dictate."
DeSanctis said that Penn National executives don't micromanage the company's properties and don't often visit them in the routine sense that other gaming companies' executives do. There are open communication lines in place that more than effectively handle the operation and performance issues of each property.
"It's an extremely adult environment. When you come to Penn, we just expect that you know what you're doing. We hire that way. We expect you to treat your people the same way we treat you. Our big things are trust, respect and confidence."
Because of that philosophy and the expertise and talent DeSanctis has been able to bring to the company, Penn National has been able to attract other solid managers and executives, like Executive Vice President of Operations Len DeAngelo, analysts noted.
"Bill Clifford has also been a very solid CFO for them," Falcone said. "(Senior Vice President of Regional Operations) John Finnamore, who runs the Charles Town and Pennsylvania operations, has been done well. They have very strong general managers across the portfolio. Steve Snyder has been an important part of the company, (Vice President, Secretary and Treasurer) Robert Ippolito has long-been a strategic player within the organization. Peter has surrounded himself with good people and that helps you to become more successful."
It's this team that now sits center stage in the gaming industry's spotlight, with Carlino at the helm. He and DeSanctis both agree there is no interest in becoming complacent. The company is already planning for a new gaming property in Pennsylvania that Carlino said will be similar to that of Charles Town Races & Slots. It hopes to have that property open by mid-2006.
Other acquisitions will likely come in time as well.
"I generally say I have no idea where the future lies," Carlino said. "My job is to sort out every path and be open to where the path leads-to be prepared always for what may come next. I think it's safe to say now what I would never have said before: that in the end, we'd like to become a fully-integrated, coast-to-coast gaming business, and who knows, maybe far enough out, a company with a world-wide focus. But we've got plenty to do right in front of us."
Thinking outside the box
Penn National shows financial ingenuity in its unique pitch for an Illinois riverboat license
In early 2004, before Penn National acquired Argosy Gaming, it has a unique approach to vying for the highly coveted, yet risk-carrying 10th gaming license in Illinois.
Penn, which already owns Hollywood Casino Aurora, came up with a proposal which essentially would have had the company build a casino with its own capital, then turn control of it to the State of Illinois in return for a management contract.
The idea, a brainstorm of Penn National CFO Bill Clifford, had Penn building the $225 million to $255 million casino complex in the Chicago suburb of Rosemont. Penn would pay the license's current owners, Emerald Casino, which the state had forced to surrender its license due to improprieties and financial concerns, $156 million, while the state would get $350 million in cash. Penn would then develop and manage the casino in return for 10 percent of its net revenues and development fees in a management deal that would have lasted 20 years.
"It was a very progressive idea," said Penn National Chairman and CEO Peter Carlino. "We understood that we were never going to be high bidder for the 10th license there. Not even close. But we also recognized that the state had an objective to make the most amount of money that it could. This idea was so incredibly clever because it would have given us a tremendous economic return. We would have put up all of the capital to build the facility, but then the state would have taken it up with a bond issue or however it chose to do so. It would have made incredible amounts of money for the State of Illinois."
The state imposes a 70 percent tax rate for its highest-earning casinos. While the Chicago-area gaming market has proven lucrative, the extremely high tax rates are an obvious disadvantage.
Penn's proposal would have alleviated the risk attached to what Penn National's President and COO Kevin DeSanctis called "instability in the marketplace."
"There's no longer any instability because the state can tax whatever it wants to tax because they're the owner-whether they take a tax or simply the profits, the same result occurs. In return for us developing the operation, fronting the capital, getting it up and running and managing it, we would get a management fee and development fee. It's really that simple," he said.
"It would have been immensely lucrative for us," Carlino added. "This was the perfect win-win situation had they the political courage to deal with it."
The proposal drew fire from others in the industry and was ultimately rejected by the state, but it has received nods of approval since.
"The type of bid they proposed was very out-of-the-box, very non-traditional, yet made tremendous economic sense," said Deutsche Bank gaming analyst Marc Falcone. "Even though they were unsuccessful and not selected, you have to take a look at the thought process that went into that approach more than anything else."
Penn National Gaming Chairman and CEO Peter Carlino was not the only casino operator to excel in 2004 and be considered for Casino Journal's Gaming Executive of the Year award. Here's a quick list of the other gaming industry leaders that came to the fore in 2004:
Lyle Berman, chairman & CEO, Lakes Entertainment-When documentary film maker Steven Lipscomb approached Berman in 2003 about creating a "PGA-type tour for poker," he immediately agreed to become a partner in the venture and provide the millions of dollars needed to film the first season. The end result of this effort-The World Poker Tour-came into its own in 2004, almost single-handedly reviving casino card play and spawning a host of mostly mediocre imitators.
Frank Fertitta, chairman & CEO, Station Casinos-Thunder Valley Casino, which Station operates for the United Auburn Indian Community in Placer County, Calif., was one of the bright spots in the casino industry in 2004. Fertitta and Station continue to show the wisdom of Las Vegas casino operators protecting their markets by setting up shop in the Golden State.
Terrance Lanni, chairman & CEO, MGM Mirage-Pulled what appeared to be the blockbuster casino deal of all time when MGM Mirage bought Mandalay Resort Group for $7.9 billion, only to be trumped a few weeks later by the Harrah's Entertainment/ Caesars Entertainment merger. Still, working all the kinks out of this deal will likely keep Lanni in the news through 2005 and beyond.
Dan Lee, chairman & CEO, Pinnacle Entertainment-By focusing on the water-based casino properties, Pinnacle Gaming has quickly grown into one of the casino industry's dominant players in the Midwest and Southern gaming markets.
Gary Loveman, president & CEO, Harrah's Entertainment-What needs to be said other than Loveman helped to orchestrate the largest deal in casino history-Harrah's $9.4 billion purchase/
merger of Caesars Entertainment? In addition to this feat, Loveman has made Harrah's a technology pioneer in the gaming industry, and was recently appointed chairman of the company.
And finally, the Tale of Two Cities award (It was the best of times, it was the worst of times...) goes to:
Donald Trump, chairman, Trump Hotels & Casino Resorts-The unexpected success of The Apprentice television series provided Trump with a massive publicity coup that has allowed him to explore a slew of side businesses such as men's cologne. Unfortunately, this boost came a little late for his casino enterprise, which had to file for Chapter 11 bankruptcy protection.