Do I Hear One Dollar.....

The mystery of how the Ontario government plans to change the revenue sharing arrangement it has with Ontario racetracks was solved to some degree yesterday as the OLG dropped the bomb on the horse racing industry, announcing that the partnership between tracks and government slots would end a year from now.

The exact plan (which tracks are tabled to close, what the new revenue sharing deals will look like, etc.) was not addressed yesterday.

Trying to make the most sense out of what the government plans to do moving forward, it looks like municipalities will be given the power to allocate x amount of gambling product and devices within its borders.

Private companies will then bid for the product.

In the case of a racino, the owner of the track will have the ability to operate the slots. The way it works right now is that the OLG rents the slots room from the tracks. The OLG pays for employees, machines, maintenance, and renovations. This comes out of the 75% of revenues the OLG keeps.

The way it will work in the future (I'm taking an educated guess here) is that tracks will have to pay all the expenses the OLG pays for now. The biggest question is what will the cut be?

Right now, probably the weakest slots facility (other than the stand alone casinos that are losing money) is Fort Erie.

According to OLG statistics for the year ending March 31, 2011, Fort Erie revenues (money lost by customers betting on slots) was $29.8 million. Total payroll for their 225 slots employees was $12 million. Horsemen received $2.98 million to enhance purses. However, the government signed a different 3 year deal, allowing Fort Erie the ability to try to get their house in order, by giving the track $5.35 million in lieu of the $2.98 million they were supposed to receive as the 10% share of slots revenues. The Town of Fort Erie also receives around a million and a half each year as well.

That leaves around $8 million under the current arrangement less maintenance expenses, which probably makes Fort Erie a break even proposition when it is all said and done, from the OLG's perspective.

It can be estimated that Fort Erie racetrack also generated between $9 and $10 million in revenues from gambling and concessions. Around half that money goes to the purse account.

Nordic Gaming, the owner of Fort Erie Racetrack, has claimed that the cost to operate the track is around $8.5 million a year. This is why an enhanced slots deal was needed in the first place. But Nordic was in no position to negotiate such a deal, so a leasing agreement was arranged with the Fort Erie EDTC who successfully got the subsidy from the government. The one distasteful thing about the deal is that Nordic was actually paid over $1.3 million the past three years for just sitting back and watching even though there was no way Nordic was going to see any profit if this deal never occurred.

OK, so why rehash all this? Going forward, there is no more agreement between tracks and horsemen regarding slots (assuming tracks will be given the option to keep slots). What does that mean for Fort Erie? If ownership doesn't change, it is a 99% probability that racing will cease there.

What about slots? Again, we are back to the mystery of what the new revenue sharing arrangement will look like. Average payroll for the province is around 11.0% of total revenues for racinos, payroll percentages increase in a big way (over 30%) when table games are introduced (more employees per table, security, etc.). Maintenance and renovations too have to be factored in, in order to attract outside businesses (or existing racetracks) to bid for casinos.

So lets say the government takes 50% of gross revenues. For Nordic, that would mean that the government would take $14.5 million of the $29 million that gamblers lose. The municipality will still expect 5% or so. However their current payroll is very high (especially compared with other racinos), and if that stays at $12 million, when factoring in maintenance, buying the machines, and renovation expenses, breaking even will be very difficult (especially when online gambling comes into the picture). There is another factor too, much of slots revenue occurs because a track is there, as spouses may split up at the track, with one going to the slots portion and the other staying in the grandstand, as well as the fact that some of those who play slots received some of their play money from revenues generated via horse racing. In other words, expect slots revenues to decrease somewhat.

With all the above factored in, Fort Erie slots and racing looks doomed, and with real estate prices depressed (thanks to those who rely on racing and slots to sell their homes), the price tag for the track as a real estate item will be minuscule.

One dollar, do I hear a dollar. C'mon, someone must want Fort Erie for a buck....

It makes me really scratch my head when it comes to the rationalization that this master plan by the government is really going to raise revenues to the province.

The fact is that the stand alone casinos lose money, and they only relinquish 20% of total revenues to the province. Why would a private business be interested in getting into the casino business in Ontario, especially with online gambling looming.

Most people who want to gamble in Ontario have no problem anyway. Locating slots elsewhere at a lower cut will not wind up gaining more revenues for the government. Nor will putting lottery machines in more places (as far as I'm concerned, they are everywhere already). Having more machines will not lead to Ontario residents losing more money on lotteries.

Table games, outside of major casinos, are not huge net revenue generators because of costs involved.

The only thing I agree with, is that when it comes to online gambling, the Ontario government is losing out some potential offshore revenues. However, in order to get that back, it needs to compete head to head with them, and that means paying out exactly what the offshores payout. This is not what the government does when it comes to Pro Line. And if they partner up with a Betfair, for example, their share of revenues will not be worth the direct addiction they will now be responsible for.

The deal the government has with the tracks right now is a guaranteed money maker, and to me, the government will need to reduce their own split in order to attract others to take over, and when it comes to land based revenues, Ontario residents are losing most likely what they are going to lose no matter how much expansion there is.

In the meantime, the government will devastate jobs, families and rural real estate prices, in their foolish quest to try to get more Ontarians addicted to gambling.