12/10/2009 12:00AM

Churchill wagering with eye to future


LEXINGTON, Ky. - Any good gambler knows to place his biggest bets where he has the biggest advantage, and to quit chasing bets that turn bad just to stay in the game.

For the past 10 years, the best gambler in racing has been Churchill Downs Inc., the publicly traded company that owns four racetracks and is the caretaker of the most popular race in the U.S., the Kentucky Derby. Over the last 10 years, Churchill has strengthened both its balance sheet and its position in the racing industry with some well-timed transactions, while avoiding the pitfalls that landed its over-reaching competitor, Magna Entertainment Corp., in bankruptcy court.

Now that Churchill has reached an agreement to purchase Youbet.com - the second-largest account-wagering company in the U.S. - the company is once again tipping its hand as to where it sees growth in the racing industry. The transaction, which values Youbet.com at $126 million and will cost Churchill approximately $43 million in cash (the rest is in stock), will make Churchill the market leader in Internet betting, and position the company to take advantage of any federal relaxation of gambling laws, a position that Churchill officials say that they support.

Although account wagering is the one bright spot in a racing industry that has seen its main revenue source - betting on horse racing - plummet by 17 percent over the last 18 months, Churchill is still facing questions about whether it can weather the economic doldrums that racing has been stuck in for five years. According to Bob Evans, the company's chief executive, those questions are legitimate, but Churchill is preparing for a new future by focusing on some common ways to raise revenue - lobbying for slot machines at its Kentucky and Illinois tracks, in the most high-profile example - and some non-traditional methods, such as the recent announcement that its Louisville track would host a three-day music festival next year featuring 65 bands.

"At the macro level, we've gone from $15.2 billion to 12-point-something-billion in handle in just five years," Evans said, referring to national handle figures on U.S. races. "I don't think there's a V-shaped recovery ahead. We might not get that handle back, so we're going to have to figure out how to live with 12-point-something-billion in handle."

It's obvious when talking to Evans that he does not have much faith in a dramatic resurgence in racing's popularity. The numbers bear Evans out. In addition to the national drop in handle figures, revenues for all four of Churchill's tracks - Churchill in Louisville, Calder in Miami, Fair Grounds in New Orleans, and Arlington Park outside of Chicago - have all declined this year. The declines, of course, are not unique to Churchill, but the drops also show that Churchill is not immune to the downturn in the industry.

The trends show up most markedly in Churchill's earnings before interest, taxes, depreciation, and amortization, or EBITDA, a common tool used by companies to measure financial performance. Through the first nine months of 2009, EBITDA for Churchill's racing operations was $41.2 million, compared to $61.1 million in the first nine months of 2008.

EBITDA results in Churchill's two other segments, slot-machine gambling and account betting, are getting better. Churchill's online business, for example, had EBITDA of $11.8 million through the first nine months of 2009, compared to $4.4 million through the first nine months of 2008. Its slot-machine EBITDA from its casino operations at Fair Grounds increased from $13.8 million to $15.4 million.

The gambling numbers are set to get a significant bump beginning in January, when Churchill is scheduled to open an $80 million casino at Calder. Churchill officials estimate that gross gambling revenues at the casino will be $80 to $100 million a year, at least initially, and while that might sound like a nice chunk of change, it's actually a pretty grim reflection of the competitive state of casino-type gambling in Florida. A casino at Philadelphia Park in Pennsylvania, for example, had gross gambling revenue of $350 million in the fiscal year that ended in June 2009.

Evans said the national gambling marketplace, which now includes casino-type gambling in more than 30 states, will require that all racetracks have some sort of subsidy in order to survive in the future. Churchill is no exception, he said, and the company expects to lobby just as aggressively in 2010 for slot machines in Kentucky as it did in 2009, when two separate efforts to pass a bill giving racetracks the exclusive right to casino-type gambling died in the Senate because of political disagreements between the state's Democratic and Republican parties.

"Every racetrack is facing some very difficult economic choices, and we're not all going to survive," Evans said. "The guys who are out there operating without some sort of subsidy, it is going to be tough sledding."

Although Evans is not gung-ho about expanding racing's traditional revenue streams, he said he is bullish on account wagering, and he has backed that opinion up by putting the company's money at risk. Churchill launched its own wagering platform, twinspires.com, in 2007, and it then quickly gobbled up three competitors to attain a critical mass, allowing the company to flex some muscle on the national landscape. Then came the Youbet agreement, which will create a company that can compete on the same level as the current market leader, Television Games Network, which is owned by the British internet bet-matching behemoth Betfair.

Remi Bellocq, the executive director of the National Thoroughbred Horsemen's Benevolent and Protective Association, said horsemen have expressed some misgivings about Churchill's aggressive move to achieve market leadership. Most of the concerns, Bellocq said, are based on the fear that Churchill could use its position to put downward pressure on the prices for the signals it carries, an opinion that is based in part on prior disagreements between Churchill and horsemen over account-wagering issues.

"Our position will probably always be, 'The more competition, the better,' " Bellocq said. "But then again, Churchill has been very good at doing the things it has done in the past."

Evans said he couldn't predict the future of account wagering, but he said that Churchill had no intention of withholding any of its signals from its competitors, as was the case recently for more than a year as a result of its reluctance to reach a content-sharing agreement with TVG. More importantly for Churchill Downs Inc., Evans said, the company's moves to build up its internet business will position the company as a leader when serious efforts are underway to legalize other forms of internet gambling. That ability to leverage a brand is a Churchill specialty, considering what it has done with the Derby over the past 20 years.

When expanded gambling on the Internet is permitted, Evans said, the companies that will succeed are the "well-funded, big-branded companies." Furthermore, Evans said that an expansion of legal gambling on the Internet could help racing, even though it would lift racing's exclusive right to offer betting over the internet.

"I think it's a good idea," Evans said. "It creates more competition for horse racing, certainly, but it will bring more people online, and we might all be better off. That might be the way we introduce a whole new generation to racing."