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Making sense of New York City OTB's plan
Critics of New York’s racing industry often point to the many competing account-wagering platforms in the state as a costly drain on the industry’s financial resources. So when New York City Off-Track Betting Corporation began working on a reorganization plan after filing for bankruptcy last year − a plan that included the possibility of shedding its account-wagering platform − most racing officials hoped some of those redundancies would be eliminated.
So far, however, that has not happened. Under a plan that has been submitted to the bankruptcy court, New York City OTB’s account-wagering operation, which handles $200 million a year, would be transferred to its creditors. The largest stake would be held by the New York Racing Association, followed closely by Yonkers Raceway. But instead of folding the platform into the creditors’ existing operations, the account-wagering operation would be operated as a stand-alone company that would compete with the platforms that are operated by the creditors, according to the plan and racing officials.
Racing officials acknowledge the plan is not ideal, considering seven account-wagering operations in the state already compete with each other, including five operated by OTB corporations. But the officials said New York City OTB’s fragile financial condition and the logistical issues created by the bankruptcy left no other option.
The reorganization plan has been approved by the company’s creditors’ committee and is now being reviewed by the bankruptcy court, but it cannot be implemented without significant legislative changes to the state’s racing law, an uncertain prospect. Gov. David Paterson has scheduled a special legislative session for Nov. 29 to address the proposed changes and other outstanding issues facing the state.
“Everyone’s ultimate goal is different,” said one racing official who represents a creditor and who spoke on the condition of anonymity because of the sensitivity of the negotiations over the plan. “The only option is to have [the account-wagering operation] gerrymandered in this political space.”
Under the plan, stakes in the new account-wagering operation would be allotted to New York OTB’s state racetrack creditors based on the total of their pre-petition and post-petition debt. According to the reorganization plan filed with the bankruptcy court early in November, that would give NYRA a 45.5 percent stake, based on total debt of $29.8 million. Yonkers would receive the next largest stake, at 34.8 percent ($22.8 million); Monticello would receive 11 percent ($7.22 million); and Finger Lakes racetrack would receive 8.2 percent ($5.4 million). The remaining half a percent would be divided among Saratoga Racing and Gaming; Batavia Downs, which is owned by Western OTB; Tioga Downs; and Vernon Downs.
Of those receiving a stake, NYRA and Yonkers are the only creditors that operate an account-wagering platform. NYRA’s platform, NYRA One, has been a critical component of its strategy to retain and reward existing customers, whereas Yonkers’s platform was created and is operated by Television Games Network, almost as an afterthought to the primary business of Yonkers, the operation of its casino.
As a result, NYRA would seem to have a powerful incentive to attempt to buy out the stakes held by the other creditors, since the other creditors seem to have little reason to stay in the business. But NYRA is squeezed for cash – it recently was forwarded a $25 million loan from the state to keep it afloat until next year – and it is not likely that the association will have the $35 million it would take to buy out the partners for several years.
The reorganization plan calls for wagers through the new platform on New York tracks to be treated as ontrack wagers, as far as the split of revenues from betting. For example, if a customer of the new platform bets on a race from Aqueduct, then NYRA will get all of the money from the bet, less state taxes. The same would go for Yonkers or Batavia. That would seem to be the fairest way to treat the bets, instead of subjecting them to the state’s patchwork of regulations, while simultaneously awarding the tracks with the most popular product.
Fortunately for NYRA, its product is, by far, the most popular in New York, and revenues from bets on the association’s races won’t subsidize any other signals.
Officials from NYRA and Yonkers did not return phone calls seeking comment on their plans for the account-wagering operation.
Under the reorganization plan, the transfer would be made to satisfy the entire $65 million pre- and post-petition debt held by the racetrack creditors. Some legislators, notably Assemblyman Gary Pretlow, the chairman of the Assembly’s Committee on Racing and Wagering, have taken issue with the $65 million value attached to the account-wagering business in the transfer, and he has said that legislators need a better idea about how much the business is worth before they can sign off on the plan.
“The simple truth is we don’t know how much it’s worth,” Pretlow said recently. “All we have is what these people are telling us it is worth.”
Pretlow said he feared the business was worth far more than $65 million, and that the creditors were getting a break for the sake of expediency. Selling the operation on the open market, for example, could bring a price far in excess of $65 million.
Over the last few years, Churchill Downs Inc. has led the way in consolidating the market, first by buying three account-wagering operations in 2007 in advance of launching its own platform and then by closing a $133 million deal for Youbet.com earlier this year. Its most recent acquisition, in fact, provides a roundabout way of determining the value of New York City OTB’s account-wagering platform.
In 2009, Youbet’s customers bet $480.3 million. So, under the deal with Churchill – which also included a bet-processing company with a thin profit margin – each dollar of handle through Youbet was valued at approximately 27 cents by Churchill. If New York City OTB’s account-wagering platform had $200 million in handle on an annualized basis, then the $65 million deal values each dollar of handle at 32 cents, an indication the deal falls in line with a free-market evaluation.