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Gambling and the Law: Jackpot for a Casino Thanks to Great Lawyering28 April 2009
By I. Nelson Rose
Legal gambling can be one of most profitable businesses around.
Take for example Penn National Gaming. The company owns four Argosy and four Hollywood casinos; manages the 200,000 square foot Rama Casino in Canada; owns three other casinos, including the Empress Joliet; operates telephone and internet wagering on races, and owns nearly a dozen OTB facilities and racetracks, some with slot machines, including Penn National Race Course. All this legal gaming brings in revenue of about $1.5 billion a year.
But even casinos have expenses. So, Penn Gaming's net income is $160 million.
Making a profit of more than 10% on sales is not bad.
But Penn Gaming just received $700 million in cash. And the only thing it cost was some lawyers' fees.
By the time you read this, Penn Gaming will have received another $775 million, in what effectively is an interest free loan.
How did Penn Gaming get so much money, at virtually no cost? For doing nothing. Specifically, for not being bought.
Back in the heady days of corporate takeovers, in June 2007, some private equity firms and large banks worked out a deal to buy the publicly traded Penn Gaming for about $6 billion. During the year it took to get the many government approvals, the Bush Recession erupted. Gas is now more than $4.00 a gallon, millions of people fear unemployment and foreclosure, and banks are reluctant to lend money to anybody. Casinos, tracks, and the stocks of the gaming companies that own them, have been hard-hit.
Although the investment companies seemed willing to complete the deal, their banks refused to come up with the money. Things really are as bad as they seem in the credit market. The banks, astonishingly short-sighted, are paying hundreds of millions of dollars, to not buy a company that they will undoubtedly want to help buy in a few years.
One of the main reasons the buyers had to pay so much to get out of the deal was the great work Penn Gaming's lawyers did during the negotiations.
Lawyers have to think about the bad and the ugly as well as the good. A lawyer should always ask, "What if things don't work out?" Partnership law, for example, expressly states how losses will be divvied up, because people going into business together often think only about how they are going to split the profits.
Penn Gaming's lawyers thought the deal would go through, but, just in case, they wrote in some great protections for the company.
First, they put in a $200 million kill fee. If the buyers tried to back out, they would have to fork over much more than Penn Gaming makes in a year.
The buyout agreement also had provisions dealing with the possibility of the banks having trouble raising the money. All of these protected Penn Gaming, including the express right to obtain an injunction, a court order requiring the buyers to perform.
Penn Gaming's legal position was so strong that when the buyers tried to renegotiate at a lower price, Penn's executives refused to budge. To get out of the deal, the buyers had to agree to give $700 million in cash and another $775 million in what amounts to an interest-free loan.
This puts Penn Gaming into a great position when either the price of gas comes down or Americans get use to paying what Europeans have paid for years. With so much cash and property, Penn Gaming will be sold for many billions, when investment funds again become available.
In the meantime, Penn Gaming and its shareholder have to thank the company's lawyers for getting it a billion and a half dollars in cash for NOT being sold.
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I. Nelson Rose