Penn National Gaming Bets Big on Pennsylvania Mini-Casino

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Penn National Gaming (NASDAQ: PENN) may have been adamantly opposed to the creation of Pennsylvania's "satellite casino" scheme, but the regional casino operator may end up benefiting most from it.

More importantly, it may offer other states a means for expanding legalized casino gambling while experiencing the least amount of fallout on existing gaming properties.

Maximum bang for the buck

In a bid to plug a budget hole last year, the Keystone State created a somewhat novel structure that protects the vast majority of the casinos currently operating while bringing economic development to regions that might not otherwise have seen any.

Unlike neighboring New Jersey, which created a destination location in Atlantic City and prohibits casinos from existing anywhere else in the state, Pennsylvania is allowing satellite, or so-called mini-casinos, to sprout up around the state and is in the process of auctioning off 10 licenses for the right to develop these gaming houses.

To ensure existing casinos aren't cannibalized, however, the legislators imposed buffer zones of 15 miles around the satellite casinos, meaning casinos can't be built within 30 miles of each other.

Las Vegas Sands (NYSE: LVS) , which operates the Sands Bethlehem casino, just ran afoul of that rule. It had the winning $9.9 million bid for the fourth mini-casino license at auction, but the company selected a location that overlapped the buffer zone surrounding another site claimed by rival Mount Airy when it won the third auction. That caused regulators to invalidate the Sands bid and hand the license over to Greenwood Gaming and Entertainment, the owner of the Parx Casino in Bucks County.

Although it was an unnecessary, self-inflicted wound for Las Vegas Sands, it's not fatal, as the casino operator will be able to participate in the remaining auctions.

Going all-in

Currently, the auction process is open only to owners of Pennsylvania's existing 11 casino license holders, which permits them to operate as many as 5,000 slot machines and 250 table games. The mini-casinos will have up to 750 slot machines and winning bidders can pay an additional $2.5 million to operate 30 table games.

The creation of satellite casinos in this particular manner has never been tried before, and it seems to fairly balance the concerns of existing operators alongside the desire of the state to expand the economic opportunities that follow casino development.

But Penn National Gaming doesn't see it that way, even though it stands to benefit. From the beginning, the regional casino operator opposed the measure, fearing it would hurt its Pennsylvania properties, such as the Hollywood Casino at Penn National Race Course, which is situated less than 20 miles from the capital of Harrisburg and Hershey Park.

In opposing the mini-casino structure, Penn said that because most of the eastern areas of the state already contain the majority of Pennsylvania's existing casinos, there could be no satellite casinos developed there. However, the western portion of the state would be ripe for competition, and that's where Penn has already established a foothold with its Hollywood Casino. Penn estimated at the time that mini-casinos could cause revenue at Hollywood to fall 14%, or about $35 million a year, from the $245 million it earned in 2016.

However, when the first auction was held, Penn handily won with a $50 million bid for a site in York County, putting it close to the Gettysburg National Military Park, which attracts some 1.2 million visitors every year who reportedly spend anywhere from $500 to $600 during their visit. While most visitors are there for around one and a half days, some 16% stay in the area for three days or more, and a casino might keep them in the area longer by extending their vacation.

Considering the disparity between how much Greenwood and Penn bid (about $8 million vs $50 million, respectively), a case could be made that Penn overpaid for the license, but it also helps the company protect the southwestern border of its Hollywood Casino.

And with Penn National's proximity to one of the major tourist destinations in the state, it may very well come out on top of a process it opposed in the first place.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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