Penn National Gaming announced plans on Thursday to pull out of a proposed Cherokee County casino off Interstate 44, leaving officials disappointed but moving onward.
Penn National had told Kansas gaming officials last month that a casino in southeast Kansas relied upon Penn getting the contract for a casino in the South Central Zone, located just south of Wichita. Penn National was not awarded the contract for the South Central Zone, which went to Harrah’s.
Also, Penn National cites the now-competitive market that exists with the Downstream Casino Resort nearby as one of the primary reasons for leaving the Southeast Zone (see sidebar).
Ed Van Petten, Kansas Lottery executive director, said it’s difficult to say what the exact reason is for Penn’s pullout.
“I have a hard time deciphering the different factors,” Van Petten said. “From everything said, I thought it had been said that a southeast casino would be marginal at best. The South Central casino would have been profitable.”
Legislators and officials had plenty to say about the decision.
“I’m extremely disappointed. It’s a huge mistake on Penn National’s part,” said Rep. Doug Gatewood, D-Columbus. “They went through the process, they got what they wanted in the contract. We know clustering models work in business. To see them pull out at this stage of the game is a horrible injustice to the entire southeast zone as well as the state of Kansas. You don’t hear about Wendy’s or Burger King saying ‘Sorry, we can’t build there, there’s a McDonald’s.’”
That sentiment was a common theme for legislators, as some said southeast Kansas has faced a lot of disappointment lately, particularly with the decision by Superior Industries to close down the Pittsburg plant.
“It certainly didn’t come at an opportune time,” said Rep. Julie Menghini, D-Pittsburg. “We’ve had our share of bad news in the job market. It would have been a nice boost to the economy.”
The process now turns back to the state, as the decision by Penn National means there is no contract or bid on the table for any casino in the Southeast Zone.
Kansas Governor Kathleen Sebelius expressed her feelings and explained the next step in the process.
“We’re disappointed Penn National is withdrawing their application for Southeast Kansas,” Sebelius said. “The Lottery will open up the process again to determine whether others are interested in operating a casino in this area.”
Van Petten said he understands that Penn National made a business decision not to invest in a Cherokee County casino and that he is not angry with Penn National.
Van Petten said he and his team would begin looking into the process of reopening bids early next week.
“If there is to be casino gaming, the bid process would have to be started from the beginning, just like we started last year in regard to that zone,” Van Petten said. “We probably will reopen it. It seems to make sense if there is someone out there who is interested. It’s a series of absolute maybes at this point.”
The possibility of reopening bids excites some in the area, especially Craig Hull, Crawford County Convention and Visitors Bureau director.
“I look forward to the opportunity to have the proposal period renewed for this gaming zone,” Hull said. “I’m anxious to see what new proposals will come forward now that the other areas have been awarded. I also want to see if there has been a change in our market locally where we might attract a different type of proposal.”
According to the Expanded Lottery Act, Penn National had to pay a one-time privilege fee of $25 million in order to negotiate the contract. Van Petten said Penn National would be receiving their money back because the contract had not reached the point of being binding.
Penn National was also given the ability to phase in the remaining $225 million investment required by statute, with $125 million up front and an additional $100 million phased over 12 years.
Originally, Penn National had expressed plans to build a destination casino, including a hotel. But as Downstream Casino was constructed and opened, the plans for the hotel were pushed to the back burner.
“The dwindling interest, then the decision to phase in the investment, and the lack of interest to build a hotel were huge red flags to me,” Menghini said. “A multitude of things didn’t make sense. I’m hopeful some of the companies that were interested in Wyandotte County will take a look here.”
Gatewood said he was particularly disappointed, as Penn National received money as a result of fending off a takeover bid earlier this summer. As part of that termination agreement, Penn National received a $225 million breakup fee, and a seven-year, interest-free $1.25 billion loan that would be repayable in 2015 using cash, common stock, or some combination of the two.
Gatewood said the $225 million could have been used to fund the Cherokee County casino, and that the decision to bring a casino to southeast Kansas should not have depended on any other county.
“If they needed Sumner County, they should have put that in the contract,” Gatewood said. “Instead, they kind of left us hanging. The economic downturn we’re experiencing is cyclical. That’s why this is so disappointing. Penn National had the cash in the hand and could have built the casino debt-free.”
However, business concerns about the viability of a southeast Kansas casino cannot be ignored, Van Petten said.
“Businesses have to be logical and reasonable,” Van Petten said. “We can’t ask a business to come in and spend hundreds of millions of dollars when they don’t think it would work. People want someone excited about the project rather than someone that’s apprehensive to begin with.”
Some of the obstacles to gaming in the area as noted by other investors is the high cost of participating in gaming. The Expanded Lottery Act requires a total investment of $250 million, including the $25 million privilege fee.
“Those are the terms under which we have gaming,” Van Petten said. “If we’re going to have gaming, then we’re going to have these conditions. Those are the laws drafted two years ago. If the rules and conditions are to change, it’ll have to be through the legislature.”
That may be easier said than done. Menghini noted that opening up changes to the statutes would open up plenty of other potential changes to the Expanded Lottery Act.
And the political battles may be tough to overcome, particularly because the Expanded Lottery Act was passed at a time the lottery needed to be renewed in the state, a convenient time for legislators to take a look at changes in statutes.
“We’d have to have much more comfortable numbers of legislators supporting gaming as we do now,” Menghini said. “Everything would be very difficult, because I’m not sure the House or the Senate leadership are interested in bringing that subject up. Getting it heard — I don’t even know how that would be possible.”
But Penn National’s loss is, of course, Downstream Casino’s potential gain. And Downstream Casino appears to have plans to capitalize on that opportunity.
“We want the citizens of Cherokee County to know that our future plans will include building on the economic base that our casino resort has established for the four-state region,” said Quapaw Tribe and Downstream Chairman john Berrey. “We are part of the Cherokee County community and remain committed to helping bring viable and sustainable economic development to the county. We are very disappointed for our fellow citizens of Cherokee County, that so many hopes and dreams of a better way of life have been delayed. The Quapaw Tribe and Downstream Casino Resort will begin immediately to explore additional ways that can help soften this tremendous loss.”
Andrew Nash can be reached at andrew.nash@morningsun.net or by calling 231-2600 ext. 132.
PITTSBURG —
