Gaming competitors in Western Pennsylvania are nipping at Mountaineer's heels. Gasoline prices have made it more costly for customers to reach its venue in the West Virginia hills.
Its chief executive and very public face, Edson "Ted" Arneault, is scheduled to step down around the end of the year. And all the while, the credit crunch poses a challenge for parent MTR Gaming Group to pare back to its core businesses and better defend their turf, say industry experts.
MTR and Arneault might have his successor right under their noses. Jeffrey Jacobs, 54 -- the namesake of Cleveland's old Jacobs Field -- sits on MTR's board, controls the biggest chunk of MTR stock (16 percent) and wants to buy more, according to a securities filing last week. His family business develops and runs gambling spots across the United States.
MTR's business core consists of three venues: Mountaineer in Chester, W.Va., about 40 miles from Pittsburgh, which offers horse racing, slot machines, gaming tables and a resort hotel and entertainment venue; Presque Isle Downs & Casino in Erie, which features horse racing and slot machines; and, Scioto Down in Columbus, Ohio, a harness racing track.
MTR has properties in Michigan, Minnesota and Nevada. The company employs 2,300 people at Mountaineer, 730 at Presque Isle and 270 elsewhere.
"Our strategy is to scale back to our core and ride the credit markets out," said Arneault, 61, and CEO since 1995, in a recent interview. "Right now, we're in a hunker-down and pay-down-debt mode, and (plan) to grow within our strategic base."
Meanwhile, Moody's Investors Service punctuated that tough credit environment by downgrading MTR's credit rating a notch on June 13, citing competitive challenges and liquidity issues.
"Selling noncore assets would improve their (liquidity). The question is, how much cash could they raise, considering noncore assets don't generate profits," said Moody's analyst Jacques Ouazana.
The analyst cites new competition from The Meadows Racetrack & Casino in North Strabane, Washington County, only 23 miles from Downtown. It opened a year ago with more than 1,800 slots and plans to have 3,800 by next April.
"With a larger facility, there will be more potential for The Meadows to take market share from Mountaineer," Ouazana said.
"It's 65 miles an hour right up to our front door," said General Manager Mike Graninger, touting The Meadows' location off Interstate 79.
Graninger doubted Pittsburghers' willingness to opt for "driving on questionable highways to get to West Virginia."
Sitting at a slot machine recently at Mountaineer, Linda Kedzierski said she doesn't mind her 50-mile drive from Niles, Ohio. She makes the trek about once a week -- often with her 78-year-old mother -- during summer months.
"It's a nice ride," said Kedzierski, 55. "We love it here. We come for the shows, too."
Still, cash flow at Mountaineer slowed to $45 million in 2007 from $68 million in 2006, said Nicholas Danna, senior gaming analyst for Sterne Agee & Leach, New Orleans.
"That's a fairly dramatic decline. And some of that was from the opening of The Meadows, which provides a more convenient alternative for people around Pittsburgh," Danna said.
Next year could see Majestic Star Casino open up on the North Shore, provided owner Don Barden can solidify a recent financial restructuring. The 440,000-square-foot facility is supposed to offer 3,000 slots.
"But one advantage Mountaineer has is table games, like poker," which the resort added in late 2007, Ouazana said. "Pennsylvania does not have table games. So, that's a competitive advantage because MTR can attract more-affluent customers."
Table games and poker brought in more than $12 million in fresh revenue to Mountaineer in the first quarter, the first full period with the new offering, documents show.
MTR emerged from the ashes of a bankrupt security-guard services company in the 1990s. With proceeds from selling those businesses in 1991, it bought gaming and oil and gas businesses. In 1996, the company took the name MTR Gaming, which has solely operated racing, gaming and entertainment businesses since 1998.
MTR's stock in the past 12 months has fallen from about $16 to about $5. That includes a more than 9 percent drop April 10, when investors learned Arneault would not renew his CEO contract.
Despite the stock slide -- or perhaps because of it -- MTR shares have drawn a great deal of interest from Jacobs Entertainment Inc. The Jacobs family increased their MTR holdings to nearly 16 percent in mid-May.
In May, Jacobs Entertainment Chairman and CEO Jeffrey Jacobs joined the MTR's board -- and the committee selecting Arneault's successor, say securities documents.
On June 27, Jacobs offered to buy up to $5 million of Arneault's stock at a 25 percent market premium, said a securities filing. If Arneault, who owns almost 7 percent, accepts the offer, Jacobs would up his stake to 18 percent or 19 percent.
The offer is good until mid-January, said the filing, or by the time Arneault hopes to step down. Arneault is reviewing the offer, which he did not solicit, said MTR spokeswoman Tamara Pettit.
Neither Jacobs nor other Jacobs Entertainment executives could be reached for comment.
"I wanted to cut back some of my activities because it's been 12 hours a day for 15 years with the company," said Arneault, who is featured in Mountaineer's television ads.
"But we're not so rigid that if on Dec. 31, (a successor) is not in place, I walk out the door and say, 'See ya, guys'," said Arneault, adding he'd stay on until replaced.
Arneault declined to comment specifically on probable successors. MTR has "some very good internal candidates and some good external candidates, which are all going to be vetted by the succession committee," he said.
"He's no different than any other board member," said Arneault of Jacobs. "He's a large shareholder, and he's got a lot of experience in gaming."
Jacobs' background is similar to Arneault's. Both men hail from Cleveland, where Arneault worked as a certified public accountant for Arthur Andersen in the 1970s and received his masters in business degree from Cleveland State University.
Arneault has been "unbelievable for MTR" as a persuasive lobbyist who "helped get table games passed in West Virginia," said analyst Danna.
What's more, Jacobs Entertainment is entrenched in gaming. It developed and operates gaming facilities in Virginia, Louisiana, Nevada and Colorado, where the privately held company is based. Jacobs runs a Cleveland-based affiliate, Diversified Opportunities Group, which invests in gaming companies, according to Hoover's Inc., which tracks companies.
MTR is in the process of climbing out of a financial hole dug by years of expansions. It steadily grew revenue from $294 million in 2003 to $436 million last year, but the bottom line has deteriorated from a $15.1 million profit in 2003 to an $11.4 million loss last year.
"Over the last five years, we've really had to focus on growing to a certain level in order to protect the assets that we have in Pennsylvania, Ohio and West Virginia. And that comes at a cost," Arneault said.
"We could have sat back and said, 'Let's not reinvest in anything and build a destination resort. Let's become a gin joint basically that has nothing but (slot) machines and no entertainment.' Then, booked a lot of cash and had a lot of profit."
But MTR's employees, casino/resort communities and shareholders are "best served with a longer-term vantage point," Arneault said.
"I think we're positioned right now that as this plan unfolds, people will see we have protected the assets, and the stock market will reward us accordingly."
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