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Ohio Taps Consultants to Increase Gaming Revenues

Posted on May 16th, 2011

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The gambling industry and its casinos are a major focus of state governments seeking to find ways and means to raise funds during the budget deficit crisis. Taking a cue from their counterparts in the private sector, government executives are tapping business consultants and financial advisers to help them maximize and optimize revenues from the industry. Faced with an $8 billion budget deficit, on top of a $7 billion deficit in the prior year, Ohio Governor John Kasich has turned to two firms to provide this expertise: Moelis & Co., and Spectrum Gaming Corp.

With its headquarters in New York City, Moelis & Co. is an investment bank organized in 2007. It provides financial advisory services, advises clients on how to raise capital through mergers and acquisitions, business restructuring and other aspects of an enterprise. Moelis & Co. also operates as a merchant bank managing a $2 billion capital pool for equity investments. It employs about 500 people and services its clients through its offices in the United States, Europe, Australia, the Middle East and Asia. Rob Nichols, a spokesperson for the Governor, justified the hiring of the two firms because “there is absolutely no one within the framework of state government with the qualifications to render expertise for these important decisions.”

However, as any business executive knows, consultants do not come cheap. The contract of the state of Ohio with Moelis & Co. could earn the firm up to $15.4 million if its proposals enable the state to earn more revenues from gambling casinos. In 2009, Ohio voted to amend the constitution and require each casino operator to pay a license fee of $50 million, a 33 percent gross revenue tax and invest $250 million in each casino site. Under the terms of the contract, Moelis & Co. is entitled to a monthly retainer fee of $200,000 for a one-year period. On top of that, if Moelis & Co. is able to make Kasich generate more revenues through negotiations with casino owners, it earns a commission of 3.25 percent of the added revenue, not to exceed $13 million.

Casino owners have raised the issue of a possible conflict of interest in the arrangement. Rock Ohio Caesars LLC, a joint venture of Rock Gaming LLC and Caesars Entertainment Corp., which operates several casinos in the state, doubts that Moelis & Co. can maintain an objective mindset under the terms of the contract. Penn National Gaming, which is due to operate casinos in Columbus and Toledo would not comment pending a review of the contract. Although casino operators appear to be keeping an open mind about the issue, Rock Ohio Caesars has suspended activities on the casinos it is constructing in Cleveland and Cincinnati until the state’s plans to get more revenues from casinos are clarified. On the other hand, Dan Kaman, speaking on behalf of the Ohio Department of Administrative Services, downplayed the concern that Moelis would render biased or self-serving recommendations. He pointed out that state and casino operators both would still have to agree to the terms suggested by Moelis & Co.

The other consultant hired by Kasich, Spectrum Gaming Corp.,cbills itself as the world’s foremost gaming and professional services firm. The company focuses on the gaming industry and provides services ranging from internet gaming and public policy, through feasibility studies, gaming regulatory services and even to specialized professional services for Indian Nations. Spectrum works with governments, gaming operators and investors through its offices in Atlantic City, Bangkok, Guangzhou, Hong Kong, Las Vegas, Macau, Manila and Tokyo. In addition to having worked with many private gaming establishments, Spectrum lists among its clients public sector organizations in many states of the U.S.A., the Netherlands, Australia, the Philippines, Singapore and Russia.

Spectrum was retained more for the technical part of the project: to assist in the development of regulations for casinos and do a market study for video lottery terminals. These terminals are envisioned to be installed at seven racetracks in the state. Under a contract which runs until March 1, Spectrum will charge $395 an hour. Because it is retained under a “requirement contract” there is no limit to the amount Spectrum can charge. For control purposes, the Ohio Lottery Commission, which pays both Moelis and Spectrum, can accept or reject Spectrum’s time and cost estimates for the latter’s projects.