Churchill Downs Wins Big in Its Latest Deal: In one fell swoop, the racetrack operator bolstered its core operations and entered a new business area

Churchill Downs Inc., the company that conducts thoroughbred horseracing at the legendary Churchill Downs racetrack, has been on a course to plug gaps in its nationwide racing schedule, bolster its share of the national simulcast market, and expand its alternative gaming business. Acquisition has been the company’s growth vehicle of choice. Last October, the company, whose flagship property is home to horse racing’s Kentucky Derby, made advances on all three fronts. In a $47 million transaction, it picked up bankrupt Fair Grounds Race Course in New Orleans. Simultaneously, it closed acquisitions, totaling $10.5 million, of two related New Orleans-area operations – Finish Line Management Corp., operator of five off-track betting facilities, and Video Services Inc., operator of more than 700 video poker machines in various locations. “We had been a pure racing company until now, and we have been anxious to broaden our revenue base to include alternative gaming,” says Michael Miller, CFO of Churchill Downs. “We wanted to pursue this opportunity not only because it provides its own discreet cash flows, but because our industry needs to generate purse dollars to keep the quality of racing at its highest levels and keep people interested in investing in the breeding and racing businesses. So we need to have purses, and bigger purses come from these alternative forms of gaming,” he asserts. The reason why simply adding more races is not the way to generate more revenue, Miller explains, is because increasing the number of races would “spread the population of race horses too thin.” “Quite honestly, probably the best thing for the whole industry would be to shrink the number of races slightly. That would ensure that we have full fields of horses. Up to a point, the fuller the field, the more betting opportunities there are.” Another vexsome issue for his company has been asset utilization, he asserts. All of Churchill Downs’ racetracks only run for certain days, weeks, or months during the year, leaving the facilities idle much of the time. “Being able to have some alternative business allows us to utilize those properties year-round and sort of leverage what our fixed costs are.” By snagging Fair Grounds, the company has filled a bothersome gap in its racing schedule that has been a drag on first-quarter earnings. None of Churchill Down’s other racetracks run the entire winter, while the New Orleans-based track runs from Thanksgiving Day into late March. The deal also broadens the company’s simulcast business. Churchill Downs began expanding in early 1999. Its $86 million acquisition of Calder Race Course in Miami in January of that year expanded its live racing and simulcast-wagering network. Later in the year, it acquired Hollywood Park Race Track for $140 million, and in a June 2000 deal, it bought Arlington International Racecourse outside of Chicago for about $71.5 million. Fair Grounds becomes the seventh in Churchill Down’s portfolio of racetracks – a network that spans coast to coast. The company also owns Ellis Park in Henderson, Ky., and Hoosier Park in Anderson, Ind. The company seems quite content with its current network of properties. “We’re always on the lookout for additional acquisitions, but there aren’t a lot of racing properties that hold a high level of interest for us now,” Miller says. “However, we do want to expand into areas where we can leverage either the assets we currently have, our brands, or our management. We’ll stretch to do something outside of racing as long as it falls under one or more of those umbrellas.” Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com