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Casino stakes may pay off big

| Wednesday, Aug. 23, 2006

No matter who wins Pittsburgh's slots license, the casino should generate $100 million a year or more for investors -- even after they pay the state's high gambling tax and operating expenses, analysts said.

That's not all profit, but it should still mean big money for individuals with ownership stakes, experts said. And their take should keep growing.

"Some people, once they start seeing the monthly figures coming in, want to stick around," said Robert LaFleur, an industry analyst with the Susquehanna Financial Group in Stamford, Conn. "It's not hard to make money in the gambling business."

Local businessmen Charles Zappala and Bill Lieberman -- who would each own 9 percent stakes in a proposed Harrah's Station Square Casino -- could eventually realize millions of dollars a year in profits, even by the most conservative estimates.

It's not uncommon for investors to make 10 percent or more in profits from a casino, said Clyde W. Barrow, who studies the gambling industry as director of the Center for Policy Analysis at the University of Massachusetts.

Backers of the Station Square casino have projected $617.7 million in revenues in its second year.

If profit margins are 10 percent, Zappala and Lieberman could each make more than $5 million a year. Other investors with smaller stakes would also do well: Steelers Hall-of-Famer Franco Harris could make $2.4 million; lawyer Glenn Mahone, $1.2 million; and Highmark Foundation President Yvonne Cook, $600,000.

The group's largest partner, Cleveland-based Forest City Enterprises, would own 75 percent of the casino. Officials have declined to say what -- if anything -- the partners paid for their shares.

Company spokesman Abe Naparstek said those estimates do not take into account the costs of borrowing money to build the casino, paying income taxes or contributing $7.5 million a year toward an arena.

"Ten percent is not even close to being on base in the early years," Naparstek said. "It's still high."

Even so, the casino should make money for investors -- and the returns should get higher into the future, he said.

"You hope, but you don't know," he said. "You don't go into projects where you lose money. You hope in the early years everyone's able to make money, but you don't know."

Gambling companies ordinarily expect profit margins of 15 to 20 percent, before paying interest and income taxes, said Les McMackin, spokesman for Isle of Capri Casinos, which wants to put a slots parlor in Uptown. Because of federal regulations, he could not talk specifically about the company's profit projections for a Pittsburgh casino.

In a worst-case scenario at today's rates, McMackin said, annual interest payments on a $500 million project would be about $40 million.

A publicly traded company based in St. Louis, Isle of Capri does not have any partners for its slots proposal. It has said it would pay $290 million for a new arena.

The third bidder, Detroit-based Majestic Star Casino, has 19 potential partners for its proposed North Shore casino. Don Barden, who owns the company, would retain 87.25 percent of the casino, while the other individuals have options to invest in the project.

Initial profits the casino makes, however, will not go to the partners, said Steve Lemberg, executive vice president. He declined to discuss the company's profit projections.

"It is our intention that profit distributions will not be made for many years while the company retains and reinvests the profits into the casino and its amenities, and also pays down principal to retire several hundred million dollars of debt," he wrote in an e-mail.

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