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Churchill Downs has built a formidable racing operation through acquisitions and smart management

By PATRICIA A. MCQUEEN

At a racing conference several years ago, Tom Meeker expressed his readiness to operate a riverboat casino for the benefit of racing should the opportunity present itself. Well, that hasn't happened yet, but as president and chief executive officer of Churchill Downs Inc., you could say Meeker is captain of another ship, one that has gone far beyond its roots in Louisville, Ky., to encompass racetracks across the country. 

Churchill's six properties accounted for roughly one-fourth, or about $3.9 billion, of the total amount wagered on horse racing in the United States last year. They include Hoosier Park in Indiana (which opened in 1994), Ellis Park in Kentucky (acquired in 1998), Calder Race Course in Florida, Hollywood Park in California (both acquired in 1999), and Arlington Park in Illinois (merger completed in 2000).

Eric Hausler, a gaming analyst at Bear, Stearns & Co. Inc., has high praise for Churchill, at least from an investor's perspective. "As far as track operations go, Churchill is one of the best," he said. "Churchill operates the tracks very efficiently, and it's a very smart, well-run company. They've managed the business through some tough times, and are well-positioned in the current environment. They have a very good quality racing product and a good business plan."

Churchill Downs had an advantage from the start: It has good name recognition, being home to the Kentucky Derby. It has taken that name, and the image of the Twin Spires that comes with it, and applied it to other facilities with great success under the banner Churchill Downs Simulcast Network. It has been a long road, but the result is a racing organization more equipped to handle the realities of today's marketplace.

Strategic initiatives

As recently as 15 years ago, racing was a cottage industry, Meeker explained, and racetracks typically enjoyed a gaming monopoly and focused on their local market. Since then, the industry has seen the proliferation of other forms of gaming and the development of new markets and growth opportunities via domestic and international simulcasting and, more recently, in-home wagering.

"The racing industry became more businesslike, where basic business skills, which heretofore weren't present in this cottage industry, had to come to the front," Meeker said. So Churchill reacted to the changes around it by developing a strategic plan to help it continue the growth that came early from simulcasting.
Four core objectives were part of that plan: promote and enhance live racing; increase the company's share of the simulcast market; lead the consolidation of the racing industry and grow through acquisitions; and promote the integration of alternative forms of gaming and entertainment into the company's racing operations. 

"It became very apparent that you could really combine those first three initiatives through an acquisition and consolidation strategy that focused on aggregation of content," said Bob Decker, Churchill's executive vice president and chief financial officer.

He added that while Churchill has been successful in maximizing short-term revenues in the simulcast and OTB markets, long-term growth will be determined by the in-home market. For that part of the business, Churchill has aligned itself with Television Games Network (TVG) rather than develop its own in-home wagering platform.

"We're not a technology company," Decker said. "Technology changes so fast, we don't think it makes sense for us to make a major investment into technological platforms in order to provide our content to the racing fans."

So years ago, Churchill and many other tracks agreed to provide content exclusively to the predecessor of TVG, ODS/United Video. "That was done for one reason only: in order to get United Video to make this major investment into the platforms, and into new production capabilities that we as an industry thought was necessary in order to make account wagering the growth vehicle and the potential success story that the industry really needed."

Verdict on consolidation

When Churchill began its acquisition strategy, some independent racetracks feared the company (and now also its current rival, Magna Entertainment, which is acquiring its own stable of racetracks) would dominate the industry, weakening their own races and forcing them into high-priced simulcasting packages.

"There has been some unhappiness, I think, with what we've done with our rates," Decker said. "But from an overall standpoint, I think everybody would agree that it's been reasonable, and we haven't done things that have really hurt our outlets or hurt the industry. There's 1,100 or so simulcast outlets in this country, and it's very important for us that we are able to have a strong working relationship with those outlets in order to maximize our sales. We will certainly increase our prices to ensure that we are compensated justly for the quality content that we have, but we will do that in the framework of understanding what makes our retailers tick."

From a general business point of view, industry consolidation is inevitable. "The racing industry has been so defragmented and, quite frankly, historically poorly run," Hausler said. "The emergence of major business-focused companies like Churchill and Magna is really changing the industry. And that's scared a lot of people. But ultimately I think it's good for the industry, because we weren't seeing a whole lot of growth. When an industry stops growing, then you need to consolidate that industry, eliminate the unprofitable locations, consolidate the most profitable ones, and then you start a new phase of the growth cycle."

"I believe it is good for the industry to have some consolidation," Meeker agreed. "Neither Magna nor Churchill will own the industry, but it is important to have an aggregation of assets. [Organizations of substantial scale] will facilitate doing business in the international marketplace."

Members of the group

The three largest tracks in the group outside Churchill itself are understandably pleased at their new association with the corporation. For Hollywood Park and Calder, Churchill brought a long-term commitment to horse racing that perhaps their previous owners lacked.

"I think the big difference is that Churchill's corporate direction is solely in the direction of a better racing product," said Rick Baedeker, president of Hollywood Park. "Not that [former owner] R.D. Hubbard wasn't totally dedicated to racing, but he took the Hollywood Park company and acquired other gaming properties around the country, so that horse racing was a component of a gaming company. Churchill Downs is all about horse racing. Even when they talk about other gaming opportunities, it's at the racetracks and for the benefit of the racetracks and for purses. That's a key distinction, I think."

Calder is another facility that has benefited from its association with Churchill. Its previous owner was based in Japan. "Although they were very, very good to this facility in terms of spending capital dollars, there was never any sense of long-term commitment to the sport," said president Ken Dunn. "They were lenders that became reluctant owners."

Dunn praised Churchill's efforts to offer special wagers that span multiple tracks and to coordinate stakes programs. "We're not there 100 percent yet, but it's an effort to see what we have and to try to complement each other's stakes programs, rather than stepping on each other's toes. I don't think there's ever going to be a way to control that completely, but we do as an industry need to do a better job. And we're addressing it at least internally within Churchill Downs."

Arlington Park may get the most from its merger with Churchill because it has to come back to prominence after being closed from 1988 through 1999. "Certainly when we're recruiting for horses, the synergies and the relationships that we can benefit from - primarily from Hollywood and Churchill - are tremendous pluses," said Arlington president Steve Sexton.

This fall, Arlington will have the additional benefit of Churchill's expertise in holding big events as it prepares for the first Breeders' Cup to be hosted by an Illinois track. "Churchill's experience in traffic flows, security, and accommodating large crowds will be very beneficial," Sexton said. 

Smaller tracks fit, too

Sometimes it's not just about the prestigious facilities - strategic locations also can make a property very important in the overall scheme of things. Consider the case of Ellis Park, a small track in western Kentucky, which plays an important role in the Churchill family by being a part of the Midwest racing circuit.

Upon the purchase of Ellis, Churchill completed some significant structural repairs and improvements to the facility. Some of the track's operations now come out of Louisville, such as its racing department and starting gate crew, and marketing functions are also shared.

Churchill moved some of Ellis' live race days to Louisville, and Ellis now runs 41 days of live racing (down from 60 days). But those races are marked by higher purses and fuller fields, making for excellent betting races in the simulcast market.

 "There was some initial concern about the shorter meet length," said Alex Waldrop, president of both Ellis Park and Churchill Downs, "but it has worked well. Most people seem to view it as an improvement. There's a tradition of live racing in that part of the state that we do not want to damage. It's an important part of the overall Kentucky circuit. We've given Ellis new tools, but it still has the distinctive character of a small western Kentucky racetrack."

Churchill's other small track is Hoosier Park, near Indianapolis, close enough to Louisville that the company felt it was wise to own the track itself when it opened in 1994.

"The Churchill Downs name gave us instant credibility," said Hoosier president Rick Moore. "It allowed us to move into the community and be an active participant. And nationally, it affords us [simulcast] opportunities that a stand-alone operation would never, ever be afforded."

Moore also believes the Churchill affiliation will hold the track in good stead when it sees competition for the first time from a new track scheduled to open in the Indianapolis market in December.
"I don't foresee the other track to get its signal into a lot of the places we do, quite honestly," he said. "And now we're going to be splitting the riverboat subsidy." (The racing industry in Indiana gets 65 cents of the $3 per person riverboat admissions tax, much of it to purses; the subsidy was some $27 million last year.) 

"It's going to be a pretty tough go for both tracks, but with us being associated with Churchill, I'd much rather be on our side of the fence."

Facility integration

In charge of integrating all these facilities in the corporate umbrella is John Long, Churchill's executive vice president and chief operating officer. 

"My role is to find the strike point where things can best be done on behalf of the corporation on a local basis, and then the other side of the strike point where the corporation can assist and augment the local efforts," Long said.

The Churchill corporate office (actually the Churchill Downs Management Co. subsidiary, of which Long is president) provides a variety of marketing, training, community relations, human resources, and even racing office functions, which include efforts to coordinate the racing and stakes schedules among the various tracks.

Multiple advantages

One key advantage of multiple track ownership is the ability to learn from others.

Last year Churchill launched its Winning Colors program, with goals to examine procedures at each track, find out what the best practices are, then initiate a corporatewide program based on those best practices. Some of those programs are based on mundane things that often get ignored at racetracks, such as utility and insurance costs and general liability issues. But others involve interacting with the community and horsemen. 
Last year, for instance, programs were created to provide information about the local area to horsemen shipping into a stable area for an upcoming race meeting; to ensure cleanliness at the racetracks; and to enhance guest services and community relations.

This year, another four initiatives are being implemented, including two aimed at the business side of the company: a focus on increasing group sales in an attempt to get more newcomers to the racetrack; and a program examining workers' compensation issues.

The other initiatives are Green Pastures, which involves working with the Thoroughbred Retirement Foundation to find homes for horses when their racing careers are over; and Helping Hands, which encourages employees at all the tracks to participate in volunteer activities in their communities.

The latter two programs "aren't so much about profitability or enhancing earnings per share," Long said, "but they're that other side of the Churchill Downs mind-set, the left brain side, which says that we've got a responsibility to the industry and a responsibility to the community, and it has more to do with our approach to business than profitability."

Eye on the future

One other program encompassing the Churchill facilities is the Twin Spires Club, a player loyalty program. And this year Churchill is conducting promotions at simulcast outlets in markets where it does not own a racetrack, following a successful promotion last fall with the Connecticut OTB system.
Including contests, prizes, and promotional materials, "it's classical retail marketing" according to Long, with the goal of getting players to choose Churchill tracks first.

While capturing more market share with its existing facilities is obviously a goal, Churchill must do more than that to continue growing. There are obvious gaps in its schedule, particularly during the early part of the year when its major tracks are not running live meets. Therefore expect the company to continue acquiring racetracks.

"We have not aggregated all of the content that we desire to have," Decker said. "If the right opportunity avails itself, we certainly are interested in at least a few more acquisitions."
That means Churchill likely will come up against Magna again - it has bid on the same properties in the past.

"Sometimes [the rivalry] is fun, sometimes it's not, especially when we're battling over assets," Meeker said.

"On balance, we're sort of looking towards the same things, but ultimately it's more important for us to be able to bring particular assets into our family of tracks and integrate those operations as part of a whole. We don't keep score by counting the number of tracks we own," he said.

There is also the growth potential of alternative gaming. The company's best bet might be in Indiana, where as of this writing a special legislative session was in progress that might result in electronic pull-tab machines at Hoosier Park.

"For our racing to remain at the very highest level, we're going to have to have alternative gaming," Decker said. "We truly believe that it is a very necessary and important part of the equation."
But some think account and in-home wagering offer the greatest potential for the racing industry.

"I don't want to say it's the future of horse racing, but I think account wagering is the next logical extension of off-track betting," Hausler said. "I really think the growth is in that side of the business."

Hausler noted that TVG's rollout has been slower than expected, but the early account wagering results in California for both TVG and Magna's own Xpress Bet were promising. However, he noted that the current situation in the industry, where players must open accounts with more than one operator to wager on the most tracks, does limit the immediate growth potential.

"Overall, I think the industry benefits from account wagering, it's just a matter of settling some of these outstanding issues. Ultimately you want to give the bettor the best and most convenient wagering option, and that's where you drive the growth," Hausler said.

"Absolutely there's no question on our part that multiple systems are not good for our fans," agreed Decker.

"Making it difficult for the customer, and having the customer required to open accounts with various operators for various racetracks is just not customer-friendly. But it's a fact of where the marketplace is today and that's really outside of our control." 

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