Jun 1, 2007, 10:45 am
Editor's note: The columnist's biased language, such as "per-sucker spending" was left as-written, since this is an opinion piece.
Massachusetts Treasurer Tim Cahill created a buzz last week when he proposed that the state get into the casino business before the Mashpee Wampanoags beat us to the slots. Lost in the headlines was his analysis of the future of the state's cash cow of a state lottery, which by almost every measure is the envy of the industry. In short, he said, our cow is showing her age.
"Our own lottery, while still the most successful in the nation, has reached a state of maturity such that sustainable growth is becoming increasingly challenging," Cahill said. And he ticked off a litany of trends working against the lottery: casinos all around us, the growth of online gambling, and a view among younger people who see the lottery as their "parents game."
"Like many products and brands before us (for example: 8-track tapes, video rentals, Sears), the lottery is in danger of losing its share of wallet and mind," Cahill said. Still one fat wallet, though, with sales last year of $4.5 billion. (Consider: Massachusetts' per-sucker spending on the lottery was $699 last year. New York was second at $336; the national average was $183.)
Cahill didn't say it, but what he was describing is precisely the model — mature businesses with strong cash flows — that private equity investors are lusting to buy these days. If it takes off nationally, lottery privatization is a game that Massachusetts can't lose on.
With the explosion of money into private equity and state government strapped for cash, the sale of public infrastructure like highways, bridges, and airports is one of the hot new frontiers of investing. (See Business Week's cover story last month. ) Investment bankers like anything that generates big fees, but of all the potential privatization plays, lotteries make the most sense. The reason: Roads and bridges are the kind of basic services governments are supposed to provide; lotteries are simply businesses run by government. And innately distasteful businesses at that, dependent on persuading those who can afford it least to spend ever more on scratch tickets. Our good government in action!
A number of states are exploring privatizing their lotteries. Illinois, the most advanced along the process, thinks it can raise $10 billion or more by leasing its lottery. Among the many interested bidders: Thomas H. Lee Partners, the Boston buyout firm. California Governor Arnold Schwarzenegger has proposed turning the lottery over to a private operator. Texas, New Jersey, Indiana, and Maryland have considered it, too.
What could the Massachusetts lottery be worth? The way to find out is to put it out to bid, says Eugene Christiansen, chairman of Christiansen Capital Advisors, the Maine consulting firm Cahill hired to study the state's lottery. Based on 2005 revenue, the firm valued the Massachusetts' lottery at $11.2 billion. In an interview, Christiansen said a deal could be structured to assure the state would receive no less in up-front and continuing payments than the current $950 million annually that goes to cities and towns, and probably more.
"The level of interest is high, " says Christiansen. "I don't see a downside if done right."
Hype or reality? We won't know unless we look. Massachusetts' very success could work against us for now. Buyers are looking for underperforming assets, and there is lower-hanging fruit to be picked elsewhere. But if other states go first, at big premiums, Massachusetts' lottery, with its huge cash flows, could fetch a substantial price and get government out of this sleazy business at the same time.
Neither the governor's office nor the treasurer's office would come close to this topic; both declined to comment.
My big questions:
Could a financially attractive deal be structured, and at what price?
Maybe even more important, would you trust these guys on Beacon Hill with all that dough?
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