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Sixteen hours. That’s how much time Donald Malloy, general counsel for Argosy Gaming Co., had last year between closing one big deal in Indiana and sitting down at the table to negotiate an even higher-stakes one in Illinois. While Malloy and the riverboat gambling business have been on a winning streak for years, the deals are critical to insuring the Alton, Ill.-based company’s future growth. The two complicated transactions — buying out a pair of partners in the Argosy Casino & Hotel in Lawrenceburg, Ind., and then acquiring rival Horseshoe Gaming Holding Corp.’s coveted Empress Casino in Joliet, Ill. — are expected to enhance the company’s balance sheet significantly. Malloy, who joined Argosy in 1996, has been an integral part of the company’s recent success. First as outside counsel, later working from the inside, he has guided the business through some choppy legal and regulatory waters, to the point where it’s now a Wall Street darling and a rising star in the gaming business. And the two deals Malloy helped Argosy pull off in winter 2001 show what it takes to thrive as a GC in this colorful but demanding business. What would be straightforward transactions in virtually any other industry become intensely complicated when multistate gambling is involved. Gaming’s reputation as a “sin-dustry” means tight state regulation and heavy scrutiny by regulatory bodies of every business deal and senior executive involved in gaming. INDUSTRY LEADER But the payoff is huge. Riverboat gambling gross revenues grew 71 percent between 1996 and 2001 to $9.5 billion, according to research firm Christiansen Capital Advisors LLC and state gaming boards. Harrah’s Entertainment Inc. is the riverboat industry leader, with revenues of $1.7 billion from riverboat gambling last year. But Argosy is the biggest business among the handful of companies devoted exclusively to riverboat gambling. Argosy, with five boats, has a modest but lucrative share of the industry revenues. In 2001 the company’s net income jumped 46 percent (from 2000) to $66 million on revenues of $780 million. Eleven-year-old Argosy has come a long way. It had one boat in the early 1990s when Malloy, a corporate transactions associate at Chicago’s Winston & Strawn, first started working with the company. In 1996 the company had a major growth spurt as five states — Iowa, Indiana, Illinois, Missouri and Louisiana — awarded the company gaming licenses [see "Lawmakers, Place Your Bets"]. By that time Malloy was working almost exclusively for Argosy. So when the company’s chief executive officer, James Perry, decided he needed more help with deals, Malloy eagerly came on board. WHEELING AND DEALING With the 2001 deals, the 40-year-old GC faced two of his biggest challenges. Five years earlier, Argosy had teamed up with two Indiana-based businesses, Conseco Entertainment LLC and Centaur Inc., to open a casino in the state. The partners helped Malloy’s company get on its feet and win an Indiana gaming license. By 2001 Argosy was able to buy Conseco’s and Centaur’s stake in the casino for $360 million. Wall Street approved. Argosy’s stock rose from under $2 a share in late 1998 to a price in the low $30s last year. “Any time you can simplify your [financial] reporting structure you’re making a good move,” says Bear, Stearns & Co. Inc. gaming analyst Eric Hausler. And “those were complicated partnerships.” But Malloy didn’t just approach the other two corporations, settle on a price and dissolve the partnership agreement. In the riverboat gambling world these transactions are more involved. As collateral for the deal, Argosy had pledged the assets of all of its other casinos. Each casino is a huge revenue producer for the state and municipality in which it is located. So Malloy had to win approval for the Indiana deals from the gaming boards in all of the states where the company had boats last year. He spent late 2000 and early 2001 working with the regulatory bodies to make sure the deal met their requirements. WINNING THE POT But this was just a warm-up for the boyish, dark-haired GC. On March 21 Malloy closed the buyout deal in Lawrenceburg. The next day he and CEO Perry went to Indianapolis to talk with the owners of Horseshoe Gaming. It was a critical meeting for Argosy. Horseshoe had put its Empress Casino in Joliet, Ill., on the market a few months earlier. It’s rare for big casinos to come up for sale. But the Illinois gaming board had barred Horseshoe CEO and Las Vegas gambling scion Jack Binion from owning a casino in the state, after citing him for alleged regulatory violations. Horseshoe was on a state-imposed deadline to sell the Empress, and a handful of other companies were vying for the property. But the steep purchase price (Horseshoe reportedly wanted $500 million for the casino) and debt that Argosy would have to assume made the deal risky. Perry asked Malloy to help assess that risk. “We went through an extensive financial analysis to figure out at what breaking point does it make the most sense to go ahead with it,” Malloy explains several months later, sitting in his office, which overlooks the Mississippi River and the company’s flagship riverboat casino, the Alton Belle. Buying the Empress would give Argosy a boost. “This would put us in the third-largest gaming market in America,” behind Las Vegas and Atlantic City, says Malloy. Unlike some riverboat locales, he adds, “You can actually find it on a map.” In just 24 hours of talks Argosy beat out the competition and won the prize. For $465 million, Malloy and company got a casino with annual revenue of $250 million a year. One of the key reasons they won, says Malloy, was that Argosy had assured Horseshoe of a quick turnaround. “We had a solid financial situation, and there were not a lot of problems for the regulators.” Still, the gaming boards from five riverboat states once again had to sign off on the transaction, because, for a second time, Argosy was using its casinos as collateral for a deal. So, through the spring months and into the summer of last year, while Malloy sweated the deal’s details with Horseshoe executives, he also was flying constantly to appear before the gaming boards in the appropriate states. Illinois conducted a full due diligence review, as though Argosy had never had a gaming license. That meant a full investigation of Malloy and other senior executives — their family backgrounds and personal lives included. “When someone comes in as a buyer, even if they already have a license, everything — I mean everything — is looked at,” says Gene O’Shea, spokesman for the Illinois Gaming Board. Says Malloy: “I have just about every regulator on speed dial, and I know they have me on theirs.” Argosy’s outside counsel helped with the regulatory work and proceedings in each state. That roster included Winston & Strawn in Chicago and Taylor, Porter, Brooks & Phillips in Louisiana, where Argosy has a dockside casino in Baton Rouge. TEAM ARGOSY At the bargaining table with Horseshoe, Malloy had to hammer out myriad issues, including the unique problem of “transition night,” the time when the Empress would change owners. In some states, casinos stay open 24 hours; in others, the day ends at 4 a.m. during the week and at 5 a.m. on weekends. Malloy and Horseshoe’s attorneys had to decide which company bore responsibility for what obligations at what time on July 31, 2001. While companies change hands every day, the transition-night agreement for the Empress required a five-page document. It covered everything from when the cash in the casino would change hands (4 a.m.) to who would be liable for a slip-and-fall in the casino at what time (Horseshoe at 11:59 p.m.; new owner Argosy at midnight). Still, a mere five months after the parties had shaken hands, the casino changed ownership. “It was unbelievably quick,” says Malloy. ON TO THE NEXT Wall Street took notice. Here was a young company buying a profitable property from a long-established player in the gambling business. “This was a great move by Argosy,” says Bear Stearns’ Hausler. “It diversifies their cash flow stream. It puts them in a great market. Argosy’s been smart about their transactions.” The trick is to keep it going. If the recession deepens, say industry observers, the company’s revenues may slide. Plus, competition from rival riverboat companies and businesses offering other types of gaming is always a concern. To add to revenues and head off competition, Argosy execs are thinking about branching out into slot machines at racetracks. And they plan to pump about $200 million into upgrading and expanding existing properties, including the Empress. Property improvements will, of course, require gaming board approval. And that means that Malloy may be hitting the road and his speed dial again soon. Related chart: Riverboat Gambling’s Smooth Sailing

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