There are only days before its 142nd running at Churchill Downs in Louisville, and amid the burst of local fanfare and national media, the Kentucky Derby’s emerging storyline in the past year is that more than ever it has become, well, more than just an iconic horse race.
While the adages — the greatest two minutes in sports, American rite of spring, Kentucky’s fifth season — still have currency, it is being financially eclipsed in the expanding empire that is Churchill Downs Inc.
The latest economic indicators tell the story of CDI’s growth and success and the Derby’s place in its pantheon. In 2015, CDI reported re- cord net revenues of $1.21 billion, up 49 percent from $812.2 million in 2014; record adjusted EBITA of $335.6 million, up 65 percent from $202.5 million in 2014; and net income of $65.2 million, up 41 percent from $46.4 million in 2014. Shares of CDI (NADAQ: CHDN) are up 25 percent from last year and 260 percent in the past five years.
Those sharp increases were fueled by CDI’s acquisition in December 2014 of Big Fish Games Inc., a Seattle-based producer and distributor of online and mobile games (the world’s largest casual gaming company, ac- cording to CDI) for an upfront purchase price of $485 million in cash and stock and another $350 million payable in 2016 and 2017, based on 2015 earnings targets.
In addition to Big Fish and Churchill Downs, CDI owns four other racetracks; six casinos; off- track betting facilities; a video poker business; data and telecommunications companies; and TwinSpires, the nation’s leading online wagering business. The company has more than 5,000 employees and maintains operations in 11 states.
“Management has transformed Churchill Downs from a pure play horse racing company to a more diversified operation, with no single element more transformational than the acquisition of Big Fish Games,” Telsey Advisory Group analyst David Katz wrote when his
firm initiated coverage of CDI last year. Katz projected Big Fish would become CDI’s largest growth entity and generate some 30 percent of the company’s EBITDA this year.
While becoming an increasingly small part of a corporate family, the Derby has burnished its bottom line. Last year, it generated record attendance of 170,500; record all-source (worldwide) wagering — $194 million on Derby day races, including $137.9 million on the Derby itself; its highest TV ratings in 23 years; and record adjusted Derby week EBITDA that was up $6 million from 2015.
“For more than a century, CDI has been known for its legendary race, the Kentucky Derby,” CEO William Carstanjen said. “The Derby is stronger than ever in terms of at- tendance, wagering, strategic partnerships and overall prominence. It remains the heartbeat of the company.”
Since 2001, CDI has spent more than $180 million to upgrade Churchill Downs. Projects have included a $121 million clubhouse and grandstand renovation; corporate suites; a new private luxury area called the Mansion with its own entrance and chef and more
than 300 seats averaging $10,000 on Derby day; a new grandstand terrace; a $12 million 4K ultra-high definition video board; new finish line suites for owners; and a recently completed $18 million renovation of premium clubhouse areas.
“CDI has evolved into one of the country’s premier racing, gaming and entertainment companies,” Carstanjen said. “The growth- through-diversification strategy we launched several years ago has allowed us to overcome the challenges our traditional racing operations have faced in a tough economy, while helping grow CDI’s net revenues to record highs.”
The racing “challenges” Carstanjen referred to are well documented. Over several decades, the industry has faced a shrinking and aging fan base; failing tracks, including Hollywood Park, site of the first Breeders’ Cup and once owned by CDI, which closed in 2013 and was razed last year to make way for a new NFL stadium; drug violations involving prominent trainers; competition from casino gambling and state lotteries; and other set- backs. The economic consequences of racing ’s decline have been significant. According to The Jockey Club, pari-mutuel wagering in the United States has dropped 30 percent, from a high of $15.2 million in 2003 to $10.7 million last year.
Against this landscape, the Derby remains one of racing’s few beacons. (Others include the rest of Derby week and the other two jewels of the Triple Crown; Breeders’ Cup; and boutique meets at tracks such as Saratoga, Del Mar and Keeneland.) Within its changing cor- porate profile, Carstanjen noted, CDI hasn’t forgotten the Derby’s roots and aims to build on its singular success.
“We keep learning from what other events and what other people are doing out there and exploring things we might do in the future,” said Carstanjen. “We are just going to keep challenging our teams to come up with strate- gies to grow the Derby. There’s no guarantee that they can or that they will, but that’s the challenge. We have been doing it for a while, and there is a sense of optimism about that.”