Sunday, September 07, 2008

So you want to buy a lottery....

Well I dusted off the spreadsheet I did when this first came up and I have made it available here...

Again I am not a finance professional and it's been a while since I had finance in grad school....

Turns out my estimate for FY 2007 earnings were only off by 9 million on sales of over two billion (not bad if I say so myself), for the annouced 2008 earnings I am off by 50 million, the had a 2.8% revenue growth I estimated 3%.  If you want the spreadsheet, or collaborate on it with via Google spreadsheets, send me an e-mail, I will also be willing to send you the actual spreadsheet if you send an e-mail the highlights however.

Using a annual growth rate of 5% and a 3% inflation rate, the NPV value (how much you would pay today to get the cash flows over time) is between 24 and 25 billion dollars (depending on which net present value formula you use) for about a 25 year lease.

It does bring up some interesting numbers near the end however, by 2033 lottery revenues show 7.5 Billion dollars,  assuming that Illinois has about 13 million people today  that if population remains flat, every man, woman and child in Illinois would be spending abut $577 a year in lottery tickets. 

So 25 Billion, that is the max (using the numbers I have and set) that you would expect anyone to pay for the lottery lease 

The posts from 2006 are here and here.

Again there are a ton of risks to anyone who leases this thing. So I doubt you get anything near 24 billion, also the contract is going to have some conditions including....

1) Protection from any legislative changes that would impact my ability to sell tickets. For example, making sales at bars illegal.
2) Some consideration if gaming is expanded in any way within the state, be it new casinos, slots at racetracks, etc. 
3) Any change in the way my revenue is taxed by the state(I saw what you did to the casino people)
4) Protection for any change in the way lottery winnings are taxed.
5) Protection for any changes within MegaMillions that impact me differently than any other state.
6) Protection for any changes within the state pension program for my employees if I have to keep them in the state plan.
7) I want the current marketing restriction on targeting groups lifted. I want free reign to market to people over 18.
8) I want to be and want my retailers to be protected against any local taxing change. So if Chicago decides to tax lottery tickets I am covered.
9) Protection if a change in federal law ends the lottery.
10) Protection for any changes in procurement law, if you tell me I now have to source with the state.
11) If the state runs any special issue tickets (vets funding, cancer research, etc)  I get a % of the cut, after some low limit. If sales exceed Z I get almost all of it.

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