Caesars' Native American Strategy
If
Caesars Entertainment
(CZR) - Get Report
can't beat the competition, then it's going to join them and rake in hefty management fees in the process.
Even as casino operators like Caesars complain that increased competition from Native American casinos are hurting business, they're forming partnerships with tribes to profit from the spread of gambling in California. On Wednesday, Caesars announced a preliminary deal with the Big Sandy Band of Western Mono Indians to build a $200 million casino outside of Fresno, Calif.
The tribe and casino operator signed a memorandum of understanding with specifics to come in a final contract that will be completed and signed in the next three months. In order to build the casino, the final contract will need to be approved by the National Indian Gaming Commission and the tribe will have to amend its gaming compact with the state of California. If approved, the plans call for a 250-to-300-room hotel and a 75,000-square-foot casino, with at least 2,000 slot machines and 20 tables.
While the name and brand of the casino were not announced, Joseph Greff, gaming analyst at Fulcrum Global Partners, said he expects the Caesars brand to figure into the final branding. Ultimately, Greff predicts the casino could be up and running in 2006 or 2007, when it will make a healthy contribution to Caesars' revenue stream.
"While likely deal terms are not specific, we think this could generate somewhere between $16 million to $40 million in fees a year to Caesars, equivalent to 3 cents to 8 cents in annual earnings per share," said Greff in a research note.
In late afternoon trading, Caesars was off a penny, or 0.1%, to $11.76.
The new partnership is the third between Caesars and a Native American tribe, part of a California casino building boom that started when voters passed Proposition 1A in 2000. The measure allowed California's Native American tribes to place slot machines and gaming tables on their land.
Caesars plans to spend $10 million this year to start development of a Caesars-branded casino with the Pauma-Yuima Band of Mission Indians in northern San Diego County. Caesars will spend $55 million to begin development of the Mohawk Mountain Casino Resort in New York's Catskill Mountains.
The move helps Caesars keep pace with
Station Casinos
(STN) - Get Report
, which has been making a push into Native American casino development. In June 2003, Station opened the Thunder Valley Casino, which it manages on behalf of the United Auburn Indian Community. The partnership has been lucrative, netting Station $17.2 million in management fees during the fourth quarter of 2003, with the company expecting 2004 fees to come in between $65 million to $75 million.
Recently, Station announced a management and development deal with the Mechoopda Indian Tribe to develop a new casino project in Chico, Calif. Sometime in 2005, the company said it will begin managing a Michigan casino on behalf of the Gun Lake Tribe. Station is counting on these Native American partnerships to help fuel growth going forward, with the company predicting that adjusted earning per share will grow between 25% and 28% over the next three years.
Casino operators like Station and Caesars see a win-win in these Native American partnerships. A major reason is that the deals usually hold very little risk for the casino, requiring little to no capital investment, but netting big fees once the partnered casinos are up and running. And not only are the deals low-risk, but they also have an added bonus: eliminating a source of competition.
In their fourth-quarter results, casino operators said increased competition from Native American casinos in California were sapping the earnings power of non-Las Vegas operations.
Caesar's fourth-quarter loss included a $127 million writedown on the book value of its Flamingo Laughlin casino and a goodwill impairment charge for Caesars Tahoe because of reduced earnings forecasts due to increased competition from Native American casinos in California and Arizona.
And
Harrah's
( HET) said that fourth-quarter revenue from its northern Nevada casinos was relatively flat from a year ago, despite increased marketing efforts. Because of the competition, the region lost $2.3 million in the quarter, off from the $1.8 million profit it had a year ago. In southern Nevada, where Native Americans are less of a presence, earnings rose 23.2%.
But with its latest partnership, Caesars only proves the well-worn adage: If you can't beat 'em, join 'em.