Nobody is going to mistake Ohio for Macau, but the Horseshoe
Casino Cleveland which opened May 15th to extraordinary crowds has
been described by Bank of America as "the busiest vertical casino
this side of Macau."
Other casinos are opening in Toledo, Columbus, and Cincinnati in
the coming months. You need to be a giant like Caesars (
), Penn National Gaming (
), or Dan Gilbert (Founder of Quicken Loans and owner of the
Cleveland Cavaliers) to own a piece of these local monopolies -
Lakes Entertainment (
owns 8% of Cleveland and Cincinnati through its 10% stake in Rock
Ohio Ventures. Lakes is the Anthony "Spud" Webb of gaming: a 5-foot
7-inch basketball player who won the 1986 NBA Slam Dunk Competition
surrounded by giants. Once celebrated as the owner of the World
Poker Tour, Lakes has repositioned itself in recent years and today
holds a portfolio of assets whose value we believe greatly exceeds
its stock market valuation. Let's dive into this Lake.
Rock Gaming assets (Ohio)
Horseshoe Casino Cleveland
: We believe this local monopoly can generate north of $100mm in
EBITDA and is worth $2.25+ per share to LACO in and of itself.
Horseshoe Casino Cincinnati
: Slated to open in the first half of 2013, we believe this asset
is worth $1.25+ per share to LACO.
: This racetrack has an opportunity to relocate to a better
location (like Penn National is also doing) and install up to 2,500
Video Lottery Terminals ("VLTs"). We believe this asset is worth
approximately $1+ per share to LACO.
Other assets and liabilities
: Lakes is self-developing a casino at The Rocky Gap Resort in
Maryland. While Maryland has been a challenging state for casinos
due to high tax rates, Rocky Gap's relatively attractive 50% tax
rate makes this project very compelling. We believe that this
project is worth approximately $2 per share to LACO.
: Lakes holds approximately $1.50 per share in net cash. Yes, you
read this correctly, a casino company with net cash equal to over
half its current market cap. This is one area where LACO stands
taller than its gaming peers.
Land for sale and notes receivable from American Indian
: Currently on the books for $35mm ($1.35 per share), we ascribe
zero value for conservatism, but acknowledge that there is over $2
per share in potential if these assets are ever monetized.
: Unfortunately, Lakes has substantial corporate expenses.
Conservatively capitalizing them at a market multiple could destroy
approximately $2 per share.
Free options on future development
: Finally, Lakes should be a contender for future promising
development and JV opportunities. We expect that the costs of
corporate may ultimately be absorbed by future projects, further
enhancing the value for LACO shareholders. We ascribe zero value to
(click to enlarge)
Today, investors are paying $2.79 per share for what we believe
to be worth roughly $6.00+. Moreover, despite its grand scale of
assets and partners, Lakes is a company with only a $75mm market
cap and a $36mm enterprise value.
Unlike many other deep value, under-the-radar situations,
catalysts are surfacing right now for Lakes. Cleveland just opened
to extraordinary crowds. Cincinnati is following in its footsteps.
Furthermore, there are many ways to monetize these assets. One can
imagine Caesars buying out Rock Gaming, Caesars buying out Lakes,
or Rock Gaming going public. With stakes in four casinos opening
throughout 2012-2014, we expect Lakes to make waves.
I am long [[LACO]].
Esplanade Capital LLC and its affiliates own stock in Lakes
Entertainment and may buy or sell the stock at any time. Our EBITDA
and multiples are estimates and may change considerably. Moreover,
the timing of cash flows from the Ohio assets is uncertain.
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