Lakes Entertainment, Inc. – deep water investing?

Company

Lakes Entertainment, Inc. (Lakes) develops, finances and manages casino properties, with an emphasis on those that are Indian-owned. The Company has development and management or financing agreements with three separate tribes for casino operations in Michigan and California for a total of three separate casino projects. It is managing the Four Winds Casino Resort for the Pokagon Band of Potawatomi Indians (the Pokagon Band) and the Red Hawk Casino for the Shingle Springs Band of Miwok Indians (the Shingle Springs Tribe). In November 2011, Galaxy Gaming Inc. purchased table game assets of the Company.

This company historically had very good and very bad deals.  The last one of the fell in the last category.  Jamul deal fell short on march 13th.  Lakes ended the deal and wrote off most of the investment from their books.  You can find the news release here.  The In 2010 they wrote off 21M of receivable plus 16M of assets and in 2011 around 30M more.  On march 13th, the 9M receivable still standing on books from Jamul have now passed to losses.

They also purchased a land years ago to build a casino and decided to cancel the project in 2011.  They wrote off that land too.

On one of their good management deal, the Four Wind Casino Report, they had an “early bought out” clause.  Four Wind exercised that clause in 2011 for 24.5M but since then revenues dropped 75%.

With all those bad news in the last 2 years, you can imagine that the stock dropped sharply (34%).  It now entered the value investing territory with net current assets at 46M compared to a market cap of 47M.

Rock Ohio Ventures, LLC

Lakes’ has a 10% ownership in Rock Ohio Ventures and as of January 1, 2012, Lakes has contributed approximately $15.7 million as required (see note 6, Investment in Unconsolidated Investee). Lakes currently plans to contribute additional capital as needed to maintain its equity position in Rock Ohio Ventures. If Lakes chooses not to fund any additional amounts, it will maintain an ownership position in Rock Ohio Ventures in a pro rata amount of what its $2.8 million initial payment is to the total amount of equity funded to develop casino operations, and all equity funded in excess of the initial $2.8 million is required to be repurchased at an amount equal to the price paid.

Investment in Evitts Resort, LLC

In September 2011, Lakes entered into a joint venture with Addy Entertainment, which submitted a response to a request for proposal by the State of Maryland Video Lottery Facility Location Commission for a video lottery operation license in Allegany County, Maryland. The Commission is in the process of evaluating applications and will award the License to operate a video lottery operation at the Rocky Gap Lodge & Golf Resort in Cumberland, Maryland. The License has an initial term of 15 years and is expected to be awarded in the second quarter of 2012. Lakes made an initial investment of approximately $2.1 million in Evitts which was used to fund the application fee for its response to the request for proposal. The Initial Investment represents a majority ownership interest in Evitts.  The Initial Investment will be returned by the Commission if the License is not awarded to Evitts. During February 2012, Lakes negotiated an agreement to buy out Addy’s interest in Evitts. Subsequent to the buy-out, Lakes will be the sole owner of Evitts. The buy-out is contingent on Evitts being awarded the license by the Commission. If the Commission awards the License to Evitts, Lakes currently plans to invest an additional $17.9 million and Evitts will be required to raise additional funds to fully finance the development. Lakes also entered into a development services and management agreement with Evitts to develop and manage the gaming facility and existing facilities at the Resort if the License is awarded to Evitts.

Management

Who is managing the company?

Lyle Berman, Chief Executive Officer ( 3,651,666 shares +  2,278,541  in trust )

Berman grew up in Minnesota and attended the University of Minnesota where he graduated in 1964 with a degree in business administration. He then went to work for his father’s leather business, Berman Buckskin. When the business was sold to W. R. Grace in 1979, he stayed on as president and CEO. The company was then later sold to the Melville Corporation where it became Wilsons Leather. From 1994 to 2000 he was the chairman and CEO of the Rainforest Cafe chain of restaurant and retail stores. He is the founder of Lakes Entertainment (previously Grand Casinos Inc.)

Where did his passion for casino came ?  Lyle is also a professional poker player and Berman has won 3 World Series of Poker (WSOP) bracelets.  Has a side job, Berman won over 2.5M in poker tournaments to date.

Tim Cope, President and Chief Financial Officer  ( 200 000 shares )

Timothy J. Cope is with Lakes since june 1998.  He served has secretary, Executive Vice President and now President and CFO.  He is also director of Voyager Oil & Gas Inc.

What are the management fees?

The management fees are pretty high, in 2011 the CEO earned 1M and the President/CFO 600k for a total of 1.6M.  If you add up the other directors you get close to 1.8 in management fees compared to 36M in sales!  It represents 5% of total revenues!  That is way too much based on current revenues.

Who are the owners?

Berman family (22% – 6M shares)

The CEO is in with us.

Dimensional Fund Advisors LP (6.5% – 704 368 shares)

This company manages investment has a group for all their customers. This 6.5% may be split between many customers.

Phileo Emerald Fund, L.P. (2.5% – 689 627 shares)

In his latest 13D filing, Phileo Emerald Fund stated :

The Reporting Person has no current plans to cause the Issuer to effect an extraordinary corporate reorganization. However, the Reporting Person has spoken with management about steps to increase shareholder value. As a result of the large discrepancy between market and intrinsic value of the Issuer, the Reporting Person may also explore a going private transaction.

Financials

Let’s put on our backbone the current profitability (read losses) and check the 2 current revenue generator projects close to completion.  We may then add Evitts deal on top.

Company estimated value

Let’s resume.  Lakes will open 2 casinos in Ohio.  One in Cincinnati (mid 2013) and one in Cleveland (may 2012 – yes, next month).  Those 2 casinos are new and shining.

See Cleveland Horseshoe Casino here.

Current Penn National Gaming closest casino (Lawrenceburg) turns around 150M EBITDA yearly and is about the same size has the new Horseshoe Casino.  We can then expect this one to turn the same profit every year.  In a little footnote in the last 10Q of Lakes, you may find that Lakes is a 10% owner of this new casino venture!

The Cincinnati one is expected to be very similar.

Here are my estimation on this project alone.

Make your calculations, but if only the phase 1 (Cleveland) is successful and all the other projects stops, we still get 28% return (10% * 135 = 13.5M / 47M market cap = 28.7%).

Disclosure : Author is long LACO.

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One comment on “Lakes Entertainment, Inc. – deep water investing?
  1. […] note, I told you in my previous article on LACO that Lakes owned 10% of the new Ohio casinos but a reader pointed out that Lakes own 10% of Rock […]

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