February 16, 2015 - 6:52pm EST by
2015 2016
Price: 8.38 EPS 0 0
Shares Out. (in M): 13 P/E 0 0
Market Cap (in $M): 112 P/FCF 0 0
Net Debt (in $M): -70 EBIT 0 0
TEV (in $M): 42 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • Transformation
  • Gaming
  • Fragmented market
  • Highly Leveraged
  • Great management
  • Merger
  • Sum Of The Parts (SOTP)



Lakes Entertainment (LACO)

Investment Thesis

The recently announced transformational merger of Lakes Entertainment and Golden Gaming and creates a well diversified gaming company at a compelling valuation and sets an attractive runway for growth in a highly fragmented market.  It couples an overcapitalized sub-scale single operating asset with a highly levered, higher growth enterprise equipped with a high caliber management team.  Believe FCF is stable and at current levels represents a 17% yield to equity. Believe fair value of the company is at least $12.00 on a conservative basis which represents 45% upside from the current price. We expect the merger to be completed by the end of the year and that the combination will increase the combined company’s profile among investors and sell side analysts which we believe will ultimately drive convergence toward fair value.

Background on Lakes and Berman

Prior to founding Lakes Entertainment, Lyle Berman, age 72, had a long history in the casino industry and in the restarant business.  Among other things, he is a professional poker player having won $2.5m in poker tournaments and won 3 World Series of Poker tournaments.  In the 1990s, he focused on developing gaming outside of the large gaming centers.    Lakes entertainment was created when Park Place Entertainment bought some assets and contracts from Berman and spun other assets it did not want, namely Tribal Gaming Casinos, into the Lakes entity. 

Lakes Entertainment today holds 4 main assets, a large loss carry forward (NOL $89m), a large cash balance ($80m), the Rocky Gap Casino in Maryland and a recently restructured subordinated note on the Jamul Casino near San Diego CA, being developed by Penn Gaming with a face value of $60m.

Rocky Gap Casino

The Rocky Gap Resort sits on 268 acres in the Rocky Gap State Park and was acquired by Lakes for $6.78m from the Maryland Economic Development Department in August ‘12.  Lakes received a gaming license and remodeled the resort in 2013 and it opened its doors in Sep 2013.  Recently, another $4m in new CAPEX has been added, for parking and remodeling of areas which had not been previously remodeled aimed at driving more visitors as parking was limited and some visitors were forced to turn away due to lack of parking.  The visitor mix is split roughly 60% new and 40% recurring and the avg win per customer is $40.  Win for overnight customers is higher than day visitors.  The casino is fairly well insulated from local competition -- Isle of Capri is 60 miles away with a substandard facility and Hollywood Casino in Charleston WVA is 90 miles away.  There is a little room to drive more efficiency at Rocky Gap from the current $4m per quarter G&A run-rate.  Gaming taxes at this casino are 50%,  run rate margins are 17.5% (net of tax) and the numbers are fairly stable.  



Rocky Gap Historical        
  2Qtr2013 3Qtr2013 4Qtr2013 1Qtr2014 2Qtr2014 3Qtr2014 LTM
Revs             8.5              14.1           11.4              10.1           14.1            15.9           51.5
OPEX           (3.4)              (8.2)           (7.3)              (7.3)           (8.2)            (8.9)         (31.7)
G&A           (2.6)              (4.1)           (4.0)              (2.0)           (3.8)            (4.0)         (13.8)
D&A           (0.5)              (0.6)           (0.8)              (0.6)           (0.9)            (0.9)           (3.2)
EBITDA             3.0                 2.4             1.0                 1.4             3.0              3.9             9.3
Margin 35% 17% 8% 14% 21% 25% 18%


Rocky Gap Valuation

(LTM Numbers)  
Revs             51.5
OPEX           (31.7)
G&A           (13.8)
D&A             (3.2)
EBITDA                9.3
At 7.5x multiple           69.44


Rocky Gap Trends (Based on data reported by the Maryland Gaming Commission


VLT=Video Lottery Terminals, Table= Table Revs, TR= Total Revenue

Year Mo Table VLT TR mov Avg YTD
2015 January           0.42           2.55           2.97           3.64         45.91
2014 December           0.52           2.56           3.08           3.68         45.57
2014 November           0.62           2.90           3.52           3.76         45.82
2014 October           0.47           3.30           3.77           3.70         45.71
2014 September           0.43           3.20           3.63           3.62         45.07
2014 August           0.61           3.60           4.21           3.51         45.45
2014 July           0.50           3.68           4.18           3.41         44.64
2014 June           0.51           3.23           3.74           3.32         42.94
2014 May           0.49           3.20           3.69           3.26         39.97
2014 April           0.23           3.10           3.33           3.29         36.28
2014 March           0.35           3.38           3.73           3.30         32.95
2014 February           0.44           2.60           3.04           3.16         29.22

Jamul Note

The Jamul Note dates from 1999, when Lakes entered in an agreement with Jamul Indian Village to develop and manage a casino approximately 20 miles east of San Diego.  Lakes terminated the agreement in 2012 due to regulatory and other delays and is owed roughly $60m on a subordinated basis from the tribe.  On April 24th, 2014 Lakes restructured this note in a tri-party agreement between Penn Gaming and the Jamul Indian Village.  Under the terms of the amendment (8k filed 4/30/2014), the note will begin to accrue interest of 4.25% once the casino begins operations.  If after 3 years from the restructuring date, the casino has not begun operations, the note will accrue at a rate of Prime +2% until operations begin and then goes current at 4.25% once operations begin.  After 7 years, the note begins to amortize at a rate of $1.5m/quarter to the extent that 80% of the available excess cash covers the amortization payments.  The Jamul casino will have a senior indebtedness of $400m in addition to the note.  The casino began construction in January of 2014 with a $360m investment from Penn Gaming and is planned to open in mid 2016. In valuing the cash flow owed to Lakes under the Note we assume that the casino opens as expected. We use a 12% discount rate and estimate the value of the notes to be worth $30m or 50% of face.  Lakes will seek to monetize this note prior to maturity and Penn Gaming or other financial players are likely buyers,

Jamul Note Valuation


Year                   1                 2                 3                 4                 5                    6                 7                    8                 9                10               11               12               13               14               15               16
Face           60.00         60.00         60.00         60.00         60.00            60.00         60.00            54.00         48.00          42.00         36.00         30.00         24.00         18.00         12.00           6.00
Amortization                  -                            6.00           6.00            6.00           6.00           6.00           6.00           6.00           6.00           6.00
                2.55           2.55           2.55           2.55              2.55           2.55              2.30           2.04            1.79           1.53           1.28           1.02           0.77           0.51           0.26
              2.55           2.55           2.55           2.55           2.55              2.55           2.55              8.30           8.04            7.79           7.53           7.28           7.02           6.77           6.51           6.26
Discount Rate 12%                                
NPV $29.63




Stand Alone LACO SOTP (Pre-merger)



Cash            80.60 Sep 28th,2014              
Building              6.50 Estimate will be sold              
Rocky Gap            69.44                  
NOL's                   -   They have more than $70mm plus loss on Note          
$60m Jamul Note                   -   12% Discount Rate              
Ohio              0.75 8% of Horsehoe Casino Cleveland, Horsewhoe Casino Cncinatti, Thiseldown Rasino   SOLD
Adjacent Land to Jamul              5.00 Will be sold to Penn              
Assets          162.29                  
Liabilities          (14.40) Last BS (Sep 28th,2014)              
G&A            (8.40) $6mm/ year Cap Rate 1.5x          
NAV          139.49                  
SO            13.20                  
Esti. NAV / share  $        10.57                  


On a pre-merger basis we believe shares were worth ~$10.50, but that on a pro-forma basis shares are worth at least $12 and that the merger itself provides the catalyst for convergence.

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Recent Merger with Golden Gaming

On Jan 26th, 2015 Lakes and Golden Gaming announced a merger agreement.  Lakes had been looking to deploy its cash balances by acquiring or merging into a business that could make strategic sense.  We believe this acquisition is ideal because it monetizes Lakes’ NOL and adds scale and high caliber management to the company.  From Golden Gaming’s perspective, it de-levers the balance sheet, provides growth capital and reduces the tax rate. GG shareholders will retain 35.7% of the pro-forma entity.  The transaction is subject to a shareholder approval at Lakes, which should be straightforward given the Berman and his various trusts and board members hold 28.4% of the shares, as well as approvals by the gaming commissions of Nevada and Maryland.  The merger is expected to close by the end of 2015.  Blake Sartini would be the combined company CEO and the plan calls for Berman to sit on the board as Chairman.  The board will also include Tim Cope, current CFO of Lakes, and one more independent director to be appointed by Berman.  Santini himself and two other appointees will also join the board (one of them also independent).  The merger carves out value from the Jamul note to be attributable only to LACO (excludes GG shareholders) so should the note be sold the value will be distributed to holders excluding Sartini.  Critical to highlight, both parties will remain fully invested and highly aligned.  On a pro-forma basis Sartini and affiliates will hold 35.7% of the shares and Berman and affiliates will hold 18.26% so insider ownership will be 53.96%.

Background on Golden Gaming and its CEO, Blake Sartini

Sartini worked his way up the management ladder at Station Casino's owned by the Fertitta family in Nevada.  In 2001, he founded Golden Gaming and has since built it into the largest operator of Taverns and Pubs on the Golden Route.  Sartini married Delise Fertitta, sister of Frank and Lorenzo, who still own and manage Station Casinos.   Golden Gaming is a Nevada loacals business and caters to them through three segments:


Distributed Gaming Routes- The company operates gaming machines at convenience stores, restaurants, bars and gas station.  It is the largest market participant with more than 7,000 machines.  The second largest player in Nevada, Century, is now controlled by its lenders.  Golden has been taking market share and could be considering Century as a target.  The rest of the market appears to be quite fragmented.  YoY revenue is showing "slight increases" according to management.  

The business model for the gaming machines depends on whether the store owner has a license, in which case there is a profit split.  If the store owner does not have a license then Golden rents space and keeps the gaming profits net of the rent.  40% of Golden’s locations are rent deals where the operators have no license and they have 80% retention rates on renewals of its multiyear contracts.  Licensing is not easy and takes time which creates barriers to entry.  Management sees a lot of potential to scale this business beyond Nevada given the fact that IL, LA, MO, OR, WV, SD have gaming machines and other states such as TX, PR, and PA are considering legalizing devices on a limited scale.  Golden has 40% share in this business in Nevada.  This is a scalable, high ROI business.  2015 Net Rev: 186.4m. 2015 EBITDA $26.4m

Taverns- This unit operates 48 locations catering to local residents with about 15 slots per location.  The revenue waterfall for the taverns, in order of importance, is Gaming, Beverage and then Food.  Although management claims the food is good, gaming and drinking are the focus.  The business plan is to continue to acquire taverns and re-furbish them to generate better returns.  Typically the investment required for refurbishment is ~40% of the unit’s cost and on average the returns pack back the investment in 2.5 years with a ~40% cash on cash return.  YoY revenue trends are up 4-5% 2015 Revs: $59.1m, 2015 EBITDA $9.8m

Casinos- Golden owns three casinos, two of which were acquired though a swap with Affinity Gaming which took Golden’s Colorado properties in exchange for 2 casinos in Pahrump, Nevada.  Through this swap, Golden has 70% market share in this county which is the gateway to Death Valley.  The largest property is the Pahrump Nugget Hotel & Casino which has 516 slots, 10 tables, a poker room with 4 tables and full sports book and a 140 seat bingo.  The other properties is Gold Town with 307 slots and Lakeside Casino and RV Park which is smaller with 203 machines.  Net Rev: 2015 $42.4m and 2015 $11.1m EBITDA

Overhead- Golden currently has $10.7mm in corporate overhead. 


PF Valuation and Recommendation

PF Revenue           348.0   LACO EBITDA             3.0
PF EBITDA             42.5   GG EBITDA           36.5
PF EBITDA Margin   12.2%   Synergies             3.0
Multiple   7.5x   PF EBITDA           42.5
EV           318.8        
Land Adjacent Jamul               5.5   GGC Leverage 5.5x
Lakes HQ building               6.5   GGC Debt        (200.8)
Sale of Rock Ohio Ventures             0.8   RG Debt             (9.2)
Adjusted EV           331.5   LACO Cash           80.6
Assumed Interest Rate 7.0%   PF Net Debt      (129.4)
Implied Interest Expense           8.80        
         125.71   PF  EBITDA           42.5
Leverage   3.0x   PF Interest Expense             8.8
Implied Debt        127.50   Maint CAPEX             4.3
Cash                  -     PF FCF             29.5
PF Cap        204.00        
PF Ownership   64.30%   CP    $       8.38
Cap Attributable to LACO         131.2   SO           13.40
Jamul Asset             30.0   Diluted SO         20.84
SO   13.4   PF Cap        174.64
Value per Share    $    12.03   PF FCF YLD 16.9%
        Upside   44%


An assumed multiple of 7.5x for the gaming assets and adding in the small saleable assets (ex-Jamul note) from Lakes creates an enterprise value of $331.5m.  On a pro-forma basis and net of the cash provided by Lakes for deleveraging, the merger results in net debt of ~$127.5m.   Given the Jamul note flows just to Lakes shareholders, and assuming a discount rate of 12%, we come to a fair value per share of Lakes of ~$12.  We believe, given the opportunity to invest profitably in the Golden Gaming assets, that the 7.5x multiple for the gaming assets is conservative.

With a fair assumption that 10% of EBITDA is re-invested into locations for up-keep results in a FCF yield of 17% thru the equity on a pro-forma basis at the current share price, not counting the upside from the Jamul Note.  No value is assumed for NOL but essentially this merged company will not be a tax payer at the federal level for the foreseeable future allowing the full FCF to be re-invested into the business.  

Comparables Table (Fwd EV/EBITDA) 

Boyd 9.4x

Churchill Downs 8.7x

Pinnacle 8.7x

Monarch 8.0x

El Dorado 7.5x

Penn National 7.5x

Isle of Capri 7.4x


Background articles on Sartini:





    show   sort by    
      Back to top