28 Indian Gaming January 2008

Targeting Acquisitions by Tribal Gaming Nations

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by Valerie Red-Horse

With the acquisition of Hard Rock International by theSeminole Nation of Florida for a price tag of $965 million

in December 2006, Wall Street took notice and started to payserious attention to gaming tribes as potential players in thecorporate M & A markets (Mergers and Acquisitions). Whilethe Hard Rock/Seminole transaction still remains rather uniquein size and scope, it is not unusual for gaming tribes to seekopportunities that will provide added economic benefit for theirnation and enterprises. Tribes will typically retain internaleconomic development personnel who will review opportuni-ties and also may utilize outside assistance in the evaluationsof specific transactions as well. The strategies employed for selecting the right fit in tribal investments are numerousand only individual tribes, their leadership, council and investment professionals can determine what makes sense for specific needs and criteria, however some general consid-erations apply throughout.

Vertical IntegrationSince every tribal gaming operation utilizes multiple

vendors in various industries within the gaming business plan,acquiring a business that supplies the gaming industry achievesvertical integration into the trade. The tribal gaming owner canultimately exploit the new business into other gaming marketsand utilize the benefits for their own enterprise needs. Therecan also be the added benefit of increased tribal employmentopportunities, tribal entrepreneurship (sometimes in partner-ship with the tribe) and training programs. One only needs toperuse the line items of any tribal gaming enterprise's cost ofgoods section of their financials to understand the types of companies vertical integration might include in the gamingindustry. Some examples are:

Advertising ATM/Credit Card MachinesAudio/Video BeverageBingo Supplies CageChips/Tokens ConstructionDécor Design/ThemeDisplays Electrical/ElectronicEntertainment EventsFacilities Finance/AccountingFood Game DevelopmentHotel Supplies/Management Human ResourcesLighting Magnetic Cards/ReadersManagement MarketingPoker Supplies Printing/EngravingPublications/Publishing PurchasingRetail SecuritySignage Slots

Surveillance TelecommunicationsTransportation/Shipping IT/Back Office Support

Core Business Industry InvestmentWith the exponential growth of tribal gaming over the last

ten years, tribal operators have truly become leaders in the gaming industry. Many tribal facilities far surpass their commercial counterparts in gross revenue, growth and netintake. However, unlike many of the large familiar names inthe commercial gaming world (Boyd, Harrah's, Pinnacle,MGM), most tribal facilities are single assets and will reach asaturation point with that sole operation. Most tribal facilitiesare limited by strict IGRA (Indian Gaming Regulatory Act) andNIGC (National Indian Gaming Commission) regulationsand all tribal gaming is restricted to trust land, so expansionpossibilities are slim. Since the tribe will undoubtedly have builta core team with gaming management expertise, investing inanother gaming enterprise, which is an industry familiar to thetribe, its leadership and senior management, ultimately makessense and can provide economic development possibilities.

On Wall Street, gaming is often included in a sector knownas entertainment, leisure, gaming and hospitality. Resort and realestate may be included as sub categories. The Hard Rock pur-chase by the Seminole Tribe is an example of core business orsame sector investment. One consideration of course, is that whena tribe purchases an off reservation gaming facility, unlike thetrust land property, that newly acquired operation is subject toall applicable taxes as well as state/local jurisdictional regulations.This may include labor union involvement, which has been a hottopic in the tribal gaming world of late. However, the tribe mustconsider the benefit of becoming a commercial gaming operator in addition to a tribal gaming operator and the ultimateeconomic benefit to be realized from such investment. This typeof investment is especially attractive to those gaming tribes insaturated areas with limited population bases.

An additional type of core business investment is assistingother tribal gaming entities in getting started with seed/venture capital for their gaming enterprises. Some tribes, successful with their own operations have reached out to othertribes and have created an inter-tribal investment resource ofcapital. At this stage it is still on an individualized basis (one-off transactions), but the list of tribes seeking investmentopportunities and those tribes taking advantage of the tribalmoney available is increasing rapidly. It appears to be a win-win investment opportunity landscape and will likely onlyincrease in size and scope.

Diversified/Defensive Business Industry InvestmentMany tribal scholars and political experts believe that tribal

gaming may be limited in duration due to legal and regulatory

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revisions on the horizon. It certainly seems that at both federaland state levels, changes to individual laws have affected gamingin many ways. A complete termination of tribal gaming is perhaps an extreme view, but a defensive strategy in tribal invest-ments is certainly worth considering. A defensive strategy mightinclude acquiring companies in industries completely at theopposite end of the business spectrum, i.e. energy, oil, gas, water,manufacturing, pharmaceuticals, medical, biotech, transportationand housing. Unfortunately (or fortunately as one chooses to viewit), in many cases, the gaming industry has “spoiled” many tribalmanagement executives with cash margins in the 30-45% rangeand when a perhaps otherwise solid investment opportunityappears in these other sectors with net margins in the 5-10% range- many tribes ultimately don't see the value as they seemingly can'tcompare to the gaming industry. However, if a diversified port-folio of companies is desired in a variety of sectors, this strategymakes absolute sense. Furthermore, many tribal nations preferto invest in businesses that are local to their area. Since they mayoften be the only gaming enterprise allowed to operate locally,they must look to diverse sectors for other investment opportu-nities. These businesses can ultimately provide added revenue,employment, training and a wealth of services and opportunities.For example, in the cases of many tribally owned medical facil-ities, they eventually will service the surrounding communities

as well - so tribally owned hospitals and clinics provide muchneeded services to both Indian and non-Indian communities andsimultaneously realize a healthy return on their investment.Ultimately tribal governments should not be dissuaded by smallerreturns within these diverse business sectors when analyzing theinvestment opportunities, but should have a larger view of thelong-term economic potential.

Section 17 CorporationsRegardless of what strategy is utilized or what industry is

identified for a tribal acquisition, a tribal government may elect to create the newly acquired business as a Section 17 Corporation, which is possible when the entity is a whollyowned subsidiary of the tribal government. Section 17 of theIndian Reorganization Act of 1934 (IRA), 25 U.S.C. § 477,authorized Indian tribes and Pueblos to incorporate tribalenterprises under federal law. The incorporation processincludes the development of a corporate charter. Under Section 17 of the IRA, tribal corporations enjoy immunity fromsuit in the same fashion as the tribes or Pueblos themselves. And,just as tribes and Pueblos, tribal corporations may waive thatimmunity. The corporations cannot have other equity partners,do not have the usual federal/state income tax liability and ittakes an act of Congress to dissolve the corporation. Some

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investment partners view the Section 17 regulations as onerous and as a similar alternative, tribally owned LLC'sprovide many of the same benefits with less restrictions.

Evaluation ProceduresAny acquisition investment for a tribal government is a

thoughtful process requiring due diligence and thoroughreview of historical financials, management and documenta-tion of the targeted investment. If a tribe identifies an invest-ment opportunity of interest, typically a firm specializing inbusiness evaluations will be retained to provide an impartialevaluation of the value of the business and an estimate of whatthe sale price should be. The five most common ways to evaluate a business are asset valuation, historical earnings valuation, future maintainable earnings valuation, currentnet earnings (also known as EBITDA - Earnings BeforeInterest Taxes Depreciation and Amortization) valuation and Shareholder's Discretionary Cash Flow valuation. Professionals who valuate businesses generally do not use justone of these methods but a combination of some of them, aswell as possibly others that are not mentioned above, inorder to obtain a more accurate value. These values aredetermined for the most part by looking at a company's balance sheet and/or income statement and withdrawing theappropriate information. It is also wise to utilize professionaladvisors known variously as intermediaries, business

brokers, and investment bankers to facilitate and negotiateacquisitions to achieve the best pricing and deal point resultsand an M & A transaction.

Shareholder PositionsAs an alternative to taking the initial plunge of an outright

acquisition purchase, tribes may consider investing as equitypartners in businesses alongside other investors and thusdecreasing their risk. This dilutes any potential returns but alsodecreases downside risk as well. This type of investment canresemble the form of private equity investment and may be better suited within the tribe's investment portfolio/asset management strategy, however crossover is common here and if the tribe identifies a company for acquisition but wants only a portion of the risk, partnerships and cooperative investments are viable possibilities.

Regardless of the strategy and sector, a tribe should thought-fully consider its expansion and investment opportunities.Economic growth and diversification are important concepts,essential to our future generations' benefit as we look to thefuture tribal financial forecast. ¨

Valerie Red-Horse currently heads the Tribal Finance Division and the Tribal Finance Asset Management Division of WesternInternational Securities (Member FINRA, SiPC). She can bereached by calling (818) 758-3449 or email valerie@wisdirect.com

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