A Compelling Play on Indian Gaming: Rotate Black – ROBK

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JANUARY 05, 2009 – COMMENTS (0) | RELATED TICKERS: MGM , LVS

Vegas is on sale and Atlantic City is a mess. Most casinos are loaded with debt and struggling under the pressures of economic sluggishness. Rotate Black, as a casino management company, has minimal capital requirements and is a pure play on casino cash flows for what could be the most exciting Indian casino opportunity located within 1.5 hours drive from NYC. Easily accessible to roughly 24 million potential gamers with no jets to fly or unappealing 3+ hour drives.

According to news articles out over the weekend and an 8k filed by Rotate Black the company has been contracted by the Seneca Nation of Indians to build and manage a world class casino in the Catskills. The Catskills had once been a premier vacation destination to many New Yorkers and due to its proximity to NYC, a long sought after destination to build a casino.

According to the Albany Times Union article, the casino could provide the state of New York with $160 million in revenue. Using 25% as the states take, gaming revenues are likely to be north of well north $525 million. As a comp, Mohegan Sun had gaming revenue north of $1.4 billion in fiscal ’08 from more than 6,000 slot machines and 300+ table games, and EBITDA exceeding $345 million.

If Foxwoods or Mohegan Sun provide any insight into strategy, the nation is likely to build a temporary casino generating cash flows while laying the groundwork for the construction of the permanent facilities. The retention of Friedmutter & Assoc., the design team for Red Rock in Vegas, and Perini Construction, which has a history of casino construction including Mohegan Sun, adds credibility to the plans.

Land issues need to be resolved, primarily whether or not the acquired land in Thomson qualifies for "restricted fee" status. According to the National Indian Gaming Commission’s website "restricted fee" status has been granted to lands located within a reasonable distance to lands indigenous to a given tribe. The Seneca Nation of Indians is both federally recognized and indigenous to New York State and Pennsylvania, giving confidence that the land qualifies.

The nation also needs to negotiate addendum to its current Nation-State compact, which allows for three Class III casinos. (Class III is full on gaming, including table games). This also appears likely. With "restricted fee" status and as a federally recognized tribe, the nation can operate a Class II casino with no state approval, however, the state would not participate in any of the gaming revenue.

Raising sufficient capital to build the casinos is also a risk. This could be mitigated if the Foxwoods model is followed and cash flows are established via a temporary facility. Additionally, the municipal debt markets, which on the surface the tribe looks to be able to tap similar to Mohegan Sun and Foxwoods, may open up due some of the provisions recently discussed in the congressional stimulus package.

With the downturn in the economy this could be the biggest winner in the gaming business, and the way to play is through shares in ROBK. The shares are very thinly traded but the story is compelling enough to take a look.