Description

Florida Gaming

Florida gaming is a bulletin board stock that owns Jai Lai frontons in Miami and Ft. Meyers Florida and right to build one in Tampa. Florida recently passed a constitutional amendment that allowed a local gaming option which would allow slots at the Miami Jai Lai facility and six others in the state limited to Brevard and Dade counties in South Florida.

Two things need to happen to allow for slots. First, the county government needs to hold a referendum to allow gaming in that county. Brevard is proposing to do it in March and Dade has not set-up a time frame yet. The slots amendment passed by a vote of 404,240 to 300,403 in Dade County, so that should not be an issue. Second, the Florida legislature needs to pass enabling legislation by July 1, 2005. This date is mandated in the constitutional amendment.

Value of Miami Fronton:

The value is entirely dependent on the legislature’s actions. The governor was opposed to slots, but so far has not shown that he will be unreasonable when dealing with the legislation(i.e. tax rate). Further, Florida is in desperate need of additional money for schools, and the slot amendment requires that all of the tax proceeds get spent on education.

Florida Gaming has signed a letter of intent with Isle of Capri to sell their existing Miami Fronton for the greater of a) six times projected EBITDA less development costs or b) $100 million. This is only a letter of intent but it does provide an exclusive negotiating period of six months from the time legislation is passed.

Assuming a reasonable tax rate:

Slot Machine: 2500
Win Per Day: $300
Revenue: $274
EBITDA Margin: 25%
EBITDA: $68M

Construction Costs: $125M

Equity Value at 6x: $285M
However, this could be a significant understatement of value. Isle of Capri offered $518 million for the 10th license in Illinois. Florida will only have seven licenses under this amendment.

Value of Fronton in Ft Myers --- Lee County which includes Ft. Myers passed the slots amendment by 51.7% to 48.3%. Seeing those results, the voters in Lee County do want slots so it might be possible to allow for an additional amendment in the future to include the Ft. Myers fronton. I assign a value of this option on slots at $15M.


Value of Company:
Miami Fronton: $285M
Ft. Myers Fronton: $15
Right to Tampa Fronton: $0
Debt: 5.5M
Total Value 295
Fully Diluted Shares Count 4.8
Value per Share: $61

Risks:

Florida legislature passes an unreasonable tax rate. I don’t think this will happen, but it might. This is a big risk, but I think the potential upside warrants taking on this risk.

My assumptions are wrong. I have tried to come up with reasonable assumptions for the South Florida market; however, these are only my best guess and I could be off.

Management is questionable. I have not been able to reach them. They did recently grant themselves options on 400,000 shares at $5 while the stock was trading significantly higher.

Tax inefficient transaction: In order to reduce tax liability the management needs to sell the whole company. Otherwise, I would have to tax effect the value and it would not be nearly as lucrative. Since this asset is most of the value of the company, and management holds a significant stake I assume they will find a way to make this transaction tax efficient.

Catalyst

Florida legislature passing enabling legislation for gaming no later than July 1, 2005; which in my opinion will lead to a sale of the company.