June 21, 2013 - 1:48pm EST by
2013 2014
Price: 3.55 EPS $0.00 $0.00
Shares Out. (in M): 26 P/E 0.0x 0.0x
Market Cap (in $M): 94 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • Casino
  • Sum Of The Parts (SOTP)
  • Founder Operator


Long: Lakes Entertainment (NASDAQ: LACO)

Current Price: $3.55

Fair Value: $5.65



Lakes Entertainment has been written up on VIC a few times before, but I still think there is upside left even after the recent run-up. Obviously, this was cheaper at $1.80, but some positive events since then have increased the value.

Lakes is a cash flow positive casino operator with multiple valuable assets that together are worth significantly more than its current market capitalization. This is a case where one can be reasonably certain that there is limited downside and simply let the upside take care of itself.



Lakes was started as Grand Casinos in 1990 by its current Chairman and CEO, Lyle Berman. In 1998, the Mississippi assets of Grand Casinos were merged with the gaming division of Hilton Hotels to form Park Place Entertainment (now Caesars). Park Place did not want to acquire the Indian casino management business, so Lakes was spun off with Berman continuing as its manager. Currently, Lakes manages one Indian casino, owns the Rocky Gap Casino Resort, and has a passive investment in three Ohio gaming projects.





In October 2009, Lakes entered into two agreements, one with Penn Ventures and one with Rock Ohio Ventures, both to fund a percentage of the costs associated with the referendum to amend the Ohio constitution to authorize casinos in Ohio’s four largest cities. This passed on 11/3/09. Accordingly, Lakes received the right to fund and own 10% of four casinos—two to be built by Penn Ventures (Columbus and Toledo) and two by Rock Ohio Ventures (Cleveland and Cincinnati). In the following months, a memorandum of understanding was signed that gave the four casinos a ten year oligopoly in the state. Lakes entered into a termination agreement with Penn Ventures on 7/13/10 in which Penn paid Lakes $25MM to terminate its right to invest in the two Ohio casinos. Lakes made this deal because it didn’t have the cash to fund all four casinos. On 12/22/10, Rock Gaming and Caesars (formerly Harrah’s) formally announced a joint agreement. Caesars will participate via equity, contribute Thistledown racetrack, and manage the three projects. Rock Ohio Ventures will maintain an 80% stake, and Lakes will own 10% of that 80%. The Horseshoe Casino Cleveland opened in May 2012; the Horseshoe Casino Cincinnati opened in March 2013; and the Thistledown Racino unveiled video lottery terminals in April 2013. Rock Ohio Caesars also has the option to open a Phase II casino in Cleveland in addition to the Horseshoe. This casino may open along the Cuyahoga River in three to five years. In May 2013, Dan Gilbert tweeted that the Phase II casino will be built and is currently in the design phase. Monthly numbers for the casinos can be seen on the Ohio Casino Control Commission website at: Monthly numbers for Thistledown can be seen on the Ohio Lottery website at: To value Lakes’s portion of these three Ohio projects, we take the following steps:


2014: $190MM EBITDA for all three Ohio projects combined

$190MM * 7.25X forward EBITDA multiple = $1.378B

$1.378B + $85MM for Phase II property = $1.463B

$1.463B – debt of $887MM = $576MM

Lakes’s portion = 10% * 80% * $576MM = $46MM


The above ascribes no value to the potential Phase II casino in Cleveland besides the land it will be built on. To date, Lakes has invested $21.0MM in Rock Ohio Ventures.


Rocky Gap

Lakes purchased the Rocky Gap Resort near Cumberland, Maryland in 3Q’12. Lakes renovated the resort, added a new lobby food and beverage outlet, and installed 558 video lottery terminals and 10 table games. Lakes originally planned on new space for the casino but had trouble securing financing. However, construction on a new event center with conference space is underway and is expected to be ready in 4Q’13. Overall, there will be slightly more meeting space than before.

Rocky Gap opened on 5/22/13. Although the partial month of May had terrible results, I don’t believe such a short timeframe after the opening is indicative of the resort’s earnings power. Additionally, the group segment (the segment that uses conference space) has traditionally been half of the resort’s business. That business will only be seen after the event center is available for use late in the year. That said, I am not exceedingly sanguine about the resort and value it at cost until more data is released. Monthly numbers for the casino can be seen on The Maryland Lottery and Gaming Control Agency website at:


Red Hawk

Lakes has a seven year contract (ends 12/17/15) to manage the Red Hawk Casino for the Shingle Springs Tribe in El Dorado County, California. This casino is performing below expectations due to the sour local economy and strong competition. Management has been trying to turn this casino around, and their efforts have resulted in much improved performance over the last year and a half. Lakes generated over $8.5MM in revenue from this contract in the LTM.


Other Assets



Lakes has a significant cash position of $23MM. The majority of the remaining cost to complete Rocky Gap will be funded with debt. Lakes is also looking at other potential casino projects in which to deploy its cash.


Note Receivable

Lakes is due a note from Shingle Springs that had $70MM outstanding as of the end of 1Q’13. Lakes is owed this amount mostly for amounts advanced before the casino opened. As a result of the poor economy when Red Hawk opened in December 2008, Lakes was not able to sell this note. Although the note is worth less than face value, it is still worth a considerable amount. There are senior notes issued at par by the Shingle Springs Tribal Gaming Authority that traded up to 85 at the end of 3Q’12 from a relative low of 52 in December 2011 as profitability at the casino improved. In November 2012, the notes jumped to par after CA agreed to reduce taxes for Shingle Springs with the stipulation that the tribe restructure its debts. Although these notes are senior to the one owed to Lakes, they offer a good comp. Management estimated the fair value of the note to be $53MM at the end of 1Q’13, which I believe is reasonable. Lakes is currently in talks to restructure its note with Shingle Springs. As part of these talks, I believe it is possible Lakes get paid on its note for some amount less than par. If this happens, Shingle Springs would likely buy out Lakes’s management contract. At that point, Lakes would have a collection of assets and only one casino under management. Such a scenario sets up for a liquidation or some other strategic alternative as I think Berman understands that Rocky Gap doesn’t offset $8MM/year in SG&A. Lastly, Lakes does earn some cash interest from its note; in the LTM they earned $2.2MM.



As of the end of Q1’13, Lakes had about $50MM in NOLs.


Office Building

Lakes owns its office building, and it is worth more than what Lakes has it for on the books. A bank used the property to collateralize a loan for $8MM, and the building is currently up for sale. Using this information and some comps, I value the building at $6.5MM.


Jamul Note and Land

Although Lakes terminated its agreement to develop a casino for the Jamul Tribe in CA, Lakes is still owed $60MM on its note. In 4/13, PENN announced that it will develop a $360MM Hollywood-branded casino resort with Jamul that could open in late 2015. Soon after that announcement, Lakes revealed it entered into a loan modification agreement whereby Jamul will pay interest to Lakes on the $60MM at a rate of 4.25% once the casino opens. Lakes also agreed to subordinate repayment of its debt until the senior financing is paid in full. This is a positive development for Lakes as it provides a clear roadmap for repayment on their debt and earning some interest. Due to the uncertainty of the casino opening, its success, Lakes’s subordination, and time value of money, I still value the note at 5% of face value.

In addition to the above, PENN has an option to buy ~98 acres of land Lakes owns adjacent to Jamul’s land for $7MM. I believe PENN will exercise this option once they break ground on the casino. I value the option at $5MM which implies a 70% chance of opening.



This company is controlled by its Founder, Chairman, and CEO, Lyle Berman. Berman founded Grand Casinos in 1990 (Lakes was spun-off from Grand Casinos in 1999) which was named the fastest growing company in America in 1995 by Fortune magazine. He is in the Poker Hall of Fame and is well respected for his gaming expertise. In 2005, he wrote an autobiography entitled I'm All In: Lyle Berman and the Birth of the World Poker Tour. He owns around 16.7% of the company and trusts for the benefit of his children own another 9.5%. These trusts purchased over $700K worth of stock on 12/20/12. Some may be wary of Berman’s ability to deploy the cash responsibly given the performance of Lakes’s stock price over the last five years. While it is certainly true that Berman’s recent projects have been disastrous, I believe he will create material value with the cash for the following reasons:

  1. He owns over a quarter of the company. In addition to that obvious alignment, he is a fair manager. One example of this is how he raised capital in a private placement for what is now Black Ridge Oil & Gas at $1.00. The stock was trading around 20% lower than that when the capital was being raised. The participants were Berman, his family, and his associates. Also, the $1.00 price was 300% higher than where the stock price was trading just one month prior.
  2. He will not finance and develop any more Indian casinos which have recently been the bane of Lakes. The current contracts and projects were negotiated when the economy was in much better shape and the Indian casino business was extremely competitive. Berman would never make those deals today. Also, because of the large initial outlay required for Indian casinos, Lakes would not be interested.
  3. Berman has had success in all walks of business during his life. He started at his family leather business, Berman Buckskin, and sold and bought it multiples times. He was the initial investor in the Rainforest Café chain of restaurants and served as its Chairman and CEO from 1994 until it was sold in 2000. Berman is credited as one of the early visionaries in the development of casinos outside of the traditional gaming markets of Las Vegas and Atlantic City. More specifically, he pioneered the Mississippi casino market by being the first person to build casinos on barges. Finally, he received the Gaming Executive of the Year Award in 1996. If one judges his competence using only the last few years, one is suffering from availability bias.



Lakes is currently running slightly cash flow positive (not including Rocky Gap) with management fees from Red Hawk and interest from Shingle Springs offsetting corporate SG&A.

Below is a table of Lakes’s assets valued in millions of USD at the end of 1Q’13 unless otherwise noted.








Mgmt fees receivable



Office building


After-tax valuation (including MN state tax)

Rocky Gap


Valued at cost

Note receivable from Shingle Springs


If Lakes sold this note for a loss (as indicated), it would pad its NOLs



After-tax valuation (including MN state tax which is conservative); also reduced for payment to Quest

Jamul note and land


After-tax valuation

Other assets


Includes income taxes receivable, Dania stake, and others

Federal NOLs


Only includes benefit for assets that I already value on after-tax bases; there are still ~$23MM in NOLs Lakes can use






= $5.65/diluted share


Although I do not include these in my valuation, additional “bonus” value could be created from a Phase II casino in Cleveland, Rocky Gap, payment on the Jamul note, Berman’s subsequent deals, and a buyback.



  1. Lakes’s recent streak of poor deal making continues.
  2. Worse than expected results come out of Ohio, Red Hawk, or Rocky Gap.



  1. Lakes monetizes its note from Shingle Springs or Ohio stake elucidating the value.
  2. Because of his age (71), Berman monetizes his large stake by liquidating or selling the company.
  3. Berman makes one or two profitable deals helping to remove any discount currently in place.
  4. Lakes simply attracts more eyes and some sell side coverage.


Variant View

I believe my variant view largely comes from the below sources:

  1. Market participants believe Berman is a value destroyer. They are suffering from availability bias and ignoring his successful prior endeavors.
  2. Market participants are not valuing the Shingle Springs note as they are not aware of the reliable comp.
  3. Market participants are not assigning much value to Ohio as it is not producing any cash and is held at cost.



The value disconnect from a conservative sum of the parts analysis and the current stock price is startling. From looking at this, one would expect Lakes to be burning through cash rapidly. Instead, Lakes is marginally cash flow positive. With an incentivized and experienced manager at the helm, Lakes offers an extremely compelling risk/reward at current levels.




This report is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author’s commentary.  Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision.  Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate.

At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information. At the time this report was published, the author was holding a long position in LACO either in his personal account or in accounts that he managed for others.


I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.



  1. Lakes monetizes its note from Shingle Springs or Ohio stake elucidating the value.
  2. Because of his age (71), Berman monetizes his large stake by liquidating or selling the company.
  3. Berman makes one or two profitable deals helping to remove any discount currently in place.
  4. Lakes simply attracts more eyes and some sell side coverage.
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