Seminoles' Hard-Rocking Purchase

It started with a bingo hall. Then came the VLTs. Now the Seminole Tribe of Florida owns the biggest collection of rock memorabilia on the planet.

On Dec. 7, the Seminoles announced the purchase of the Hard Rock businesses from British casino operator Rank Group for $965 million. The deal -- expected to close in March 2007 -- includes 124 Hard Rock Cafe restaurants, four Hard Rock Hotels, two Hard Rock Casino Hotels, a pair of Hard Rock Live concert venues, and equity stakes in three unbranded hotels. It also includes more than 70,000 pieces of rock memorabilia.

The Seminoles, who pioneered the Indian gaming industry by opening a bingo hall in 1979, own and operate two high-end Hard Rock Casino Hotels in Florida that generate an estimated $1 billion in annual revenue. Along with four other smaller operations in the state, the Seminoles' six casino operations -- which currently operate Class 2 gaming devices or video lottery terminals (VLTs), resembling Las Vegas-style Class III slot machines -- gross an estimated $1.2 billion in annual revenue, accounting for the bulk of the tribe's revenue. For the Seminoles, the Hard Rock acquisition not only diversifies their business operations beyond gaming and into the restaurant business, but also gives them a platform and a brand from which to expand their gaming operations beyond their six reservations in Florida.

It's worth noting, however, that the deal excludes the Hard Rock Casino in London, as well as the Hard Rock Hotel & Casino in Las Vegas; Rank will keep the London property, while the Las Vegas property was sold to the Morgans Hotel Group (NASDAQ:MHGC) this past May for $770 million. Also, as part of that deal, Morgans controls the use of the Hard Rock Hotel brand west of the Mississippi River, including Texas, California, Australia, and Vancouver, British Columbia.

The Hard Rock acquisition reflects both the growing magnitude of the Native American gaming industry and the success of the Seminole Tribe of Florida in particular. It also makes the Seminoles one of a few exorbitantly wealthy Native American tribes with the financial clout to take their gaming business to a national level and beyond. Consider that the acquisition represents a cost of about $300,000 for each of the Seminole tribe's 3,100 members.

Indian Gaming Industry Growth

The magnitude of Native American gaming
Just how big has Native American gaming become? Consider the following:

1. The Native American gaming industry has doubled total revenues to $22.6 billion since 2000.
   
   
2. Outside Nevada and New Jersey, Native American gaming has passed the U.S. commercial gaming industry in size. Native American-owned casinos in the six riverboat states, plus Michigan, Colorado, and South Dakota -- states with full-scale Las Vegas-style gaming -- combined to generate $13.4 billion in gaming revenue in 2005.
   
   
3. In 2005, the 21 top-grossing Native American gaming operations averaged $463.8 million in revenue; the Seminoles of Florida own two of them. Outside Nevada and New Jersey, only three commercial gaming operations are even on track to hit as much as $463.8 million in revenue this year, including MGM Mirage's (NYSE:MGM) MGM Grand Detroit and Penn National's (NASDAQ:PENN) Argosy Lawrenceburg in Indiana.
   
   
4. The top 21 Native American gaming operations accounted for 43% of total tribal gaming revenues in 2005; the top 60 operations -- representing a mere 15.4% of the tribe's 391 gaming operations -- accounted for 70.4% of total revenues.

Indian Gaming: Power at the Top

A growing influence
Native American tribes with gaming operations have become increasingly influential players in the greater gaming industry. Moreover, a select few tribes have operations that rival those of major regional players, such as Ameristar Casinos (NASDAQ:ASCA), Pinnacle Entertainment (NYSE:PNK), and Isle of Capri (NASDAQ:ISLE). In Connecticut, the Mashantucket Pequot Tribe and Mohegan Tribe own the two biggest casinos in the world in Foxwoods and Mohegan Sun, respectively, and combine to generate an estimated $2.2 billion in annual gaming revenue. That's more than Ameristar and Pinnacle combined. Both tribes are taking their gaming businesses to a national level; the Mohegans recently opened Pennsylvania's first racino in the Mohegan Sun at Pocono Downs, while the Mashantucket Pequot are in the bidding for one of two slot-parlor licenses allotted for Philadelphia. The Mashantucket Pequot are also partnering with MGM Mirage on a $700 million expansion project at Foxwoods Connecticut.

Much like the Mashantucket Pequot and the Mohegans, the Seminoles are similarly powerful, with $1.2 billion in gaming operations in Florida that bear a resemblance to Station Casinos' (NYSE:STN) $1.3 billion locals operation in Las Vegas. In Florida, the tribe benefits from its location near a mature population with a wealth of both free time and money to spend, as well as the ability to operate in places where commercial casino operators can't. The tribe also doesn't have to pay taxes. And while the recent introduction of Class III slot machines in Broward County presents the only land-based competition for the Seminole Hard Rock Hotel & Casino Hollywood, the Seminoles stand to benefit the most from the legalization of Class III slot machines, for reasons I'll discuss in my next article.

For related coverage, check out:

• From the Florida Gaming Summit
• Boyd Gaming's Florida Play
• The Magnitude of Pennsylvania's Slots
• Harrah's: Prepare for Breakup?

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has a disclosure policy.