Class III Slots Mean More Seminole Power

The Seminole Tribe of Florida has gone to the federal level to force approval of Class III gaming at its casino operations.

Jeff Hwang
Jeff Hwang
Jan 18, 2007 at 12:00AM
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The Seminole Tribe of Florida has reportedly gone to the federal level to force approval of Class III gaming at its casino operations in Florida. Jeff Hwang says the Seminoles are already one of the most profitable gaming entities outside of Las Vegas and that Class III gaming will make the tribe even more powerful.

Fresh off putting in the winning $965 million bid for Rank Group's Hard Rock International (see Seminoles' Hard-Rocking Purchase), the Seminole Tribe of Florida is now focused on the next task at hand -- getting approval for the operation of Las Vegas-style Class III slots at the tribe's seven casinos in Florida, including the two exceptionally profitable Hard Rock-branded casino hotels in Hollywood and Tampa.

The South Florida Sun-Sentinel reported yesterday that the Seminoles have filed court papers with a federal judge in Tallahassee to force the U.S. Department of the Interior to establish guidelines that would allow the Seminoles to install traditional Class III slots in place of the Class II "Bingo" machines currently in operation (Class III machines generate more revenue than Class II). The Department of the Interior had previously set a November 2006 deadline for the Seminoles and the state of Florida to reach an agreement on a gaming compact, after which the Department of the Interior would step in and issue regulations itself.

That deadline has since passed without action.

By virtue of the Indian Gaming Regulatory Act, the Seminoles are entitled to any type of gaming legal elsewhere in the state of Florida. In this case, that means Class III slots, which have already been introduced at the first two of four pari-mutuel gaming facilities in Broward County granted approval for Class III slot machines -- Magna Entertainment's (NASDAQ:MECA) Gulfstream Park and the nearby Mardi Gras greyhound track and casino. Previous negotiations broke down between the tribe and former governor Jeb Bush, whose term recently ended.

As it is, the burden is on the state of Florida and its new governor, Charlie Crist, to reach an agreement with the Seminoles, as doing so would at least allow the state to receive tax revenue from the tribe's gaming operations. Failing to reach an agreement and allowing the federal government to make the rules could result in the state getting nothing.

Seminole power
One thing is for certain: The Seminoles are already one of the most profitable entities in gaming outside of Las Vegas, and they're only getting stronger. The tribe's seven casinos rake in an estimated $1.2 billion annually. That's more than the annual take of either Ameristar Casinos (NASDAQ:ASCA), Pinnacle Entertainment (NYSE:PNK), or Isle of Capri (NASDAQ:ISLE), and roughly in line with the other top two gaming tribes in the U.S. -- the Mashantucket Pequot Tribe and the Mohegan Tribe, owners of Foxwoods and Mohegan Sun in Connecticut, respectively. The difference is that both the Mashantucket Pequot and the Mohegans pay 25% of slot revenue to the state of Connecticut, while the Seminoles currently don't pay taxes to anyone but themselves. Meanwhile, the Connecticut tribes already operate full-scale Class III gaming -- including tables games -- while the Seminoles don't even operate Class III slot machines yet and are limited to $2 limit poker and higher-stakes tournament poker, meaning there's considerable upside to current operations even before expansion.

The Seminoles also have several key locations near a large population of mature age with lots of free time and money to spend -- and in a state with a favorable tax rate (zero for now) and limited potential for new competition -- giving the tribe's gaming operations a Station Casinos-like (NYSE:STN) look. At the same time, the tribe will enjoy considerable competitive advantages over the Broward County casinos:

1. The Broward County casinos -- which will include Isle of Capri's (NASDAQ:ISLE) Pompano Park within the next few months and Boyd Gaming's (NYSE:BYD) Dania Jai-Alai sometime in 2008 -- are only allowed to operate 16 hours per day. The Seminoles operate 24/7.


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2. The Broward County casinos aren't even allowed to have ATMs on site. In fact, the casino at Gulfstream Park has a regular shuttle service to scoot patrons to the nearest ATM and back.

3. The Broward County casinos are limited to 1,500 slots each. The Seminoles currently have no cap on expansion.

4. The Broward County casinos pay half of gaming revenue to the state of Florida. The Seminoles don't pay gaming taxes.

And the biggest beneficiary of Class III gaming is...
All said, who do you think is the biggest beneficiary of the legalization of Class III slot machines in Florida? Is it Isle of Capri? Boyd Gaming? The state of Florida?

Well, I suppose a case could be made for slot manufacturers such as International Game Technology (NYSE:IGT) and WMS Industries (NYSE:WMS). But in my opinion, the biggest beneficiary is not any of the commercial casino operators, the state of Florida, or even Broward County, but rather the Seminole tribe. The Seminoles' gaming operation is bigger than Ameristar and Pinnacle, and the exceptionally profitable nature of those operations in Florida gives the Seminoles financial clout. That clout has already resulted in the purchase of Hard Rock International, and also gives the tribe a competitive advantage over both Ameristar and Pinnacle when it comes time to expand into new markets of mutual interest -- namely, Las Vegas.

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Ameristar is a Motley Fool Hidden Gems selection. Fool contributor Jeff Hwang owns shares of Ameristar Casinos, International Game Technology, and WMS Industries. The Fool has an ironclad disclosure policy.