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California's Casino Boom

By Jeff Hwang - Updated Nov 16, 2016 at 4:49PM

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Deals with Native American tribes boost further expansion of gaming in the state.

Back in June, California Gov. Arnold Schwarzenegger reached an agreement with five Native American tribes -- three in San Diego County and two others in Northern California. Approved this past Friday by U.S. Interior Secretary Gale Norton, that first set of compacts called for the tribes to back a $1 billion state bond and contribute an additional $275 million or so annually to the state. In exchange, the tribes were granted the right to operate an unlimited number of slot machines (over the current statewide 2,000-slot limit), perhaps setting off a wave of deals that would greatly expand slot-based gaming in California.

Last Thursday, Schwarzenegger reached a second, more controversial set of deals with five other tribes. In all, the five new compacts are expected to bring in another $200 million in relief to the state budget. But the key deal aims to create a monstrous six- to eight-story, 600,000-square-foot casino complex with 4,000 to 5,000 slots and would contribute an estimated $152 to $175 million to the state.

That deal, with the 259-member Lytton Band of Pomo Indians, is also the most controversial.

Under terms of the agreement, the new casino would be placed in San Pablo, just across the bay from San Francisco. The Lytton Band, which currently operates a small card room there, would contribute 25% of its revenues to the state. In exchange, the state will grant the Lytton Band a slot monopoly over a 35-mile radius. However, concerns regarding the social impact of putting such a large casino -- its 4,000-plus slots will rival those of Atlantic City casinos -- in an urban area have Democratic legislators lobbying to cut the slot count in half.

But no matter how the deal goes through, it's clear that gaming in California will be expanding rapidly. The obvious benefactors are the slot makers -- leader International Game Technology (NYSE:IGT) in particular, as well as WMS Industries (NYSE:WMS) and Alliance Gaming (NYSE:AGI). The boom will also be a boost to casino operators who manage Native American-owned casinos in California, namely Station Casinos (NYSE:STN), Harrah's Entertainment (NYSE:HET) and merger partner Caesars Entertainment (NYSE:CZR), and Lakes Entertainment (NASDAQ:LACO).

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Fool contributor Jeff Hwang owns shares of International Game Technology and Lakes Entertainment.

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