Andrew MacDonald and William R. Eadington - August 2005.

When assessing and reviewing opportunities for casino developments in new jurisdictions, what is the essential information that must be gathered and processed?

Almost by definition, significant investment opportunities for gaming companies occur outside the "mature" markets that increasingly characterize many of the jurisdictions where such companies have located their primary assets. Indeed, Las Vegas may be one of the few exceptions to this generalization. As a result, many of the established gaming companies have been looking far a field for potential new casino projects that might sustain the typically high returns on invested capital that used to prevail in more familiar markets before they became "mature".

This has led to a situation of exploring opportunities in new "foreign" jurisdictions, far from the home office, often in foreign countries in various corners of the world. In the past few years, we have observed such opportunities arise in new and potential gaming jurisdictions such as the United Kingdom, Macao, Singapore, and even Pennsylvania. However, as was demonstrated in 2005 in the United Kingdom, not all expectations in such venues will necessarily be realized.

Any gaming company considering development opportunities in such "foreign" jurisdictions—and wanting to compare them against other potential investments—should first establish a framework against which the risks and potential rewards of such propositions may be tested. That framework should realistically assess the company’s vision, core competencies, expertise, and strategic goals. Beyond that, there is also a need to establish which of all the alternative opportunities the company may—or should—pursue.

The factors influencing this kind of decision-making are geographic, cultural, political, legal, and legislative. The assessment process for "foreign" projects should also evaluate the challenges posed by foreign language (if relevant), the jurisdiction’s foreign investment criteria, the market's likely competitive dynamics, and expected market demand. When an opportunity emerges that appears to be attractive and generally meets the company's framework, then much more detailed information gathering and analysis becomes necessary.

The types of information that may be useful in assessing promising opportunities are:

1. Background demographic information on the country and its sub-jurisdictions (provinces, states, and/or counties) in general, and the proposed casino location in particular. This means understanding the population base within 15 minutes, 30 minutes, 45 minutes, 60 minutes and 120 minutes travel time from the proposed venue. It is also important to know how wealth is distributed in these bands, (i.e. are middle and upper income citizens some distance away from the proposed location, for example, in the country's or province's capital city? Is it realistic to expect that they would travel to this location?)

2. Tourism versus locals' potential for the market. Should the project be geared only for those local citizens within easy traveling distance from the casino? What is the potential for that market segment? Is the country or region already attractive for overseas and domestic tourist visitors? Is there already an existing tourism sector—with appropriate infrastructure—in the vicinity of the proposed casino site? Might the casino project grow that tourism market substantially? Is there likely to be significant competition for such tourism from other casinos in the region?

3. License provisions and certainty. How do you gain a good understanding of what the government is really offering? How valid and stable will their offer remain over time? Are they experienced in working with private sector companies, and do they have a reputation for keeping their agreements? Will this project be welcomed by the public at large, or will it generate backlash or resentment? What happens if the opposition party comes into office during development or afterwards?

4. Exclusivity. How certain is it that any exclusivity granted will be maintained for a reasonable period of time, or for the time initially signaled by government? Are there other forms of permitted gambling—legal or illegal but tolerated—that might erode the casino market. (Gaming devices permitted in bars and taverns might be an example of such a competing product.) Are there neighboring jurisdictions that might replicate or exceed the offering of this government in trying to attract their own projects?

5. Location specific information. In what condition are the transportation infrastructure and utilities infrastructure in and around the proposed location? What other tourism amenities or facilities in the vicinity might be complementary to this project? How far is the venue from the nearest international airport? Are there specific constraints in foreigners’ ability to cross the border or to get through customs to visit this location?

6. Bidding Competition. To what extent does the company have an “inside track” on this particular project? Are other major gaming companies aware of this opportunity? Do they have political links or business partners within the jurisdiction that might provide them any kind of advantage? Are their government contacts and partners better than your government contacts and partners?

7. Project concept and timing. Does this project depend on pending legislation? If so, how long before legislation is enacted and contracts can be signed? How much risk is there that the legislation will change significantly before passage? How much work is required by the company in terms of specific project details, such as architectural renderings or design particulars, before finalization? What are the anticipated capital costs of the project and how predictable are they? What are the construction conditions that prevail in the region?

8. Project financing. What financial arrangements will be made with local banks, the company's banks, and other sources of financing? How will financing be divided between debt and equity capital? How much equity capital will the "selected company" need to put forward?

9. Deal structure. Will the company be expected to bring in local partners? If so, what will be their contributions—both financially and in terms of expertise offered—that might enhance the value of the project? Are these partners that the company would engage if they were not required to do so? Will the partners and the entire deal be acceptable to regulators in the company’s home jurisdictions? What is the situation on the ownership of the site?

10. Gaming tax rates and duties. What are the tax rates and other assessments that will be applied to operations? Are there any "Taxes in Kind" that the government will require, i.e. infrastructure projects, convention centers, other tourism amenities unrelated to this project, etc. Can you have confidence that, once the project is built and operating, government will not increase the tax rates and assessments?

Realistically and carefully answering the above questions is critical in dissecting and assessing the value and risks of the opportunity. From an economic perspective, it is important to understand how large the gaming market might be, from both a "locals" and tourism perspective. This requires a detailed assessment of the market, the likely penetration and visitation rates amongst the local population, and spend per visit estimates, to project potential levels of gross gaming revenues. These results can then be checked against gaming spend data from comparable markets and measured as a proportion of household disposable income to check their reasonability.

At this point, a simple profit and loss model can be constructed that assess cost structures relevant for the market under consideration and project profit potential. This should result in a (hopefully) realistic EBITDA (Earnings, Before, Interest, Taxes, Depreciation and Amortization) estimate. From this, it is possible to assess how much capital spend is "required" to deliver this level of profit at an acceptable level of return on investment.

Comparing this result to the projected capital outlay for the project will provide insight into the potential value creation of the project. The greater the gap between the "required" capital outlay and the projected capital spend, the more value that will be created for the company. This can then be adjusted to accommodate development risk, as well as reinvestment and expansion contingencies of the project.

Anther way of estimating "value created" is to take the projected EBITDA and multiply it by a valuation multiple (i.e. 8-10 times EBITDA), thereby estimating an Enterprise Value. Deducting total development costs from the Enterprise Value provides an assessment of the net value created by the project. This relatively simple framework allows for an initial assessment of the attractiveness of this project in comparison to other company projects under consideration.

Picking winners for a company is achieved through determining which projects most closely align to the company's strategic objectives and which ones ultimately create the most value. Among that group may be intriguing "foreign" investment opportunities that are attractive due to their significant promise, but which also pose greater levels of risk.


Date Posted: 18-Mar-2006

Andrew MacDonald and Bill Eadington are comoderators of the annual University of Nevada Reno, Executive Development Program. The EDP is considered the pre-eminent development program for senior casino executives worldwide.