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|  | JUNE 14, 2004
By Christopher Palmeri Now, Big Casinos Bet on the Indians Many companies in gambling's Establishment are finding that managing tribal operations is a lucrative source of new revenue While MGM Mirage (MGG ) has raised its offer for Mandalay Resorts Group (MBG ), in a merger that would give MGM Mirage control of half the hotel rooms on the Las Vegas strip, other casino companies are looking outside Nevada for growth, frequently to Indian reservations. But it wasn't that long ago that the nation's gambling Establishment was on the warpath with the Indians. Threatened by tribal casinos that were stealing customers from strongholds in Las Vegas and Atlantic City, casino executives such as Donald Trump and Steve Wynn unleashed high-price lawyers and big-bucks lobbying campaigns aimed at heading the Indians off at the pass. Now, companies that manage tribal casinos have become one of the hottest plays on Wall Street. The reason: Traditional gaming markets are mature, and the cost of building a new resort now tops $2 billion. The number of Indian casinos, meanwhile, continues to soar. Last year, the nation's 377 tribal casinos generated $15.9 billion in revenues -- more than Las Vegas and Atlantic City combined. That number should climb as states such as California, New York, Connecticut, and Rhode Island continue to find gaming on tribal land more palatable than traditional casinos. "HERE TO STAY." One early convert to Indian gaming was Harrah's Entertainment (HET ), which began pursuing tribal casino deals in the mid-1990s and now operates four such properties in Arizona, California, Kansas, and North Carolina. Trump runs an Indian casino near Palm Springs, Calif., and has been pursuing tribal deals in Connecticut and Florida. Las Vegas-based Caesars Entertainment (CZR ). hopes to build three new casinos on behalf of tribes in California and New York. "It's clear that tribal gaming is here to stay," says Wallace R. Barr, president and CEO of Caesars. "If I'm going to lose revenue to California, I might as well go and get my share and bring it back to Nevada." For casino companies, the Indian contracts can be lucrative. Longtime Las Vegas operator Station Casinos (STN ) lent the United Auburn Indian Community $50 million and guaranteed an additional $210 million in bank loans to build its Thunder Valley Casino outside Sacramento. Station, which gets a 24% cut of the casino's profits, is on track to earn $80 million in management fees -- roughly 20% of overall earnings -- from the property this year, according to Deutsche Bank casino analyst Marc Falcone. HELPFUL TIES. Station, whose stock has doubled since Thunder Valley opened a year ago, aims to launch four other Indian casinos in California and Michigan. "We're building a business out of this," says President Lorenzo J. Fertitta. It can be a good deal for the tribes, too. In exchange of a cut of the profits, they get access to capital and management expertise that they wouldn't otherwise have. Harrah's, for example, mines its database of 26 million casino customers, encouraging them to visit nearby Indian properties with free hotel rooms and other incentives. Established casino brands, such as Harrah's and Trump, can also help an Indian property stand out from its tribal competition. Managing Native American casinos, however, doesn't appeal to everyone in the industry. To make sure that casino money goes mostly to the Indians, federal law limits an outside manager's take to 30% of profits. Management contracts are also limited to seven years. Although they can be extended, they rarely are, because by then the tribes have trained their own people and are likely to give the outside managers the boot. NEW RISKS. Because of those shortcomings, some large casino companies such as MGM Mirage aren't aggressively pursuing the Indian contracts. "It's not the best return on investment," says J. Terrence Lanni, MGM Mirage's chairman and CEO. It's also not an investment without risks. Politicians and community activists, who fear the Indian casinos will strain local resources without paying their share of taxes, have been opposing some new projects. Some states, most notably California, have also been asking tribes for a bigger cut of gaming revenue, something that could diminish the profitability of the management contracts. For now, however, the casino Establishment has found making peace with the Indians is a lot more profitable than waging war.  Christopher Palmeri is a correspondent in BusinessWeek's Los Angeles bureau Edited by Douglas Harbrecht
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