VANCOUVER, British Columbia, Feb. 17, 2015 (GLOBE NEWSWIRE) -- By Financial Press
According to the 2014 Indian Gaming Industry Report – U.S. Indian gaming facilities, including non-gaming operations, directly and indirectly generated 679,000 jobs and $91 billion in output. Slot machines generate about 70% of direct gaming revenues.
Poydras Gaming Finance (TSX-V:PYD) is focused on leasing and financing slot machines and related capital expenditures for casinos and gaming machine suppliers in the United States.
PYD owns and finances slot machines in Oklahoma and has a financing agreement with a gaming machine supplier based out of California. California and Oklahoma are the two largest states in terms of gaming revenue at Tribal casinos, generating a combined 38% of revenue.
"The bulk of our machines are currently located in Native American owned casinos in Oklahoma," stated Poydras CEO Peter Macy in an exclusive interview with Financial Press, "We buy machines from manufacturers and place them on a casino floor, using a revenue-sharing model. In some cases we also finance complementary capital expenditures – like renovations or expansion".
Growth in the gaming industry is driven by regional markets, and Oklahoma is a regional powerhouse, drawing players from surrounding states. Gaming revenue in Oklahoma has increased 15% over the most recent two year period for which data is available.
Poydras has a definitive agreement to acquire the Integrity Companies, a third-party provider of slot machines to Native American casinos, for $17 million in a combination of cash, stock and assumed debt. The acquisition is expected to add $5.5-$6.5 million of incremental annual EBITDA to Poydras' bottom line.
"Casinos typically do not have access to capital or the equity markets," explains Macy, "That provides us with an opportunity to put in cash-generating machines while helping the casinos remain competitive".
In 1976, The Supreme Court ruled that states have no authority to tax or regulate activities on reservations. Within a few years, Native American tribes began to operate bingo halls and casinos.
"Native American tribes are viewed as sovereign states," stated Macy, "Therefore they don't pay federal taxes and very little in the way of state taxes. That is a big competitive advantage, but it does not create easy access to capital."
Macy explains that no individual or institution can own equity in a casino - except the tribe that it benefits. That constraint eliminates the equity market. And the gambling regulatory environment is too complex for most private equity funds.
"You cannot foreclose on a Native American casino and take over the operations," stated Macy, "By federal law the only entity that can operate it is the Native American tribe."
This regulatory and fiscal environment has created a unique opportunity for Poydras.
"As a public company, we are focused on de-risking our shareholders' money," stated Macy, "so we need a workable scenario if the relationship breaks down. We have never had a problem, but if we did, we would simply remove our machines from the building. We receive equity-like returns with an investment that is fundamentally secured."
On January 13, 2015 Poydras, in partnership with the Integrity Companies, entered into a long-term gaming machine placement agreement with the Tonkawa Tribe of Indians of Oklahoma. Poydras and Integrity will provide 600 Class III gaming machines and up to $5.5 million in funding for the renovation of the Native Lights Casino. The placement agreement is expected to generate approximately $6 million in annual revenue for Poydras.
"We're anticipating closing the deal by late March, 2015," stated Macy, "Gaming deals require normal exchange approvals but we also have to satisfy the regulatory bodies for each Native American tribe. So we have 25 licenses that need to be approved. Complex financing is part of the DNA of Poydras and the process is going smoothly."
The deal adds about $5 million cash flow to Poydras' bottom line. Macy likes the business model because the operational expenses are easy to control. The casino is responsible for taking money out of the machine every day. If someone spills a beer on a machine and it shorts out, Poydras has to fix it. But the direct costs are extremely low – around 10% of revenue.
Typically, new machines cost $15,000 to $20,000. High quality used machines go from $8,000 to $14,000. Macy expects about a 3 year payback on the acquired machines.
"There are about 900,000 slot machines in the US," stated Macy, "150,000 of those machines are in our currently addressable markets. We think 5,000 machines is achievable in three years. We are already halfway to that with just organic expansion."
There are currently 470 Indian gaming operations in the United States generating about $30 billion in gaming revenue, and Indian gaming operations continue to account for a larger percentage of the US gross gaming revenue.
Poydras is currently trading at .09 with a market cap of $11.8 million.
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