By Andrew MacDonald and Bill Eadington
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 afield 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
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
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
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.
Another 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
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.