Florida tribe’s Hard Rock coup - Wednesday 13th of December 2006

The Seminole Indians have ridden in with $965m to snap up the restaurant chain from Rank, writes Matthew Goodman

THE Seminole Indian tribe knows how to throw a party. The opening of its first Hard Rock casino and hotel two years ago had a team of 10 skydiving Elvis impersonators as well as the traditional guitar-smashing ceremony that occurs whenever the chain opens a new venue.

When the tribe clinched the deal last Thursday to buy the entire Hard Rock Cafe restaurant chain, the Seminoles — in traditional dress and accompanied by a medicine man — were presented with a Gibson guitar once owned by Hank Williams. And they promised the celebrations wouldn’t end there.

“It will be one hell of a party,? said Jim Allen, chief executive of Seminole Gaming, after his acquisition of Hard Rock International from Rank Group, the leisure conglomerate, for $965m (£493m).

The tribe already operates seven casinos in Florida, including two Hard Rock hotel and casino resorts in Tampa and Hollywood. It will now add 124 restaurants in 45 countries, as well as the world’s largest collection of rock memorabilia, which has an Eric Clapton guitar and items from Elvis, Bob Dylan and Madonna.

The tribe’s victory in the auction for Hard Rock has surprised many, particularly as the deal marks the first time a native American tribe has acquired a big international company. The competition was formidable — it included the large buyout firms Permira and Apollo, and the investment fund controlled by Robert Pittman, the entrepreneur who co-founded the MTV television station.

“There’s a tremendous amount of pride in the tribe today,? said Allen. “It’s a legendary statement for the Seminole and for all the tribes in North America. We were competing against some of the biggest hedge funds and private-equity firms. We competed on a level playing field and we were successful.?

The agreement marks the culmination of a six-year association with Rank. In January 2001 the two organisations announced a partnership that led to the Seminoles developing the hotel and casino complexes under licence in Florida.

To finance the latest deal, the tribe is putting up between 45% and 48% of the price in equity; the rest will be financed through debt, which it has already arranged. That debt will be secured against the Hard Rock assets. Allen said that the tribe had created a new entity, called Seminole Hard Rock Entertainment, that will be the holding company for the chain.

Gambling already accounts for the lion’s share of the income generated by the tribe’s commercial activities, which stretch to cattle farming and citrus growing. Allen is coy about divulging details of the tribe’s financial position, but the gaming operations contribute more than 90% of the tribal budget. He also notes that licensing fees from its two Hard Rock sites “were starting to represent 30% of the brand’s profits worldwide?. Some estimates suggest that the two venues alone generate revenues of more than $700m.

Last year Rank’s Hard Rock operation made a profit of £34.8m. Allen said one of the impressive things about the chain was its staying power. “It has been around for 35 years and it has competed with everyone — international brands like Planet Hollywood, Rainforest Cafe and, in America, chains like Nascar Cafes. The only one that has survived the test of time has been Hard Rock Cafe.?

Despite his enthusiasm for the restaurants, it is the hotel and casino side where the tribe sees the potential for growth. “There are 128 restaurants and only five hotels — we think that’s the growth opportunity,? said Allen, who said it was “too premature? to talk about specific locations for future venues.

It should come as little surprise that the Seminoles would like to concentrate on opening more hotels and casinos. The tribe paved the way for the native American people’s move into gaming when it opened a high-stakes bingo hall and casino in 1979. Since then, other tribes have followed and turned to gaming for their income. In several states the casinos on Indian reservations are the only legalised gaming venues that are permitted.

Despite the financial success of the reservation-based casinos, the Seminole tribe has attracted its share of controversy. The Internal Revenue Service, America’s tax-collecting organisation, probed the financing deal to fund the construction of the tribe’s two Hard Rock venues. It declared that the $415m of tax-free bonds used were illegal and, in October 2005, the tribe announced that it would issue $730m in bonds to pay off the original bonds.

The tribe is also embroiled in a bitter dispute with Power Plant Entertainment, a subsidiary of the company that developed its Hard Rock sites, over fees it must pay from income generated by the casinos.

And not everyone welcomed the development of the Hard Rock hotel in Hollywood — the tribe forced the eviction of 200 residents of a mobile-home park to free up land to build the venue, prompting many of the residents to try to sue the tribe.

If Allen is concerned that expanding from the tribe’s Florida heartland to become an international concern will inevitably lead to hiccups, he does a good job of masking it.

“It’s not a worry at all,? he said. “I have been in the casino industry for 28 years and nobody here has less than 21 or 23 years’ experience. And, most important, the purchase does not require a whole new management team as we are buying a respected team.?

The only people who managed to put a damper on all the excitement last Thursday were in the City of London. Rank’s shares fell 4.1% on the day the deal was announced, although some of the drop was due to a poor trading statement by the company. In a note to clients, analysts at Morgan Stanley expressed disappointment at the price achieved by Rank, arguing that it fell significantly short of its valuation of £593m. It is unlikely that too many members of the Seminole tribe will be complaining.

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