A Rivers runs through it: Walton Street insiders use of a valuable casino trademark owned by one of its portfolio companiess

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Spencer Wiggins
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1 A Rivers runs through it: Walton Street insiders use of a valuable casino trademark owned by one of its portfolio companiess May 2015 A report by UNITE HERE Contact: Jon Scolnik, jscolnik@unitehere.org, Executive Summary Walton Street Real Estate Fund VI owns the trademarks to the Rivers Casino brand. The trademarks federal registrations are held by the first Rivers Casino, a Fund VI portfolio property in Pittsburgh. But affiliates of Walton Street s co-founding managing principal Neil Bluhm have been using the valuable Fund VI-owned brand for Bluhm s own growing casino empire. We estimate the Rivers Casino brand could have commanded approximately $15 million to date in licensing royalties if licensing agreements were arms length transactions among unrelated parties. We also estimate the brand s carrying value to be roughly between $40 million and $52 million. The question of how much the brand is worth and who derives the benefit Fund VI limited partners or Walton Street insiders - has added significance in light of the SEC s current resolve to scrutinize the fees private equity real estate managers charge for ancillary services. The SEC acting chief of examinations in May 2015 specifically highlighted the need for managers to be able to back-up any assertions that related party transactions were within market norms. Have affiliates of Walton Street principals that are using the Rivers Casino brand paid at or above the market rate to use Walton Street Fund VI-owned intellectual property? n How and why did it come to pass that Neil Bluhm s personally and family-owned casinos are permitted to use valuable Fund VI-owned trademarks such as the name Rivers Casino? n Would the related party transactions underlying this arrangement pass muster with the SEC? n What consideration, if any, will Fund VI limited partners receive from Bluhm s Chicago and New York casinos (also called Rivers Casino ) for the use of trademarks or any other intellectual property owned principally by a Walton Street fund? 1

2 Introduction The Rivers Casino brand is owned by Walton Street Real Estate Fund VI through its majorityowned Pittsburgh casino, which created the brand in 2008 and filed it with the US patent office that same year. 1 Two logos have been registered by the Fund VI property since. 2 Yet as Walton Street co-founding managing partner Neil Bluhm testified to gaming regulators last year, his casino company including multiple Rivers Casino -branded properties was the leading and most active [casino] developer outside Las Vegas since the recession. 3 Rivers Casinos win has totaled over $3.3 billion since the Pittsburgh ($1.8+ billion) and Chicago ($1.5+ billion) casinos opened. Another $222.5 million annually is expected from the third Rivers Casino in New York (topping $1 billion in fewer than five years). Rivers Casino brand subject of related party transactions with Bluhm affiliates Walton Street insiders have obtained the benefit of valuable rights and intellectual property owned by a Walton Street fund-owned portfolio property. Equity ownership at the Chicago Rivers Casino includes each Walton Street managing partner: Neil Bluhm, Jeffrey Quicksilver, K. Jay Weaver, Ira Schulman, and Eric Mogentale. 4 Only the Pittsburgh casino, the first of the three Rivers Casinos to be developed so far, has any equity participation by Walton Street Capital funds. The other two have significant ownership by Bluhm affiliates. Bluhm affiliates also provide (or plan to provide) oversight of management at all three Rivers Casinos. 5 Another Bluhm affiliate, separate from the casino ownership and operating companies but managed by the same CEO, granted the Chicago casino the use of the Rivers Casino trademarks in That Bluhm affiliate, Rivers IP Holdings LLC, had no Walton Street participation and was 100% owned by Bluhm family trusts and the Bluhm casino affiliates CEO as of early Why was the Bluhm family and Bluhm CEO-owned Rivers IP Holdings LLC able to grant the use of the Rivers Casino brand when the brand was owned by a Walton Street Fund VI portfolio property? Were any rights to the Rivers Casino trademark transferred from a Fund VI-owned affiliate to Bluhm family-owned Rivers IP Holdings? If so, what compensation was provided to the Fund VI affiliate? 2

3 Is Fund VI receiving compensation at or above market rate for trademark use? Several questions arise with respect to the role played by Rivers IP Holdings LLC. Can Walton Street Capital demonstrate to LPs or SEC examiners that Fund VI is receiving at or above market rate compensation for trademarks Walton Street made available to its insiders affiliate? Does Rivers IP Holdings receive any income for its role in the licensing agreements for Rivers Casino trademarks or other intellectual property? If so, how much of that income is retained by Rivers IP and its Bluhm-affiliated owners? Rivers Casino trademarks have significant value We estimate the potential income that Fund VI could have earned by charging royalties for the Rivers Casino brands to be at least $15 million so far, on a 1% royalty rate basis. In addition, the trademarks balance sheet carrying value could run as high as $52 million. Casino brand names are generally valued using either the income approach (modeling the cost to license a non-owned name) or the cost approach (assessing the cost to replace the brand) or a combination of the two. Casino companies must make a number of assumptions and estimates given the difficulties in benchmarking. Very few actual arms length trademark licensing agreements or brand sales occur in the casino industry, especially in the non-tribal regional markets outside Las Vegas in which Rivers Casino competes. Nevertheless, since the Rivers Casino brand is actually licensed, the income approach would seem to be the most appropriate method for determining how much the licensing rights are worth. Chicago Rivers Casino would have generated $15 million in royalties so far on 1% basis The Chicago Rivers Casino would have produced $15 million in trademark licensing royalties assuming a 1% licensing royalty rate since opening mid-2011 (1% of the house s take, known as gross gambling revenue). Combined with the upstate New York Rivers Casino, annual royalties from both casinos would be expected to reach $6.5 million annually. The 1% rate assumption is based on the few public companies competing in the Chicago and Pittsburgh markets that have published their rate estimates. 6 3

4 Roughly $40 million to $52 million in value as an intangible asset Publicly reporting casino companies in the Rivers Casino markets arrive at a variety of valuations which can be compared to the casinos overall success at attracting gamblers. These reported valuations show the potential for casino trademarks to have significant value. 7 Although these data are too sparse for precise benchmarking, a few meaningful comparisons can be made. For example, the two currently operating Rivers casinos generate one-third the gaming revenue of Boyd Gaming s entire portfolio, but at only two properties compared to Boyd s 22 casinos. Boyd valued its trademarks at $129 million. One-third of that amount is more than $40 million. 8 Another, perhaps more telling, example involves the valuation that was derived for one of Bluhm s own casino brands pursuant to the 2012 sale of the Riverwalk casino (along with its brandname) in Mississippi. The purchaser valued Riverwalk s brands at $7.5 million. 9 Yet the Riverwalk casino was only one-seventh as profitable as the Chicago Rivers Casino, comparing the purchaser s $19 million annual EBITDA forward estimate (at purchase) versus Rivers Chicago s $132 million EBITDA reported elsewhere for the preceding twelve-month period. 10 The $7.5 million Riverwalk brand valuation multiplied by seven exceeds $52 million. Bluhm affiliates use of Rivers Casino brand missing from Fund VI property s financial statements By March 11, 2011, Bluhm affiliates were using the Rivers Casino brand for their casino then- March 11, 2011 construction document for Chicago Rivers Casino (excerpt) 4

5 under development outside Chicago, as shown by construction documents. 11 Yet financial statements finalized the same day by management at the Fund VI-owned Rivers Casino in Pittsburgh did not list any related party transactions in 2010 or subsequent events (covering the period through March 11) connected to the use of a trademark. 12 The March 11 balance sheets for Fund VI-owned Rivers Casino in Pittsburgh contained no trade name valuations at all. Intangible assets consisted solely of the casino s gaming licenses and its goodwill, which accounted for the excess of the price paid for the Fund VI property versus its carrying value at the time of its acquisition. But the Rivers Casino trademark was not acquired at purchase. Rather, the Rivers Casino trademark was created and first used by the Walton Street Fund VI property itself, so its value could not be derived using an actual market transaction. But the use of the casino s owned name at another, non-owned property would warrant valuation, whatever imperfect method used. 13 A significant gap exists after the first Chicago use of the Rivers Casino name. What agreements were in place as of March 11, 2011? March 11, 2011: Rivers Casino appears on Chicago casino construction documents. June 21, 2011: Rivers IP Holding, LLC formed. 14 Managed by Bluhm casino CEO from inception. 100% owned by the CEO and three Bluhm family trusts as of early July 1, 2011: Trademark License Agreement allowing Chicago casino to use Rivers Casino trademarks. Licensor is Bluhm affiliate Rivers IP Holdings LLC. 16 The same Bluhm executive sat on all sides of the related party transactions Greg Carlin co-founded the Bluhm family casino empire in the mid-1990s and has served in various key executive roles since. 17 Carlin has served as the manager of Rivers IP Holdings LLC (the entity that licensed the Rivers trade name) since it was formed through at least early During the same period, he was CEO of the other interested parties to the Rivers Casino intellectual property deal: the Chicago casino holding company (a Bluhm affiliate) and the Pittsburgh casino (a Fund VI majorityowned property) that registered and owns the trademark. Carlin was also CEO of the oversight management company for all Bluhm-affiliated casinos. 18 Carlin also served on the audit committee for the Fund VI casino property (as well as the audit committee for the Bluhm-affiliated Philadelphia casino). Carlin s audit committee role raised concern among Massachusetts gaming regulators, who in 2013 wrote: Gregory A. Carlin oversees the operations of those two casinos while also serving on the committee that acts to review his management activities. In our view this is a conflict of 5

6 interest and is exemplified by an issue that was discussed in [Philadelphia casino] HSP Gaming, LP s Audit Committee meetings. Massachusetts Gaming Commission Investigative Report (Mass Gaming and Entertainment, LLC), May 31, 2013, p.40. Carlin has also served as CEO for the upstate New York Bluhm casino affiliate using the Rivers Casino name. 19 Greg Carlin s roles: Position Company Company Description CEO and audit committee (through at least early 2013) CEO Holdings Acquisition Co. LP Midwest Gaming & Entertainment, LLC The Fund VI Rivers Casino (Pittsburgh) The Chicago Rivers Casino CEO Rush Street Gaming, LLC Bluhm casino "oversight" Managing Member Rivers IP Holding, LLC Licensor in Chicago Rivers licensing agreement CEO Capital Region Gaming, LLC New York Rivers Casino Conclusion Walton Street Real Estate Fund VI has a significant equity commitment in its Rivers Casino (at least $184 million). The property includes trademark assets that are intangible and hard to value, but very valuable nonetheless, and which are in use or expected to be used by Bluhm affiliates at other properties outside the Fund VI portfolio. The Rivers Casino brand could potentially be worth at least $6.5 million annually in licensing fees, assuming a 1% royalty rate. The carrying value may roughly be from $40 million to $52 million. The Acting Director for the SEC Office of Compliance Inspections and Examinations recently advised private equity real estate managers who have promised to provide their investors with rates at or below market rate review their benchmarking practices to ensure they can support their claims. 20 Can Walton Street Capital ensure its limited partners that its principals have received no less unfavorable terms with respect to royalty rates than would have applied in a transaction with gaming companies unaffiliated with Neil Bluhm or any Walton Street insider? 6

7 Endnotes 1 PA Gaming Control Board, Ownership Interests, Jan. 31, Belko, Mark. Majestic Star Becomes Rivers Casino. Post-Gazette (Pittsburgh). Nov. 20, US Patent & Trademark Registration Number US Patent & Trademark Registrations , Neil Bluhm, Testimony before the New York Gaming Facility Location Board (NYGFLB transcript), September 8, 2014, p Illinois Gaming Board Minutes of Regular Meeting Open Session, Aug.23-24, Retrieved May 28, Capital Region Gaming, LLC RFA Response, Exhibit VI.E. Massachusetts Gaming Commission Updated Investigative Report, (Mass Gaming and Entertainment, LLC), May 1, A 1% licensing royalty rate was the higher estimate by regional competitor MTR Gaming for its trademarks and branding (MTR used a range of 0.5 to 1.0%). See MTR Gaming Group, Inc. Form 10-K (US SEC), March 16, 2015, pp The 1.0% rate was a recent estimate by two other publicly-reporting operators of similar size (Greektown and Tropicana). None of the other public casino companies competing in the Pittsburgh or Chicago markets have recently published estimated royalty rates. See Greektown Holdings, LLC, Form 10-K (Feb. 14, 2014), p. 64; and Tropicana Entertainment Inc., Form 10-K, (Mar. 8, 2013), p. F-25. The other companies are Caesars, Boyd, Pinnacle, Isle of Capri, and Penn National. 7 Caesars Entertainment Corp., Form 10-K (March 16, 2015). Boyd Gaming Corp., Form 10-K (Feb. 27, 2015). Penn National Gaming, Inc. Form 10-K (Feb. 27, 2015). Pinnacle Entertainment, Inc., Form 10-K (March 2, 2015). Isle of Capri Casinos, Inc., Form 10-K (June 23, 2014). MTR Gaming Group, Inc. Form 10-K (3/16/2015). 8 Boyd Gaming Corp., Form 10-K (Feb. 27, 2015). p Churchill Downs Incorporated. Form 10-K (US SEC), Feb. 27, 2013, p Churchill Downs Inc., Churchill Downs Incorporated to acquire Riverwalk Casino and Hotel in Vicksburg, Miss., Press Release, Oct. 5, Andrew Zarnett and Sri Rajagopalan, Gaming, Lodging, and Leisure 2012 YE Spread Book, Deutsche Bank Markets Research, April 8, 2013, pp Construction drawings revised March 11, Holdings Gaming Borrower, LP. Consolidated Financial Statements as of and for the Years Ended December 31, 2010 and March 11, Notes 10 and Holdings Gaming Borrower, LP. Consolidated Financial Statements as of and for the Years Ended December 31, 2010 and March 11, p. 8. Belko, Mark. Majestic Star Becomes Rivers Casino. Post-Gazette (Pittsburgh). Nov. 20, Delaware Department of State records (Division of Corporations). 15 Greg Carlin, Multi Jurisdictional Personal History Disclosure Form (MA Gaming Comm.), Jan. 14, Schedule A to Trademark Security Agreement by Midwest Gaming & Entertainment, LLC in favor of Wilmington Trust, NA, July 10, Rush Street Gaming, LLC. 1 Rush Street. No date (early 2015). p Greg Carlin Multi Jurisdictional Personal History Disclosure (MGC). 19 Capital Region Gaming, LLC RFA Response, Exhibit VI.G p Marc Wyatt, Private Equity: A Look Back and a Glimpse Ahead (speech), May 13,

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