Mergers and Acquisitions (M&A) in Native American Finance

Emerging trends in Native American M&A

We have seen several trends emerging in Native American M&A. Acquiring businesses and moving them on reservation has contributed to job creation and proven to be a strong revenue generator. Tribes have established family offices or private equity-like funds to facilitate the acquisition of off-reservation businesses as well. Acquisition targets range from 8(a) federal contractors to energy, manufacturing, healthcare, and technology. Tribes have long demonstrated expertise in managing gaming properties, making the trend of acquiring commercial gaming properties to diversify geographic revenue streams no surprise.

Creating an effective M&A strategy

To create an effective strategy, it is important to have well-defined investment criteria, an appropriate legal structure, and a clear understanding of the role of stakeholders in the decision-making process. An experienced advisory team is crucial to ensuring a smooth experience.

Pre-transaction planning is important
Pre-transaction planning and strategic alignment allow acquisitions to be executed efficiently. Considerations before contemplating the first acquisition include legal structure, investment criteria, and the Tribe’s internal review and approval processes. 

Engage advisors who can determine the best legal structure
Whether electing a Section 17 corporation, tribally chartered corporation, or state-chartered LLC, it is a good practice to create a holding company and an acquisition company to insulate the Tribe and its other entities from M&A risk. The Bureau of Indian Affairs provides an overview of several different legal structures available to Tribes, any of which can be used for acquisition entities.¹ Each entity type has its own advantages and disadvantages, and we encourage engaging a financial advisor and legal counsel to determine the best legal structure for acquisitions. Key suggests maintaining legal separation between the acquisition targets, Tribal government, and existing gaming and economic development entities.

Define the investment criteria
After determining the legal structure, having clearly defined investment criteria will help focus your acquisition strategy. Criteria include the amount of equity the Tribe is willing to contribute to acquire a minority, majority, or full ownership stake in the target. Determining any industries in which the Tribe is not willing to invest is equally important. Other criteria include the investment horizon, minimum investment returns, and impact on the broader Tribal economy.

Tribal Council preauthorization speeds execution
Several of our clients have found that when a Tribal Council provides levels of preauthorization, the deal team can execute more quickly, rather than awaiting approval on each decision. For one Tribe, a preset amount is approved in its budgeting process and additional equity contributions can be approved in ad-hoc meetings.

Due diligence protects the Tribe’s investment
Financial and operational due diligence are imperative for protecting the Tribe’s investment. Having a third party conduct a quality-of-earnings report and reviewing the audited financial statements of the target company are just the beginning of the due diligence process. Management interviews and site tours provide important insight into the target’s day-to-day operations and help determine the cultural fit. Diligence on a company’s corporate structure and governance, contracts, ongoing or potential litigation, and intellectual property gives visibility into any legal issues that may arise after closing. Understanding market position, sales and market plans, contract terms, and existing customer relationships provides comfort about the future revenue generation potential of a business.

Consider access to capital
Access to capital is a significant consideration for acquisition activity. Tribes have several options for funding an acquisition. Existing credit facilities from the Tribe’s gaming or other economic development entities may be used for acquisition financing. In many instances, however, we propose using a separate credit facility to limit the potential negative impact acquisition targets may have on existing economic development.

Financing options for acquisitions
The public bond, Term Loan B, or leveraged loan markets are available to finance acquisitions. Public bonds provide long-term fixed-rate debt for highly leveraged transactions. Term Loan B credit facilities typically have low amortization requirements and variable rates for repayment flexibility. Pro-rata bank market credit facilities provide the greatest flexibility but are the most restrictive on leverage. Under most of these structures, there is an expectation of equity contributions from the Tribe. For smaller acquisitions, the Tribe may determine that self-funding the acquisition will result in the highest returns.

Choose the right financial partner
Choosing an experienced financial partner to help raise capital and provide financial advice is an important consideration. Whatever your goals or plans might involve, Key offers assistance and support through our financial tools and firsthand experience.