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Liquidity Split

By Jeff Hwang
April 20, 2004

There are a few reasons why a company might choose to split its stock. Following a rise in stock price, companies like recent rockets Shuffle Master (Nasdaq: SHFL) and stunner Taser International (Nasdaq: TASR) might split to make their stocks more accessible to smaller investors. Sometimes the goal is just liquidity.

Yesterday morning, Lakes Entertainment (Nasdaq: LACO), which has yet to show a profit from existing operations, announced a 2-for-1 stock split. Effective May 3, this will be its first split since the company was spun off prior to Grand Casinos' merger with Caesars Entertainment (NYSE: CZR) over five years ago. According to CEO Lyle Berman, the split "is designed to increase our trading liquidity."

This makes sense for an increasingly popular stock with a mere 8.8 million-share float.

Lakes Entertainment, as we have noted, has attracted attention from investors with the rising popularity of poker and the World Poker Tour, of which it owns 80%. The unit is expected to show a profit at some point this year and is set for an IPO later this year. But it's the core business of developing and managing American Indian-owned casinos, which currently produces no revenue, that accounts for the bulk of Lakes Entertainment's growth potential.

Because of that potential -- and because the stock had traded at a fraction of book value -- Lakes Entertainment more than quintupled over the past year to a current price near $26.50 per share. However, that implied value is based on four potentially lucrative casino projects that may or may not come to fruition. Such a wide range of outcomes makes the stock volatile, as does the modest float, some of which has been held out of play by investors like myself.

To its credit, unlike, say, a Rocky Mountain Chocolate Factory (Nasdaq: RMCF), Lakes Entertainment makes no attempt to feign that the split will create shareholder value. Unlike the impending World Poker Tour IPO -- which is indeed intended to unlock value -- it's meant to improve liquidity and tame the stock's volatility.

That's OK in my book.

Give us your take on the Lakes Entertainment discussion board.

Fool contributor Jeff Hwang owns shares of Lakes Entertainment.

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