To every yin there’s a yang, every Cheech a Chong, every bet a bookmaker and every cash-strapped economy an incentive to legalise activities that contribute significant tax dollars.
Hence, there is a significant likelihood the United States will change its position and allow online gambling for its businesses and citizens. When this happens it will be a boon for many players in the gambling business. And it’s going to be big: US citizen participation is predicted to generate $12 billion in annual revenue!
There is Too Much at Stake
Goldman Sachs seems to have been a bit early in June of 2009 when the influential investment bank predicted the United States would legalise online gaming saying
“We believe it is logical to assume that the US market will eventually regulate – given the potential implications for US tax take, if nothing else,”
“Were the market to be legalized, we believe that the size of the revenue opportunity could increase materially,” it continued. “Based on an assumption of 30% penetration of offline poker players and $300 gross gaming revenue (GGR) per player, we estimate that a legal poker market could be worth $3bn.”
“Were GGR to increase to 45%, and GGR per player rise to $400, the size of the poker market alone could be worth $6bn. We also estimate that the casino market could expand to a similar scale, based on various offline penetration assumptions.”
But the timing and the details are still up in the air. Goldman suggested it could take a while for these changes to take place. A congressional report from November 2009 stated that regulated online gambling could generate $42 billion in revenues for Government over 10 years. Representative Barney Frank has been lobbying to get online gambling legalized and regulated for quite some time, having introduced the Reasonable Prudence in Regulation Act, and the Internet Gambling Regulation, Consumer Protection, and Enforcement Act in 2009, which would overturn the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006. The UIGEA:
“prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.”
Industry Activity Suggest Changes are Coming
Despite the UIGEA going into full effect in June of 2010 evidence suggests it won’t be around for long. First reason being it is utterly ineffective.
According to an article from PokerNews.com on June 1, 2010:
UIGEA regulations are in full effect, yet the Internet poker sites don’t appear to be a dry, post-apocalyptic wasteland. As this sentence is typed, 41,356 are playing cash games on PokerStars and another 17,532 are on Full Tilt Poker, according to the online poker traffic site PokerScout.com.
I can tell you at 4:00 pm EST on January 22, 2011, on one popular internet poker site there are approximately 300,000 players on approximately 46,000 tables. This information was uncovered while doing research for this article. Wink Wink
The other indication that a change in U.S. policy is expected is reflected in a series of actions taken by leading online gaming participants. During the last 6 months of 2010:
1) Sportingbet PLC, a British online gambling company, agreed to pay $33 million to settle a United States investigation over alleged illegal Internet gambling. Part of the settlement includes not to criminally prosecute Sportingbet for crimes, apart from tax violations, related to Sportingbet’s Internet gambling business with US customers from 1998 to 2006, according to the US Justice Department. This would clear the company to re-enter the U.S. market should a change in policy arrive and makes the company more attractive as an acquisition candidate.
2) In July 2010 the House Financial Services Committee Votes to Approve Barney Frank’s Internet Gambling Legislation. An article at PokerNews.com concludes:
The passage doesn’t mean that legalized online poker is imminent, but it shows how far the fight has come. Just four years ago, Congress voted 6-1 against Internet gambling in supporting the Unlawful Internet Gambling Enforcement Act. Today the committee voted nearly 2-1 in favour of the cause.
3) In July 2010, online gambling behemoths Bwin and PartyGaming Plc announced a $3+ billion merger creating the world’s largest listed online gaming company. In the announcement the companies stated, “This merger of equals makes great strategic, operational and financial sense. We will be in pole position to capitalise on the wealth of opportunities that will flow from the continued evolution and expansion of the global online gaming industry*.” (author highlight for emphasis)
4) On December 20th 2010 Bloomberg reported “Ladbrokes Plc, the U.K. bookmaker founded in 1886, said it was in “very preliminary” talks with online gaming company 888 Holdings Plc, after the Sunday Telegraph reported it had made a 240-million pound ($373 million) bid.” The Bloomberg release states further, “Ladbrokes Chief Executive Officer Richard Glynn, who took over in April, wants to increase Internet winnings, which have been growing more slowly than those of rivals. The talks also reflect pressure faced by gaming companies as competition intensifies with the opening of markets in Europe and the U.S.*” (author highlight for emphasis)
These industry actions certainly appear like preparations for expected market opportunities arising from the opening of the U.S. online market. I am not the only one that thinks so. Check out this info from a recent article titled “Online gaming companies in for huge 2011“, by Greg Tingle:
In a note to investors recently, the Morgan Stanley leisure analyst Vaughan Lewis said: “The overall political tide is moving firmly in favour of regulation, rather than prohibition.
“With its expertise… market-leading technology, strong marketing capability and good brands, we think the combined entity of PartyGaming and Bwin would be extremely well positioned to benefit from any market opening in the US. We include nothing in our forecasts for the US, so any new market here is pure upside.”
And in a recent Barclays Capital research note, the investment bank said: “In the event of Federal regulation, we believe PartyGaming would be the likely key beneficiary.
The PartyGaming/Bwin merger has got the other big companies in the sector scurrying around to do similar deals. They don’t want to be left behind in what will become a gold rush should the US legalise online gaming.
The Most Obvious Beneficiaries
While everyone is looking at the large foreign online players to be the big winners in this emerging scenario I don’t see much mention of the major U.S. casino operators as beneficiaries. The online players are certainly well positioned and that is where I am making my investment but the major U.S. casinos like Caesars Palace, MGM Grand (MGM), Wynn (WYNN) and Las Vegas Sands (LVS) are sure to participate in the winnings as well. Given the caché of these brands I expect these companies to do quite well.
There are tremendous synergies that these companies will derive from offering customers both physical and online services. The most obvious being the ability to offer loyalty points redeemable across platforms, including complimentary rooms and meals and other favourable discounts and marketing opportunities unavailable to only online or lesser known gambling operators. I would also argue that U.S. gamblers will have a higher level of comfort having funds on deposit with a major U.S. publicly listed company than a lesser known foreign entity.
Gary Loveman, chief executive officer at Harrah’s Entertainment Inc. believes legalized online gambling would generate billions of dollars in revenue for U.S. operators. “We would enjoy a substantial portion of that,” Loveman said, noting that Harrah’s owns the popular World Series of Poker tournament and brand. He said the company’s online unit, Harrah’s Interactive Entertainment, operates in the United Kingdom and will next launch in Italy and France.
The Internet Could be Bigger than Macau
The numbers don’t lie. WYNN and LVS are both trading near 52 week highs on the prospects of involvement in Macau. Macau had 25 million visitors in 2010 while according to comScore 32 million U.S. residents visited online gambling sites in the month of October 2010 alone. That was up 114% from the previous month and in an environment where it is still illegal and very difficult to deposit funds at gambling sites. When the U.S. online gambling market is legalized it will have the potential to dwarf the opportunity in Macau without the overhead required to build massive multi-billion dollar structures to lure visitors. You just need a little extra server space in Kahnawake.
These developments certainly merit attention for investors as the implications are broad and potentially lucrative for the participants. I am looking at all the players for consideration. It seems to me that name brand recognition will be a useful tool for attracting players. From that perspective I am most interested in Caesar’s Palace, especially because it is part of the Harrah’s group of properties that is already lining up a significant online strategy hiring the former PartyGaming CEO Mitch Garber to oversee these initiatives. Unfortunately Caesars pulled their plans for an IPO.I suspect all the activity to legalise online gambling in the U.S. will soon revitalize those plans. We will have to wait and see the terms of any offering to assess the value of the common stock.
I will defer to the gaming analysts to decipher which other Casino operators would be the best investments to profit from the upcoming U.S. online gambling boom. I am a technology investor and I am going try to participate by buying shares in previously mentioned 888 Holdings listed on the London Stock Exchange (888.L).
There are several things that led me to conclude that 888 is a great investment for my portfolio. 1) The company already confirmed preliminary discussions with Ladbrokes to be potentially acquired for £240 million or about 30% above today’s price. 2) 888’s subsidiary Dragonfish is Harrah’s partner for its online poker efforts and Harrah’s is serious about online gambling and is the largest Casino operator by revenue in the world. Not a bad partner to hitch your wagon to. 3) The stock is cheap, trading for less 1x revenues while its peers like PartyGaming (PRTY.L) and Betfair (BET.L) both trade closer to 2-3x revenues.
The one overhang for the stock is the risk of a potential financial penalty assessed by the U.S. government for operating U.S. gambling activities between 1998 and 2006. Similarly sized SportingBet (SBT.L) reached a $33 million settlement with the U.S. government to avoid further prosecution on this issue. I believe a penalty of that size is already more than priced into 888’s stock and I doubt Harrah’s would have chosen the company as a partner if this was perceived as a major obstacle to eventually entering the U.S. market with its online poker products. Whichever way you choose exposure to this exciting market development there is sure to be a great deal of news and opportunity surrounding this ever popular sector of the economy.
Read more about this and other new technology investments at www.bulwatechreport.com.
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