Sector Gambling

8/3/2019 Sector Gambling

http://slidepdf.com/reader/full/sector-gambling 1/7

U.S. ON LINE GAMBLING MARKET

DEREGULATION

Case study of the likelihood and potential impact of the

pending proposal for a deregulation of the US online gamblingand money wagering market

Syz Bank Research Team - November 2009



INTRODUCTION

Laws and regulations revolving around gambling on and off line in the US have been forged quickly and withouttransparency, in some instances not even logic. A good example is provided by the fact that Unlawful InternetGambling Enforcement Act (UIGEA) was attached to the Port Security Act (an anti-terrorism law) as a last minutemanoeuvre by some republican Senators to prevent Americans from gambling. The key message was “ if you don’t vote against online gambling, you vote pro-terrorism”.The Department Of Justice (DOJ) wanted to discourage betters, online gambling providers and financialinstitutions offering funds transaction services. At present, providing online betting/money wagering and relatedfunds transactions are illegal, whereas placing bets are not.The online gambling matter is not a priority of the Congress now, especially at a time when the economicrecession, financial crisis, healthcare reform and other important matters require the utmost attention. There arenevertheless a number of elements that support evidence of momentum building in favour of a deregulation of theonline gambling market in the US.Barney Frank, a powerful democrat head of financial services within federal congress, finally proposed a draftaimed at allowing US citizens to be able to bet online (with the exception of sports events), while still beingsubject to state law. Note that he is a very liberal congressman that strongly supports online gambling. This is atwo-bladed sword as it tells us on one end that he might use his power to push the draft through, but on the otherthat his role will keep him extremely busy in short/medium-term with the financial crisis, healthcare reform andother matters of higher importance to the congress.

1. HISTORICAL REGULATION OVERVIEW

1.1 WIRE ACT

1961: The Wire Act was created as part of a series of antiracketeering measures conceived by the Congress.The main purpose of the Act was to assist American states enforcing their respective laws on gambling andbookmaking and to suppress organised gambling activities.

“Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility

for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing

of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which

entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the

placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.”

This has been the sole existing regulation embracing the gambling industry prior to 2006.

1.2 UIGEA

2006: The Unlawful Internet Gambling Enforcement Act was signed into law as an answer to the need of new mechanisms for enforcing gambling laws on the Internet . The UIGEA objective was to stop online gambling byenforcing a block of all money wires coming from and going to accounts created for gambling purposes, with theexception of USA based websites for lotteries and horse racing. The law also made it illegal for gambling sites toaccept bets from US citizens. As a result, the legislation caused a number of online gambling sites to stopaccepting bets from American players. Also, if a company was already breaking a State or Federal law, such aviolation would have labelled a company as unauthorized to continue providing online gambling services.The sites/companies that took immediate steps as a consequence of the UIGEA were: Party Poker/Party

Gaming, Paradise Poker/Sporting Bet, Pacific Poker/888 and Pokerroom.com/BWIN. As mentioned above,following the signing of the bill into law, the DOJ prohibited financial services companies from providing fundstransfer in case the money was to be wired to a gambling account; PayPal was fined and forced to abandon thatbusiness. About 56% of the most popular fund transfer exited the US market around three months after the lawwas in force.

1.3 INTERNET GAMBLING REGULATION CONSUMER

PROTECTION & ENFORCEMENT ACT

2009: Frank Barney proposes the Internet Gambling Regulation Consumer Protection & Enforcement Act.

The Internet Gambling Regulation Consumer Protection & Enforcement Act would establish a federal

regulatory and enforcement framework under which Internet gambling operators could obtain licensesauthorizing them to accept bets and wagers from individuals in the U.S., on the condition that they […] enforce

prohibitions or restrictions on types of gambling prohibited by states, and Indian Tribes.



3

1.4 LICENSING

The bill would provide the Department of the Treasury with the exclusive authority to establish regulations andlicense Internet gambling operators. License applicants would be:

• Subject to review of their financial condition and corporate structure, business experience, suitabilityand criminal background checks, and agree to be subject to U.S. jurisdiction

• Prohibited from accepting any type of bet or wager that is initiated or terminated in a state or tribal

land that prohibits that type of Internet gambling, or any sports gambling or wager prohibited underthe Professional and Amateur Sports Protection Act.

2. COMPANIES’ LEGAL STATUS OVERVIEW

According to this new draft, all the companies that broke either state or federal law would no longer be allowed todo business with US citizens. This is crucial in trying to understand whether new or old European players willmanage to (re)enter the US online gambling market. Here is a quick snapshot of the legal past attrition betweensome European players and US legislation.

-PartyGaming represented the biggest case of US law infringement that resulted in the companyadmitting the violation while not pleading guilty. The company accepted a non-prosecution settlementthat required the company to pay the US government an annual €105 mln fine until 2012. Consequently,

we gave the name a very low possibility to re-enter the market.-888 Holding also admitted to have violated some state/federal laws, although to a lesser extent thanPartyGaming and decided to leave the US market immediately as the UIGEA was signed into law. Samerational as the above: very low probability to enter the market.

-BWIN acquired Ongame, the CEOs of which were arrested by the French government. These are thekind of things that would definitely not help in gaining US government approval.

-Playtech is considered to be fairly clean .

For these reasons, we have assigned PRTY and 888 very low and BWIN a low probability to be impacted by thederegulation.

2.1 STILL ACTIVE ONLINE POKER PLAYERS

The first question that might pop into one’s head is: “How is it that a number of European companies left the US because of the UIGEA while other enterprises are still allowing US citizens to gamble online? ” The answer isfairly simple. Companies such as Rational Enterprises (PokerStars) or TiltWare (Full Tilt Poker) simply do notcare about breaking US law. In order to be prosecuted by the DOJ, a party has to be recognised as being guilty ofcommitting a crime and has to be within the United States’ borders in order to be judged in court. Anotherimportant aspect that differentiates the position of companies such as PRTY and Rational Enterprises is the factthat the former is a publicly traded company and, as such, it can not afford to take that risk as potentialconsequences could be devastating.The following table shows the world’s biggest online poker providers, along with data about players’ traffic, USexposure, company ownerships and more.

Service Provider Public Ticker ExchangePeak

PlayersAveragePlayers HQ Server US

PokerStars Rational Enterprises No NA NA 43'183 26'600 Isle of Man Yes

FullTilt Poker TiltWare LLC No NA NA 23'928 15'000 Ireland Canada Yes

Playtech Playtech Yes PTEC LN London 9'887 5'300 Israel/Cyprus Unknown No

PartyPoker PartyGaming Yes PRTY LN London 10'303 5'300 Gibraltar Alderney No

Ongame bwin Entertainment Yes BWIN AV Vienna 5'832 2'850 Austria Canada No

Everest Poker Ultra Internet Media Yes GIGM US Nasdaq 4'930 2'300 Canada No

Cereus Blast Off Limited No NA NA 3'790 2'200 Malta Canada Yes

IPN Boss Media Yes LOT IM Milan 4'050 2'100 Sweden Malta No

CakePoker Cake Gaming No NA NA 2'763 1'880 Dutch Antilles Yes

EntractionNetwork Entraction Holding Yes ENT B SS Stockholm 3'046 1'500 Sweden Malta No

PacificPoker 888 Holdings PLC Yes 888 London 2'148 1'220 Gibraltar Gibraltar No

Bodog Bodog Group No NA NA 1'682 910 Antigua Canada Yes

In addition, let us not forget that the US government and DOJ will eventually enforce the shutting down of theworld’s two biggest online poker websites operators PokerStars and Full Tilt Poker, which are still offering theirservices to US citizens; bear in mind that the UIGEA has been legislated, but is not being enforced. This wouldanswer another important issue, which is how these companies are still able to accept funds from individuals and



4

why financial institutions are allowing it without verifying the nature of the accounts. A simples as well as shockingreason is that the US payment clearing system is quite an archaic one. It works on a pooled funds system basiswhich makes it extremely difficult and costly to track every transaction and verify every account. The estimatedexpenses to do so would amount to a multi-billion dollar investment! On the other hand, we have alreadywitnessed the US government seizing a number of accounts (illegally) in Kentucky, in order to shut down agambling service; the money was later returned to the account owners.

3. OUR SCENARIO

The most likely scenario in our view is one in which B2C licenses would be given to local land-based casinooperator such as Mirage MGM, Wynn Resorts, Las Vegas Sands (LVS) and Harrah (private) that would enter thebusiness by leveraging the strength of their brand. This would leave European companies with only B2Bopportunities. Nonetheless, taking into account the legal stain of PRTY LN, 888 LN and BWIN AV, we would notbe sure whether these companies would be allowed to enter the US market at all.

3.1 HOW THIS WOULD HAPPEN

Nowadays, MGM and LVS are struggling to survive due to the severely burdened balance sheet they have todeal with (D/E of about 250% and negative FCF). While this hints at a low probability that these companies wouldbe able to start a new business, there are two elements that strongly support the thesis of MGM and LVS goingdown the online B2C business: their extremely strong brand and their political power as lobbies. The only pureB2B player is Playtech. The other European peers are mostly B2C oriented. Nonetheless, it is important toremember that Party Gaming, BWIN and 888 rely on proprietary software for the poker business, implying theycould be approached by land-based casino operators to form a joint venture to exploit their on-line pokerexpertise and software. The same rationale applies to WYNN, with the exception that the company’s financialstrength is more solid and they might be able to acquire online gambling assets directly. We deem MGM thecompany with the strongest brand and the biggest potential winner amongst casino operators, while WYNNboasts the strongest financial flexibility, hence the same weight. We are aware that LVS has most of its operationin Macau and its US business only contributes 30% of total revenues. However, this might represent a motivationto increase exposure in the US gambling market via entering the growing and more profitable online moneywagering activity. For these reason, we added LVS to our list while still attributing a regulation impactprobability/factor lower than its two peers.

Another lead, although less likely, is the LBO/Acquisition one. The financial solidity and cash flow generation ofParty Gaming and Playtech is very strong. Moreover, both companies have no debt sitting on their balance sheet.

MGM, WYNN or LVS might team up with private equity boutiques to pursue the acquisition of these businesseswithout undergoing any additional leverage, as the financing for the transaction would be transferred on thetarget’s balance sheet. In this case, PTY LN or PTEC LN stocks would benefit of course from the premiumapplied, while MGM, WYNN or LVS stocks might rise thanks to the strengthening of their business. Still, we notethat MGM and LVS have never showed interest in vertical integration in the past. Conversely, IGT is a slotmachine manufacturer and slot machines software providers might go for an horizontal integration option whichwould make great business sense in out view. While this scenario would still benefit Playtech most obviously, wedo not consider it very likely. Hence, IGT has not been included in our final recommended list.

3.2 EUROPEAN NAMES

While we do not see it as a very likely scenario, should European players enter the US online gambling businesswe think the impact on such companies would be significant. Our assumptions lie on the size of the US marketand the possibility that European players would have to leverage their online proprietary poker software andonline gambling know-how. Regardless, we see PTEC LN as a clear winner.

Another European stock that is likely to benefit from a deregulation is Lottomatica. The company controls asizeable share of the US lottery market through the joint venture with GTECH. Since the Barney Frank’s draftconcerns all forms of online gambling but sports, we believe that the lottery business might be impacted as well.Another point concerns Boss Media (unlisted, Sweden). The company, which is now owned by Lottomatica, wasalready active in the US in the past. We think that Lottomatica’s presence in the US (thus acceptance by lobbyistgroups) and familiarity with its legislation would facilitate an attempt to conquer a share of the new Americanmarket. We note that SportingBet sold all of its US assets following the approval of UIGEA, therefore we decidednot to include it in the final list.When UIGEA was unveiled in 2006, all European gambling stocks were hit. Following is a chart displaying thereaction to the event and the performance to date.



5

Eu ropean Gambling Stocks 5/11/09

2006 2007 2008 2009

0

50

100

150

200

250

888 HOLDINGS

PARTYGAMING

PLAYTECH

BWIN

LOTTOMATICA

SPORTINGBETSource: Thomson Datastream

All four stocks dropped sharply on October 2nd

2006, although to a significantly different extent. The 1st

daylosses / post event trough were:

PartyGaming -58% / -75%

Playtech - 41% / -43%

888 Holdings -26% / -36%

BWIN -35% / -35% (same day)

Sporting Bet -50% / -84%

Lottomatica -2% / -4% (no US exposure at the time)

We can extrapolate that PartyGaming was the company that was relying on the US the most at the time. We notethat this ranking generally reflects that of the online poker traffic of these companies.If we look at land-based Casino operators, the chart tells a different story.

Land-based Casino Op erato r 5/11/09

2006 2007 2008 2009

0

50

100

150

200

250

300

MGM MIRAGE

LAS VEGAS SANDS

PENN NAT.GAMING

WYNN RESORTS

Source: Thomson Datastream

The stocks’ reaction was very limited in the short term and in the mid term the performance maintained the strongupward trend it had been following since beginning 2005.

During the 2005-2007 rally, MGM is the stock that experienced the best performance (+182.7%) closely followedby WYNN (+180.2%), which is also the one that reacted the most on the news in the short term.



6

We can thus derive that the upside for these land-based Casino operators on a stand alone basis is more limited,as the on-line gambling experience is not to be considered a material substitute of the land-based one. Still,additional upside might be provided to such names in case the scenarios outlined above were to materialize.

3.3 TIMEFRAME

If the bill were to be approved by both House and Senate, by the way the US legal system works, this might takeplace towards the end of next year. Should it not be the case, the next term for a law proposal will be January2011, with a consequent potential final transformation into law towards the end of 2012. In general, odd years

tend to be busier because of elections, but this is not a strict rule.

CONCLUSION

While it is very challenging to come up with a probability, if we were to quantify it we would say that there is a40%-50% chance that the bill will be passed by the House and Senate to the President, who should then sign thelaw (given both the democratic support and his personal stance as a gambler). Here is a synoptic tablesummarizing the most interesting players and their suggested weighting if a basket were to be created.

Probabilityof Impact

PotentialImpact

SuggestedWeighting

Theme

Playtech High High 25.0% B2BLottomatica High Low 15.0% B2B

MGM Mirage High Medium 20.0% Casino

WYNN High Low 15.0% Casino

Las Vegas Sand Medium Medium 10.0% Casino

BWIN Low Medium 5.0% Europe

888 Very Low High 5.0% Europe

PartyGaming Very Low High 5.0% Europe

POST SCRIPTUM

While researching the matter, we came across various different sources diverging on a number of subjects. Also,the legislation in question is not clear and has a number of loopholes that are being exploited by somecompanies. Last but not least, the lack of objective and reliable factors revolving around US politics andlegislation makes it difficult to predict with precision the likelihood, the timeframe and impact of a deregulation ofthe US online gambling market.

Fabrizio De NotarisRoberto Magnatantini



7

APPENDIX I

List of the most popular funds transfer services for online poker and casino that closed down following theapproval of UIGEA:

Service Active

Date

Stopped Games

Add-funds No Apr 2, 07 --

AllAccessvisa.com Yes Feb 4, 09 Both

American Express Yes Both

Affiliatespeedpa No Aug 27, 09 --

ATMonline No Jan 23, 07 --

Cash Transfer Exp. Yes Poker

Central Coin No Jan 18, 07 --

Citadel Commerce No Jan 17, 07 --

Credit Cards Yes Poker

Anonymous No Feb 1, 09

Diners Yes Casino

eChecks Yes Poker

EcoCard No Jul 30, 07

Epassporte No Apr 11, 08

eWalletXpress Yes PokerFashchecks Yes

Firepay No Oct 2, 06

Fonelinx Yes Poker

Gatorpay Yes Poker

ImmediateDeposit No Mar 19, 07

Instadebit No Jan 18, 07

Instant Checks Yes Poker

JCB Yes Casino

Makeadeposit No Mar 13, 07

Merchant Banks - (RBS / Barclays) No

Moneybookers No Oct 25, 06

Moneygram Yes Poker

MyCitadel No Jan 17, 07MyWebATM No May 19, 07

Neteller No Jan 18, 07

Nexum No Jan 18, 07

Nucharge No

Payspark (Ezipay) No Jan 26, 07

Paypal No NA

Paytru / Prepaid Visa No Dec 7, 07

Pic-Club Yes Poker

Pindebit Yes Poker

Primapin Yes Both

Quicktender (Usemywallet) Yes

Togglecard No Apr 18, 09

Ultraprepaid Yes Poker

UsemyBank No NA

Visa Gift Cards No Jul 28, 07

Visa Yes

Virtualpin Yes Poker

Western Union No

Wire/ Cash Transfer Yes Both

Youteller April No

Documents

Sector Gambling