Online
gaming companies in for huge 2011, by Greg Tingle
- 23rd November 2010
Could
online gaming firms be in the mix of the top stockmarket
investments to make in 2011?
The
listing of Betfair (BET) at the conclusion of October
on a fancy multiple and the $3.3 billion megamerger
between PartyGaming and Bwin (PRTY), due to complete
in the first quarter of 2011, appears to have added
spark to the industry of late.
Then
there is the prospect, albeit slight, of the liberalisation
of the US igaming market which has put the industry
firmly on investors' watch list, including ours, for
next year.
It
is understandable, as even a snapshot look at the
stockmarket gains of the world’s biggest online
gaming companies between circa 2004-2006 reveals just
how quickly fortunes were made and lost.
The
iGaming Global Top 30 Index, an index of the stockmarket
performance of the biggest 30 online gaming companies,
surged 40% between July 2004 and August 2005. This
was followed by 12 months of extreme volatility before
sinking thanks to a controversial piece of legislation
in the US.
Since
2006, online gaming’s real story has been dominated
by America’s Unlawful Internet Gambling Enforcement
Act (UIGEA).
The
multibillion-pound global industry virtually collapsed
in a heap after its biggest market - the US - was
closed down overnight when Congress introduced a surprise
clause to legislation in September 2006, in effect
making internet betting illegal. Not only was that
a blow for investors - it was a hugely expensive one.
British-based
companies were among the biggest casualties.
As
soon as the London Stock Exchange opened the following
Monday morning, shares in PartyGaming - then a FTSE
100 member - dived by 58%, while rivals 888 Holdings
(888) and Sportingbet saw their shares slide by 26%
and 64% respectively, wiping an estimated £4
billion off the sector's value.
The
companies were forced to focus on opportunities in
other parts of the world, but the businesses have
never fully recovered from the impact of losing their
most lucrative market. Last year, online gambling
was worth an estimated $5.4 billion (£3.5 billion)
overall, a figure that could rise to $12-$16 billion
if the market was opened up, analysts say.
Despite
the recent loss of a sympathetic Democrat majority
in Congress last month, there is renewed hope of floated
gambling companies being dealt a good hand on both
sides of the Pond.
The
new Republican chairman of the House financial services
committee is likely to be an old-style Alabaman named
Spencer Bachus.
Yet
he is likely to listen to the prospects of a reinvigorated
gambling sector for the ailing US economy. The Federal
government’s non-partisan accountants, the Joint
Committee on Taxation, have estimated online gambling
could generate between $10 billion and $42 billion
in new revenue by 2019, depending on the number of
states that opt into a federal regulatory programme.
Yet
he is likely to listen to the prospects of a reinvigorated
gambling sector for the ailing US economy.
The
Federal government’s non-partisan accountants,
the Joint Committee on Taxation, have estimated online
gambling could generate between $10 billion and $42
billion in new revenue by 2019, depending on the number
of states that opt into a Federal regulatory programme.
And
you can see why if you glance at the forecast numbers.
With
the US nationwide unemployment rate at 10%, 48 of
50 states facing budget shortfalls and a Federal deficit
approaching $1.3 trillion, the economic backdrop against
which to promote regulation and taxation of internet
gambling has arguably never been more favourable.
Yet
those companies poised to get a real boost should
America legalise online gambling, such as the impressive
PartyGaming/Bwin combine, are getting excited about
the future.
"We
are seeing things from a legislative perspective that
are quite exciting for us," says Jim Ryan, chief
executive of PartyGaming, whose comments undoubtedly
reflect the mood of a growing contingent of gambling
operators on both sides of the Atlantic.
There
has been speculation that PartyGaming and Bwin have
decided to merge at this time precisely because they
will be better placed than any other operator to seize
a huge market share should the US decide to legalise
online gambling. You only have to look at the market
share that Party was able to capture by becoming one
of the first operators into the online poker market
back in 2001.
Analysts
agree the enlarged company is in a strong position
to exploit the opening up of the US market.
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.
"Under
this hypothetical scenario, we estimate the potential
[underlying profits] uplift could be 94% for PartyGaming
and 58% for Bwin and 888. On a state-by-state hypothetical
scenario, we estimate the uplift for the group would
be considerably lower, but still meaningful."
Meanwhile,
at the end of October analysts at Numis published
a note saying there is 50% upside potential at Party
when the merger with Bwin completes in March 2011.
With the shares trading at around 230p at the beginning
of November Numis have put a price target of 400p
on the stock.
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.
888
and Sportingbet are also possible future takeover
targets as the industry consolidates, but only once
their legal liabilities in the US market are cleared.
Serious negotiations in the PartyGaming/Bwin merger
were only concluded once Party had secured a $105
million settlement with US authorities.
Analysts
say a resolution would clear the way for 888 and Sportingbet
to re-enter the lucrative US market should moves to
overturn the 2006 legislation succeed.
Sportingbet
has already acted telling shareholders at its latest
results meeting that it had made a £22.8 million
settlement with the US Department of Justice over
an investigation into illegal internet gambling. The
agreement means the firm will avoid being prosecuted
in the US for accepting online bets made by Americans
between 1998 and 2006.
Sportingbet
would hold the most appeal to potential bidders, analysts
reckon, pointing to its very strong market positioning
in Australia and commenting that Ladbrokes (LAD) and
William Hill (WMH) could be interested in a takeover.
Liberum
Capital analyst Richard Taylor recently highlighted
the strength of Sportingbet’s sports betting
business, which he said had one of the best gross
margins in the sector at around 10%. In addition,
he said Sportingbet’s management was open to
a bid, having previously stated up to 55% of their
cost base could be removed.
Another
former giant of the sector, now somewhat depleted
thanks to the UIGEA, is 888.
Analysts
say 888's attraction would be the potential for cost
savings in a tie-up with a rival online gaming operator,
and that Party/Bwin might be a possible buyer. What
would make it attractive is that both Party and Bwin
use 888 as a supplier.
However,
the Shaked family who founded the company, and who
control over 50% of the shares, would be looking for
a price significantly above the 40p at which the company
currently trades.
There
have been whispers among London traders in the last
few weeks that a £262 million, or 76p a share,
cash bid from a much bigger industry player, possibly
US entertainment giant Harrah's, which already has
close business links with 888 could be on the cards.
Certainly
888 chief executive Gigi Levy has said recently that
he looks at consolidation as one of the possible routes
to realising shareholder value.
Another
giant of the industry looking to become bigger still
is the mighty Betfair. Having listed on the LSE at
the end of October at 1,300p, the shares soon touched
1,600p-plus, as tracker funds piled in confident it
will canter into the FTSE 250 index at the December
review with a market value above £1.6 billion.
If
things are hotting up at the Federal level for the
online gaming industry there are also some exciting
developments at state level.
So
far in 2010, four states have considered whether or
not to legalise some combination of online poker,
casino gaming and sports betting: Iowa, Florida, California
and New Jersey.
The
state making most headway is New Jersey, where internet
gambling has been under consideration by lawmakers
since 2001. It is finally receiving serious consideration
in the state Senate where two bills, which would legalise
internet sports betting and casino gaming respectively,
have already passed the committee stage this year.
From
California to New Jersey to Florida, more state and
federal congressmen are taking the reality of a legal
online gambling regime a lot more seriously.
Whoever
wins the race, state or federal, one thing is clear:
more and more stakeholders in the US are finally coming
around to understand the risks and implication of
a ‘do nothing’ strategy. This is an opportunity
cost and gambling companies are getting their bets
on regardless.
But
ongoing political deadlock clearly poses a real threat
to regulatory efforts at all levels of American government.
But even as gambling industry stakeholders duke it
out in the halls of legislatures around the country,
as well as on Capitol Hill in Washington, the very
fact that the conflict between them is intensifying
signals that interest and investment in pushing for
online gaming regulation is rising.
With
billions of dollars out there to harvest and market
share to win, the entire online gaming sector looks
ripe for an upturn in coming months. Investing in
online gaming companies has always been a white knuckle
ride - and there looks to be every sign this particular
circus is once again rolling back into town.
Online
casinos, also known as virtual casinos or internet
casinos, are online versions of traditional ("brick
and mortar") casinos. Online casinos enable gamblers
to play and wager on casino games through the Internet.
Online
casinos generally offer odds and payback percentages
that are comparable to land-based casinos. Some online
casinos claim higher payback percentages for slot
machine games, and some publish payout percentage
audits on their websites. Assuming that the online
casino is using an appropriately programmed random
number generator, table games like blackjack have
an established house edge. The payout percentage for
these games are established by the rules of the game.
Reliability
and trust issues are commonplace and often questioned.
Many online casinos lease or purchase their software
from well-known companies like Microgaming, Realtime
Gaming, Playtech, and CryptoLogic Inc in an attempt
to "piggyback" their reputation on the software
manufacturer's credibility. These software companies
either use or claim to use random number generators
to ensure that the numbers, cards or dice appear randomly.
By
taking advantage of 'free' bet promotions, users can
back the event, and then lay the event on a betting
exchange, at similar or same odds, thus ensuring that
their 'free' bet is not a bet at all, instead more
like a financial trade. No matter the outcome, it
is possible (by using a betting / arb calculator)
to calculate both the possible outcomes before the
sporting event has started. By inputting the odds,
the bet calculator then tells you what amount to bet,
to ensure that whether the bet wins or loses, the
return is the same. (Wikipedia).
