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January 17, 2022

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Despite sneering about “Harrah Reid,” MGM Resorts stands to gain most — $100M-$200M by 2012, firm says

That's what Union Gaming Group found in an analysis released this morning, and then a follow-up, expanded missive -- both of which I have posted below. Very few licensees would benefit, but the benefit would be huge:

Relevancy: Ameristar Casinos (ASCA), Boyd Gaming (BYD), Caesars Entertainment Corporation, Isle of Capri Casinos (ISLE), Las Vegas Sands (LVS), MGM Resorts International (MGM), Pinnacle Entertainment (PNK), Station Casinos, Wynn Resorts (WYNN), Bally Technologies (BYI), International Game Tech. (IGT), Shuffle Master (SHFL), WMS Industries (WMS)

Details: The following is an excerpt from a research note published this morning exclusively for clients of Union Gaming Research. Iterations of a draft Internet poker bill introduced by Harry Reid have been circulating. In our estimation, never before has the passage of Internet poker, at the federal level, been as probable as it at this moment. The Internet Poker Regulation Act proposes to amend the Unlawful Internet Gambling Enforcement Act to allow for traditional payment processing for internet poker and to legalize internet poker at the federal level. There are a number of critical variables which are subject to change from here.

View: In 2012, potentially the first year of legalized U.S. Internet poker, we believe there will be $1b+ in EBITDA generated by licensees. We feel very strongly that 90%+ of the direct benefit will accrue to a very small number of licensees, ~10 or so. Of the casino operators with public equity we believe MGM has the most to gain, perhaps translating to $100m-$200m in related EBITDA from the activity as early as 2012, representing $2-$4/share. This is a function of scale in our view. The combination of a large player database, multiple highly recognizable brands, and a significant number of physical venues should translate to an important critical mass of players online and therefore disproportionate share. Without question the Venetian and Wynn brands will be ripe for participation along with multi-site operators with enviable player databases such as PENN, BYD, ASCA, PNK, and ISLE. Of course Harrah’s is often mentioned in any related context due to its Total Rewards database, its World Series of Poker plus casino brands. Other “privates” that can disproportionately benefit include Palms due to the high correlation between the average online poker demographic (male, 35-years of age) and the Maloof’s typical demographic at the Vegas resort. We believe Station Casinos, helped by the Fertitta’s UFC ownership has an opportunity to benefit as well. A handful of gaming suppliers that have technology or intellectual property of note are perhaps the 2nd or 3rd derivative to benefit in our view (BYI, IGT, WMS, SHFL). Perhaps as exciting is the acquisition anticipation as notable online consumer brands such as Facebook, Yahoo, and Google may have interest in participating.

The follow-up:

U.S. Internet Poker—early details and quantification

Iterations of a draft Internet poker bill introduced by Senate Majority Leader Harry Reid have been circulating. In our estimation, never before has the passage of Internet poker, at the federal level, been as probable as it at this moment. The Internet Poker Regulation Act proposes to amend the Unlawful Internet Gambling Enforcement Act (UIGEA) to allow for traditional payment processing for internet poker and to legalize player banked internet poker (and player banked poker derivatives) at the federal level. There are a number of critical variables which are subject to change from here:

· Potential Internet poker licensees include seasoned U.S. casino operators, qualified race track operators, and slot machine manufacturers (all operating for the prior five-years). We understand that the various interests are looking to have this defined as casinos and race tracks with 500+ electronic gaming devices, tribes with ~$200m in gaming revenue, and none of the 588 card clubs.

· For the first two-years post enactment there may be an implicit licensing blackout for existing (offshore) Internet poker providers. This clause is seemingly the major item of “dispute.” Should these offshore entities be permitted to participate we believe a prerequisite may be traditional licensing in both Nevada and New Jersey. To that end we ultimately believe a small group of offshore Internet poker providers and related technology vendors may be suitable for joint-ventures, licensing, and acquisitions.

· Licensing will begin 15-months post enactment of the Act

· States and qualified Indian tribes are required to opt-in.

· Licensees may only take U.S. bets for the first three years followed by foreign consumer wagers in jurisdictions where internet gaming is legal.

· Monthly gaming tax: the U.S. Treasury will collect a 20% gaming license fee (then distribute to relevant state) calculated as a % of deposit receipts (Rake + tournament fees + any other poker related fees).

· Licenses will be five-years in length and renewable.

· Extension of credit will be allowed.

· Consumers names, addresses, and TIN’s must be collected, in addition to data on gross wagers, winnings, and losses for the purpose of calculating applicable taxes.

Size of market and number of potential licensees.

Our first pass at the definitions suggests that the number of licenses will be several hundred (not 1,500 when taking into account the 443 commercial casinos in the U.S., 44 race tracks, 456 tribal casinos, and 588 card rooms). This contemplates the elimination of card rooms (or most card rooms), the majority of tribal casinos, many race tracks without gaming devices, and a number of commercial casinos that don’t meet statutory definitions. Furthermore, many land-based gaming operators will simply not be applicable here given their lack of relevant location/brand, capital, and even desire.

The Poker Players Alliance suggests there are 23mm U.S. online poker players while 15mm of these are believed to play poker online for money. We estimate the U.S. Internet poker market at $3b+ (in revenue) in 2012 (potentially the first year of commercial Internet poker activity) relative to the current ~$24b global internet gaming market. We believe this vastly underestimates the potential market size in the years after Internet poker is legalized in the U.S. which should inflect from the licensing of trusted brands, and allowance of traditional transaction means (electronic versus personal checks for example).

We est. MGM could generate a related $100-$200mm as early as 2012.

In 2012, potentially the first year of legalized U.S. Internet poker, we believe there will be $1b+ in EBITDA generated by licensees (using Party Gaming’s 2006 write-down of $780mm in U.S. revenue as a proxy these numbers appear achievable). We feel very strongly that 90%+ of the direct benefit will accrue to a very small number of licensees, ~10 or so. Of the casino operators with public equity we believe MGM has the most to gain, perhaps translating to $100m-$200m in related EBITDA from the activity as early as 2012. This will require some modest capital investment and represents an incremental $2-$4/share. This is a function of scale in our view. The combination of a large player database, multiple highly recognizable brands, and a significant number of physical venues should translate to an important critical mass of players online and therefore disproportionate share. Without question the Venetian and Wynn brands will be ripe for participation along with multi-site operators with enviable player databases such as PENN, BYD, ASCA, PNK, and ISLE. Of course Harrah’s is often mentioned in any related context due to its Total Rewards database, its World Series of Poker plus casino brands. Other “privates” that can disproportionately benefit include Palms due to the high correlation between the average online poker demographic (male, 35-years of age) and the Maloof’s typical demographic at the Vegas resort. We believe Station Casinos, helped by the Fertitta’s UFC ownership has an opportunity to benefit as well. A handful of gaming suppliers that have technology or intellectual property of note are perhaps the 2nd or 3rd derivative to benefit in our view (BYI, IGT, WMS, SHFL). Perhaps as exciting is the acquisition anticipation as notable online consumer brands such as Facebook, Yahoo, and Google may have interest in participating.

What’s next?

With the lame duck session anticipated to end on December 17th, we believe this measure appears to have a 9-day window from now for passage. Chatter suggests it may be attached to the kitchen sink tax extension bill in order to fast track passage. This comes despite Senator Kyl’s commentary against attaching.

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