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Never Before Has Passage Of Internet Poker Regulation in US Been So Probable

Written by:
Aaron Goldstein
Published on:
Dec/09/2010
Internet Poker Regulation

Union Gaming Research out of Las Vegas released a notice on Thursday stating that, in their estimation, “never before has the passage of Internet poker, at the federal level, been as probable as it at this moment”.

A draft bill being circulated by Senate Majority Leader Harry Reid is expected to be attached to a more extensive tax extension bill as early as next week.  The legislation seeks to legalize and tax online poker in the United States.

The Union Gaming Research notice goes on to breakdown how a number of properties are likely to benefit, and not just those based out of Las Vegas.

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 most controversial wording in the Reid draft bill pertains to a proposed two-year “black out” period for already existing online gambling ventures based outside the United States.

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.

The Union Gaming Research also estimates that MGM could generate a related $100-$200mm as early as 2012 based on the notion that the U.S. Internet poker market is currently at $3b+ and expected to grow once legislation is enacted. 

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.

- Aaron Goldstein, Gambling911.com

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