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Investment Opportunities

Will 2018 be as profitable as 2017 for savvy gaming investors?

Investment Opportunities

The year 2018 might turn out to be one of the most interesting ever for investors in gaming companies.

Harbingers of activity abounded last year:

  • Japan legalized casino gaming, and now has to enact enabling legislation.
  • Consolidation continued among casino companies.
  • The REIT phenomenon accelerated.
  • Supplier companies moved more emphatically into the virtual world of online gaming in various forms.
  • Pennsylvania broke the logjam, becoming the first state in several years to legalize online gaming.
  • The U.S. Supreme Court took up the issue of sports betting, and legislatures and companies throughout the country are positioning themselves for possible legalization.
  • New companies went public.

Let’s take a look at each of these:

  • Japan. With authorizing legislation enacted and the ruling Liberal Democratic Party winning the recent elections, passing enabling legislation is all but certain, and will probably happen this year.

There is a lot to be decided: how many licenses, locations, tax rate, and local ownership requirements.

What we do know is that, assuming a reasonable law, every major casino company will pursue a license.

So, with far more unknown than known, we’ll hazard a guess that favorites for licenses would be Las Vegas Sands, thanks to its highly successful integrated resort model; and MGM Resorts, based on the power of the MGM brand and CEO Jim Murren’s willingness to be collegial with prospective Japanese partners.

Some think Macau casino operators will be at a disadvantage in pursuing licenses because Japanese decision-makers might think they have a conflict of interest. But Melco Resorts may be an exception, as CEO Lawrence Ho is making Japan his top priority and because he can point to City of Dreams Manila as an example of not allowing a conflict with his Macau properties.

  • Casino consolidation. There might not be any blockbuster deals like Penn National buying Pinnacle, but everyone talks optimistically about more acquisitions to come as higher valuations tempt prospective sellers, and buyers have learned how to make purchases add immediately to earnings.

Boyd, Caesars and Eldorado are likely buyers; and don’t rule out Golden Entertainment and Full House Resorts, which can do some smaller deals.

  • The REIT phenomenon is finally catching on, though maybe not the way it was envisioned several years ago when Penn National spun off Gaming & Leisure Properties.

What has happened is that Gaming & Leisure has shown, most recently with Boyd agreeing to buy four Pinnacle casino operations that they will own, that REITs can facilitate mergers and acquisitions, as well as grow on their own.

And, with VICI Properties spun off from

Caesars, there are now three gaming REITs (MGM Growth Properties is the third), making for an industry subsection.

This might also be the year that REITs acquire properties outside of gaming, broadening their potential to a vast world.

  • Suppliers moving online is not new, but what has changed is that, after several years of trying to figure out what to do, companies have found their paths.

That is evidenced by Aristocrat buying Big Fish from Churchill Downs and Scientific Games’ success at its B2B business, as well as its purchase of gaming and sports betting platform provider NYX Gaming.

Look for more acquisitions in this space, and for historic slot machine companies to become social and real-money online casino operators, as well as providing games and platforms to online casinos.

  • Online gaming. States might not rush to legalize internet gaming this year, and the experience of New Jersey shows that iGaming is not a quick way to enrich state treasuries, but efforts continue.

What would really light a fire under iGaming is legalization of sports betting.

  • Sports betting. We’ll know by June whether the Supreme Court clears the way for full-fledged sports betting everywhere and, if so, how states and Congress react.

What we know now is that contingency legislation has been introduced in a number of states to allow sports betting if the federal ban goes away.

If sports betting is fully allowed, and states permit bets to be made by computers or mobile devices, the competition to jump in will make the 1889 Oklahoma land rush look like a stroll in the park.

There will be three sets of winners:

Incumbent casino operators, as most states will limit online licenses to licensed casinos. That, in turn, will create a rush of iGamers to sign deals to supply casinos with games and platforms.

Sports betting operators who can provide

odds-making, technology and sufficient size to allow smaller casino operators to have sports books—this field can include big Las Vegas casino operators and international companies like Paddy Power Betfair. Perhaps no sports betting operator has better positioned itself to capitalize on U.S. expansion than London-listed William Hill.

Providers of online platforms and technology, thus the Sci Games purchase of NYX Gaming.

  • Newly public companies. Games and virtual sports provider Inspired went public last year, as did VICI Properties, the Caesars REIT spinoff.

There are other candidates this year.

AGS has been prepping to go public for some time and, while owner Apollo Global Management could go in another direction, this might be the year the slot and table game provider does an IPO.

Novomatic is a giant international gaming conglomerate owned by Austrian Johan Graf. The company intended to IPO last year but put those plans on hold. This could be the year.

Interblock has made no public noises about going public, but an IPO would make sense both to reward its founder and to open the public markets to help fuel the growth ambitions of the electronic table games provider.

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