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Panic Via Wire

DOJ memo reversal is just another sign that government is part of the problem, not the solution

Panic Via Wire

With the exception of Nevada, investments in gaming companies carry one overriding risk—the government.

That point was brought home when the U.S. Department of Justice threw a wrench into the proliferation of online gaming by reversing course and saying the 1961 Wire Act bars all interstate gambling on the internet, not just sports betting.

Stocks sold off in the wake of the opinion, and its impact remains unclear weeks later. Some see a big negative impact, noting that information and financial transactions related to sports betting and online gaming that move across state lines might be considered illegal even though wagering is intrastate.

Others think the interpretation might not apply to non-wagering information, such as servers in one state supporting operations in another state. In that case, they see the status quo remaining.

Yet others note that a growing number of congressional members represent states that now have sports betting, intend to legalize sports betting or operate online lotteries. Those states combine to a significant lobby to defend the interests of online gaming.

Regardless of how it plays out, the DOJ opinion is just the latest instance of a national government throwing a monkey wrench into the gaming works.

The United Kingdom has slammed bookmakers by slashing the maximum bet on gaming machines in betting shops from £100 to £2, which will lead to significantly lower earnings for companies like William Hill.

And Britain might not be done as the UK Gaming Commission heads into a review of the industry and there is growing pressure to rein in sports advertising.

Or take Italy. Higher taxes and a mandatory reduction in amusement-with-prize machines have hit some stocks hard, such as IGT.

Or consider China and Macau. There are varying degrees of apprehension over the renewal of the six Macau gaming concessions and whether the government will put the licenses out to bid to other operators. And there are always questions about how the national Chinese government might interfere for any number of reasons, including a tit-for-tat punishment of the three U.S. concession holders as part of the trade conflict with the United States.

Meanwhile, concession holders keep investing billions of dollars in Macau to keep to the promise of redeveloping the city into a tourism mecca, not just a gambling town, hoping to appease the government, excited about the still great untapped potential of the mainland China market, and with fingers discretely crossed that concessions will be renewed under terms similar to today’s.

Back in the U.S., the situation has improved in many state capitals.

Instead of overly strict rules slapped on suspicious newcomers as was the case when casinos were first legalized, legislators now more often are trying to help protect companies that have become established employers and big taxpayers. Louisiana, as an example, is comprehensively reviewing its gaming industry with an eye towards making it more competitive.

But threats still exist, such as Illinois lawmakers perhaps approving expansion that could oversaturate their markets, or states legalizing slot routes, creating convenience gambling competition to casinos.

The bottom line is that gaming companies have many attractive qualities as investments, but they might never enjoy the same valuations as other industries because of legislative risk.


Finding Eldorado

Eldorado Resorts continues to evolve at a rapid pace.

The latest event in Eldorado’s transformation was closing on the agreement with British bookmaker William Hill in which Eldorado now owns 20 percent of William Hill US and 13.4 million shares of London-listed parent William Hill Plc.

Under the agreement, William Hill will place its sports books in all current and future Eldorado casinos. The agreement also makes Eldorado international, with William Hill US having operations in St. Kitts and the Bahamas, and Eldorado’s stake in William Hill Plc. giving it financial interests in the United Kingdom.

The agreement follows another with the Stars Group, the international online gaming, poker and sports betting company, that will operate skins in Eldorado’s markets in exchange for a revenue share, $25 million in stock, another possible $5 million of stock, and perhaps more equity later.

At present, the dollar figures are relatively small. In 2017, the operating profit for William Hill US was $28.5 million, making Eldorado’s share $5.7 million. The 1.6 percent stake in parent William Hill Plc. represents about $32 million in stock value as of this writing. That compares to Eldorado’s market cap around $3.5 billion.

Likewise, Eldorado’s $25 million stake in the Stars Group is just a sliver of that company’s $4.8 billion market cap.

Business agreements, of course, are made for what will happen, not what has happened. And the potential from this agreement for Eldorado appears significant given that sports betting in the U.S. is in its infancy.

Just over four years ago, Eldorado was a small private company owning namesake Eldorado Casino in downtown Reno, half of adjacent Silver Legacy and a riverboat casino in Shreveport, Louisiana.

Then came the acquisitions: MTR Gaming, through which Eldorado became a public company, adjacent 1.5 casinos in Reno from MGM, Isle of Capri, Tropicana Entertainment and Grand Victoria.

Today, Eldorado operates 27 casinos in 13 states and serves such major markets as Chicago, Dallas, Houston, St. Louis and Philadelphia.

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