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Risk Versus Rewards

Government can give and government can take away

Risk Versus Rewards

There’s a famous line about the New York legislature but pertinent everywhere: “No man’s life, liberty or property are safe when the state Assembly is in session.”

And, boy, is that true in the gaming industry.

The term for this danger is called legislative risk. Simply put, it means that what Uncle Sam, a state legislature or a Communist Chinese president gives, he can take away.

We’ve seen this phenomenon over and over again.

Perhaps the most notorious, from the casino industry’s perspective, has been the state of Illinois.

It first legalized casinos. Hooray!

Then it raised taxes. Ugh!

Then it raised them again. Ouch!

Then it raised them at the top level to 70 percent. Eventually, even Illinois politicians saw the counter-productivity of that move and rolled back the tax, though to what one still might consider an extortionate level.

The current case of a love-hate attitude of a government toward gaming comes from China.

Stocks of Macau casino companies have been on a roller coaster for about two years.

Earlier, they soared as investors were in an almost wet-your-pants euphoria about the building boom in Macau, the belief that Chinese are nearly manic about gambling, and the extraordinary growth story of the Chinese economy.

Then the mood changed. At first, concerns were dismissed. The Chinese want all the growth that casinos offer. No problem, gaming executives said.

But the Chinese government continued to squeeze visitation until revenues began to fall, and so did the stock prices.

More recently, travel restrictions from the Mainland were eased, visitation soared, and so did stocks driven by forgiving, and forgetful, investors.

But a huge jump in September revenues apparently spooked the Chinese, and Macau talked to the casinos about capping growth.

Stocks slid. But as before, executives discounted the effect of such talk. The Chinese just want steady growth, say 15 percent a year, not an overheated 53 percent, they said.

But just two days later, neighboring Guangdong Province slapped on travel restrictions again. Once more, stocks tanked.

We’ll see how all of this plays out. Logic says the Chinese want a prosperous Macau, and they want to favorably impress Taiwan with the success of the one-nation, two-systems model in hopes of achieving a reunification of that land into China.

But one never knows.

Even in the stable and predictable United States, internet gaming companies, publicly listed on the respectable London Stock Exchange and financed by the biggest firms on Wall Street, did not foresee the 2006 law barring financial online gaming transactions, and its sudden wealth destruction.

Three things investors and business executives should keep in mind:

1. Political stability is a rarity in most of the world, and China especially has had a tumultuous history. What is true or said today might not hold as soon as tomorrow.

2. Mainland China might be hurtling toward capitalism, but the Communist Party is still in charge. That means a dictatorial and ideological government sets the rules. And the Red ideology abhors gambling.

3. What any government gives, it can take away, especially from a privileged industry that draws no public sympathy, and is seen by much of the population as a sinful bane.

In other words, gaming investor beware.

However, legislative risk sometimes comes even before gambling begins, as Ohio and New York are demonstrating.

If a trader put some money into Penn National before the vote and the stock popped after PENN won the Ohio casino referendum, he did all right.

But an investor who bought PENN or a supplier after the victory based on analyst calculations of how much money the companies can make now that casinos are legal, bought on political speculation, not business fundamentals.

For, no sooner did the polls close than Issue 3 opponents began to try to undo it. And in Ohio, Land of the Perpetual Referendum, several suggested referendums next year would legalize slots at racetracks, raise the 33 percent gaming tax, or legalize up to 15 casinos.

The most draconian referendum, proposed by Columbus Mayor Michael Coleman, would strip PENN and Dan Gilbert of their hard-won casino rights and put the licenses up to bid, at a higher tax rate, of course.

In New York, politicians are changing the rules on the Aqueduct slot parlor even before they pick a winner.

That is not surprising considering that the winner is being chosen by an unelected governor who wants to be elected though the president of the United States, of all people, has asked him to step aside, and by the leaders of the state Assembly and Senate, one a Democrat and the other a Republican.

The process has become so political that several of the six bidders have been making it a public relations contest, including privately accusing others of planting favorable and unfavorable stories in New York newspapers.

The latest twist by the cash-strapped state is that bidders must put up $200 million cash in advance. Steve Wynn promptly dropped out. Others might be gone by the time this column is published.

The shenanigans in New York are nothing like in Ohio, where both sides spent many millions of dollars as competing gambling interests combined with politicians on both sides to hurl outrageous allegations at each other.

Ohio is an example of an initiative and referendum system that has become dysfunctional in an age when special interests hire professional petition companies to contort what originated as a process to give citizens direct access to lawmaking.

But that’s another column for another publication.

For here, suffice it to say that legislative risk is one of the big unknowns for gaming investors.

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