It’s that time to take out the crystal ball and look into the year ahead.
Given the swirl of uncertainty evidenced by daily headlines and stock market swings, this might be more difficult than usual, but here are some thoughts:
- Sports betting. The big story of the past year might be the big story of the new year, the proliferation of legal sports betting in the U.S.
Unless there is a big shift in public opinion, and Congress doesn’t have more important things to do, it appears that sports betting legalization and regulation will continue to be done on the state level.
The Supreme Court decision striking down the federal ban on sports betting led to some big surprises. Who would have thought that Eldorado Resorts, for example, would become such a national player and a part owner of William Hill US? Or that MGM would ally with GVC? Or that GVC itself would transform in such a short time into an international sports betting giant?
The decision has also seen a rush of European companies into the U.S., introducing some that just months earlier were unknown to most Americans, such as Kambi, Kindred and GVC.
And who would have foreseen such a quick about-face by the major sports leagues from foes to partners with gaming companies?
For 2019, look for more of the same. And, as daily fantasy sports paved the way for sports betting, legal sports betting is paving the way for mobile and online gaming, which should open huge markets and opportunities for companies and investors.
- The economy. We spent so many years bemoaning the slow recovery from the Great Recession that it nearly passed by us that we have enjoyed one of the longest periods of economic growth in history.
Now, there is worry that the next recession is at hand. Every day brings the headlines: the dive of the forward-looking stock market, fear of a recession-preceding inverted yield curve, the Fed raising interest rates, job creation slowing and announcements of layoffs growing, the initial stimulus of last year’s tax cuts having run its course.
There are problems to be sure. But the stock market and the economy both might find themselves in 2019 climbing a wall of worry. There are still stimulating elements out there, such as that the tax cuts continuing to make American companies more competitive, and that no part of the economy appears to be in a bubble.
Having said that, no one has repealed the business cycle, and we might be due for a recession. If so, casino companies will suffer along with other consumer discretionary industries, though they now have a model learned following the Great Recession of how to mitigate the damage.
- Foreign policy has not been a concern in the past, but if your business depends on Macau, you are probably hoping very strongly that Donald Trump and Xi Jinping avert a trade war.
If the U.S. and China end up in a bitter trade war, it seems in the realm of possibility that the Chinese government could decide to make examples of high-profile American companies that are not strategically important, and that could be Macau casino operators. After all, they are raking in billions of dollars from Chinese citizens in businesses that depend on government licenses. Plus, the timing could be right with casino concessions expiring in 2020 and 2022.
Further incentive could come from the pressure by some to open Macau to more Chinese operators. It is at least interesting that Macau Secretary for Economy and Finance Lionel Leong recently said the government should consider bidding out the six concessions, publicly opening the possibility that current gaming concession holders could lose their licenses.
Until now, the assumption has been that Macau will follow its script: wring out concessions from current operators and renew their licenses, and that might still be the most likely outcome.
It is difficult to handicap without personal knowledge, but Wynn could be the most vulnerable given that its legendary founder is gone and there has been speculation that the company might be sold. If so, that could present the opportunity to find a Chinese buyer for the Macau properties, thus killing two birds with one stone from the Chinese government viewpoint.
Perhaps the American casino operator with the least vulnerability, if concession renewals get political, is MGM Resorts. There is no pugnaciousness about MGM. It keeps a low profile. It doesn’t hurt that local political power Pansy Ho is the second largest shareholder after MGM in MGM China.
Of note, Macau represents 15 percent of MGM’s business.
Final thoughts on Macau. If the government cracks down on VIP play as it did several years ago, Wynn again is most vulnerable, as VIP is its biggest segment. Las Vegas Sands would be least affected as the mass market—the rising and enormous Chinese middle class—is its market.
- U.S. regional casino consolidation, valuations and interest rates. The round of consolidation among casinos has been spurred by REITs’ willingness to facilitate deals at above historic average prices, cheap money and a growing comfort (some might say complacency) on the part of casino operators for debt at four to five times EBITDA.
Money is becoming more expensive as the Fed pushes up interest rates, and the valuations of at least publicly listed companies have come down with stock prices, suggesting prospective sellers might not get the high prices they want.
Further, higher interest expense could dampen buyers’ enthusiasm, especially if recession hits EBITDA lines, making debt more worrisome.
In other words, we could be in for a slow-down in acquisitions. However, if the Fed is nearly done normalizing interest rates from their historic lows and if recession is averted, there is now a practiced formula in place for consolidation to continue.