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Online Gambling: US legalisation could transform fortunes for lucky European firms

The ban on online gambling in the United States seems to be coming to an end, in some states at least. Financial necessity appears to be the mother of reform as indebted state governments look for additional tax revenue to help plug their massive deficits.  
Online Gambling: US legalisation could transform fortunes for lucky European firms

 

It is the news that the internet gaming industry has been waiting for. And it has the potential to transform the fortunes of a number of lucky companies listed here in Europe.

I’m talking about the lifting of the ban on internet casinos introduced by stealth back in 2006, but which seems likely to be progressively dismantled as we move through 2011.

Financial necessity appears to be the mother of reform, with both federal and state governments struggling to deal with the fall-out from the financial crisis.

Online gaming of course would provide central and state coffers with a much-needed new source of tax revenues.

Here we catch up with Michael Campbell, equity analyst at Daniel Stewart, who will help us get to grips with what many believe could be one of the big stories of 2011.

The analyst reckons that the European business-to-business gaming firms are likely to benefit most, either through tie-ups with US firms or going it alone.

Campbell believes that the front-runners in winning new business will be Playtech (LON:PTEC) and Partygaming (LON:PRTY). 

The potential beneficiaries also include the Italian firm Lottomatica’s (BIT:LTO) GTECH unit and possibly 888 Holding’s (LON:888) Dragonfish - although the latter may be hampered by its ongoing dispute with the US Department of Justice.

Speaking with Proactive Investors Campbell said that Playtech would be at the top of his list of winners.

“Whether things go ahead on a federal level, or whether it goes through on a state-by-state level, Playtec has a good chance of doing some business there.” 

 

Outlaws: Gaming firms effectively deported by Bush administration 

George W Bush effectively outlawed online gaming in the United States when he signed the SAFE Port Act into law in October 2006. The bill was fundamentally focused on homeland security and America’s freight ports.

As a late adjunct the Unlawful Internet Gambling Enforcement Act (UIGEA) was integrated into the bill. 

UIGEA effectively made the online gambling and casino industry illegal because it prevented money transfers from any American financial institution to online gambling websites.

Consequently the gaming firms that operated the major online poker and sports betting websites had little option other than to accepting customers from the United States. 

UIGEA hit the market hard, the entire sector losing a large proportion of their valuations. 

Five years, and a global financial meltdown later, and the US legislature is looking at ways to reopen the potentially lucrative industry.

It is hoped that the resulting boost to tax revenues could provide a much needed boon to the deeply indebted state governments – particularly California, New Jersey and Nevada.

 

Legalise It: One way or another

Legally and politically it is not exactly clear how this change will take shape.

Many had pinned their hopes on a proposal to put forward a new Federal bill - which would legalise online gambling across all 50 states - however the bill did not make it through congress in the tail end of 2010.

“It’s up in the air at the moment as to how it’s really going to pan out,” Campbell told Proactive Investors.

“It’s by no means a slam-dunk in terms of it not going through ... but with the Republicans being against online gambling it is going to be tough to get it (a federal bill) passed.

Campbell adds: “So although there a reduced chance that a Federal bill is going through, there is a possibility it could happen.

“They’ll have to make a really good case in order to really convince the Republicans that it will be a good idea.”

Meanwhile two of the most financially strained states - New Jersey and California - have pressed ahead with their own intra-state bills. A number of these intrastate bills - which would legalise online gambling, confined within state borders – have been put forward with mixed success.

However the Daniel Stewart analyst stressed that once written into law it could take just a matter of months for things to get going. Then many publicly traded firms will try to tap into these ripe new markets.

 

Badda Bing: New Jersey could be the first territory to reopen

Last night Senator Raymond Lesniak's online gambling bill (S490) was passed through the New Jersey assembly and it could become law in a matter of weeks.

“New Jersey is moving ahead, not just with online poker, it is also allowing online casino and they’re also open to legalising online sports betting,” Campbell said.

“They’re moving quite swiftly.”

The Govenor of New Jersey, Christopher Christie, has the right to veto the bill over the next 45 days, after which point it will become law by default.

“The Governor has veto and it is not clear at this stage what Governor Christie's stance is with regards to online gambling and Senator Lesniak’s bill in particular,” Campbell said in a note to clients.

However it is clear that the state must do something to plug its US$10.5 billion budget deficit.

Campbell added: “Lobbying for business, Atlantic City will be competitive as it has the potential to be a reasonably sizeable online gambling market. 

“The news comes at a crucial time when Atlantic City casinos are set to reveal another tough year of trading (revenue of  around US$3.6 billion down 9.6 percent year-on-year, and down around 31 percent over a four year period).

“Lesniak’s bill will grant licenses to Atlantic City casinos to set up an online gambling industry based in Atlantic City.”

 

California Dreaming: A potential US$1.5 billion market

With around 37.25 million inhabitants California is America’s most populated state. The state’s huge budget deficit is believed to be in the region of US$25 billion.

The potential increase is the dangling carrot that provides one of the main plus points in the argument to legalise online gambling in California. 

Experts estimate that online poker could be a US$1.5 billion market in the sunshine state, which could add around US300 million to the coffers (based on a 20 percent tax rate).

Several bills have been put forward in California, each with their own nuances, and they have received mixed levels of support.

Ultimately there is a high level of support for the concept but so far it is unclear what a successful bill would look like. Just like everywhere else the lobbyists are hard at work.

Most recently a group of stakeholders known as the Poker Voters of America (PVOA) announced its intention to introduce a draft online poker bill.

It is understood that the Californian authorities have until the end of March to decide which path to take.

In Conclusion 

It seems highly unlikely we will return to the pre-2006 era when the likes of PartyGaming and the other UK internet casino groups were the high rollers of the US market. The landscape has changed irrevocably. What this progressive liberalisation gives the European firms is entry to back to the US. 

The payouts from here on in may be smaller than what these companies were used to. But at least there will be payouts.

 

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