Seeking Alpha
Newsletter provider, growth at reasonable price, small-cap, medium-term horizon
Profile| Send Message|
( followers)  

Online gambling is coming to a state near you! Boyd Gaming Corporation (NYSE:BYD), MGM Resort International (NYSE:MGM) and Caesars Acquisition Company (NASDAQ:CACQ) will be the biggest beneficiaries.

History of Online Gambling

Online gambling was first deemed legal in the United States in November 2002 when the United States Courts of Appeal for the Fifth Circuit ruled the Federal Wire Act prohibited online sports betting. The same ruling did not prohibit online betting on a game of chance. The Justice Department continued to take the stance that all forms of gambling online are illegal. In September 2006, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) to make transactions from banks or similar institutions to online gambling sites illegal. This bill expanded the scope of the Federal Wire Act. In response to the UIGEA, a number of major online gambling sites suspended their US operations.

In December 2009, Congress passed a new bill legalizing and regulating online poker and some other forms of online gambling. In November 2010, New Jersey became the first state to legalize online gambling in some form. Nevada legalized online poker in December of 2011 and issued the first online poker license in June of 2012. Ultimate Poker, the recipient of the Nevada online poker license, has been dealing games since April 2013.

Earlier this month, Delaware became the first state to offer a wider range of online gambling. Three sites, Delaware Park, Dover Downs and Harrington Raceway, offer a range of casino games including poker, blackjack, slots and roulette.

With any new system rollout, there will be a period of working out the bugs. Currently, Delaware's online gambling sites are experiencing some issues as will New Jersey's. I believe any news surrounding scaling problems should not put off investors. If the news of the short term hiccups affect stock prices it will be a buying opportunity.

Why Buy Now?

After Delaware legalized online gambling, on November 21st, 2013, Boyd Gaming Corporation's casino Borgata Hotel Casino and Spa received authorization from the New Jersey Division of Gaming Enforcement (DGE) to begin a trial launch of its real-money online gambling product in New Jersey. Borgata plans to commence a "soft play" period on its online gambling sites. Soft play on the sites will be limited to invited customers and certain qualified Borgata team members. Boyd Gambling's online gambling partner, bwin.party digital entertainment plc, will also begin testing of its online gambling sites. Under New Jersey law, the DGE may authorize Internet gambling permit holders to offer real-money online gambling to the general public in New Jersey as early as Tuesday, November 26, assuming all testing and soft play is completed to the satisfaction of the DGE.

Caesars Interactive Entertainment, a subsidiary of Caesars Acquisition Company, received the same authorization from the DGE and is going through the "soft play." Caesars can potentially receive authorization for online gambling to the general public as early as Tuesday, November 26. Caesars are offering three sites CaesarCasino.com, HarrahsCasino.com and WSOP.com.

Nevada, Delaware and New Jersey all have legalized gambling. This trend of legalizing online gambling is likely to accelerate in 2014. State governments with weak balance sheets see the opportunity to generate additional tax revenue. A recent study showed Florida alone could generate an additional $90 million per year in tax revenues from legalizing online gambling. According to Betable Blog, a gambling industry insider, California, New York, Pennsylvania, Massachusetts, Connecticut and Maryland could all follow suit and legalize online gambling in 2014. California and New York are two of the largest online gambling markets in the US and will be a huge opportunity for operators of online gambling sites. The continued news surrounding legalization and rollout of online gambling systems will be a huge plus for the stocks in this space.

What is the Market Size?

According to the Amercan Gaming Associations website,

Millions of Americans play various gambling games on the Internet, even though the businesses are typically illegal, unregulated, and offer no consumer protections. An estimated 1,700 offshore sites accept these bets, with the annual market estimated at $4 to $6 billion.

Morgan Stanley estimates legal US online gambling revenues would reach $670 million in 2014, increasing to $9.3 billion in 2020, representing a 45% annual growth rate. H2 Gambling Capital estimated the legal US online gambling revenues will reach $7.4 billion in 2017. Nevada will only represent $400 million of the $7.4 billion. This means the vast majority of expected revenues will come from states yet to legalize online gambling.

There is a tremendous opportunity for providers of online gambling services. After the "Wild West" environment of the 2000s, which included a number of arrests and freezing millions of dollars, the regulatory environment will be much stricter. This regulatory scrutiny provides significant barriers to entry. Regulators will clearly be more comfortable with well established entities, particularly current casino operators who regulators have a long standing regulatory relationship with and with operations in the state. New Jersey awarded the initial test license to Boyd Gaming Corporation's Borgata Hotel Casino and Spa. Borgata is a casino in Atlantic City. New Jersey also awarded a similar test license to Caesars Interactive Entertainment, a subsidiary of Caesars Acquisition Company which has ties with Caesars Entertainment Corporation (NYSE:CZR). Caesars operates Harrah's Resort Atlantic City, Showboat Atlantic City, Caesars Atlantic City, and Bally's Atlantic City casinos in Atlantic City. In Delaware, the three initial licenses were awarded to casino operators with operations in Delaware, including Delaware Park Horse Racing and Slots, Dover Downs Hotel and Casino and Harrington Raceway and Casino. This evidence points to existing casino operators benefiting the most from the online gambling market opportunity. For this reason, I believe casino operators Boyd Gaming Corporation, MGM Resorts International (NYSE: MGM) and Caesar Acquisition Corporation are the best ways to play this theme.

I believe established online gambling operators in Europe will benefit as well as these companies have established technology, and US casino operators will want trusted partners. In Delaware, the three authorized online casinos all use online poker software provided by 888poker, a subsidiary of 888 holding (LSE: 888). In New Jersey, Boyd Gaming Corporation is partnering with bwin.party, a subsidiary of bwin, a private company, which is the largest online gambling company. Other established European providers on online gambling technology include BetFair (OTC:BTFRF) and 32Red (LSE AIM: TTR).

Boyd Gaming Corporation $10.05

Based in Las Vegas, Boyd Gaming Corporation is a leading casino entertainment company, operating 22 gambling entertainment properties in eight states -- Nevada, New Jersey, Illinois, Indiana, Iowa, Kansas, Louisiana and Mississippi.

In New Jersey, the company developed and operates Borgata Hotel Casino and Spa, which has quickly emerged as one of the world's best-known casino brands. Borgata has been Atlantic City's clear market leader since the day it opened, and has established itself as one of the leading entertainment destinations in the region.

The largest segment of our business is in the Midwestern and Southern parts of the country, where Boyd currently operates 12 casino properties:

  • Blue Chip Casino Hotel Spa, located an hour's drive from Chicago in Michigan City, Ind.;
  • Par-A-Dice Hotel Casino, in East Peoria, Illinois;
  • Two Diamond Jo-branded casinos in Dubuque and Worth County, Iowa;
  • Kansas Star Casino, Hotel and Event Center, near Wichita;
  • Treasure Chest Casino, serving metropolitan New Orleans, Louisiana;
  • Delta Downs Racetrack Casino and Hotel, located just east of the Texas border in Vinton, Louisiana;
  • Sam's Town Hotel and Casino in Shreveport, Louisiana;
  • Evangeline Downs Racetrack Casino in Opelousas, Louisiana;
  • Amelia Belle Casino in Amelia, Louisiana;
  • Sam's Town Tunica, located a short drive south of Memphis in northwest Mississippi;
  • And the IP Casino Resort Spa in Biloxi, Mississippi.

Boyd's brick and mortar presence in many states and their early entrance into the US online gambling market via New Jersey will provide them an opportunity to provide online gambling in many states.

MGM Resorts International $18.65

MGM Resorts International owns and operates the following casino resorts in Las Vegas, Nevada: Bellagio, MGM Grand Las Vegas (including The Signature), The Mirage, Mandalay Bay, Luxor, New York-New York, Monte Carlo, Excalibur and Circus Circus Las Vegas. Other Nevada operations include Circus Circus Reno, Gold Strike in Jean and Railroad Pass in Henderson.

The company and its local partners own and operate MGM Grand Detroit in Detroit, Michigan. The company also owns and operates Beau Rivage in Biloxi and Gold Strike Tunica in Mississippi. In addition, the company owns Shadow Creek, an exclusive world-class golf course located approximately ten miles north of its Las Vegas Strip resorts, Primm Valley Golf Club at the California/Nevada state line and Fallen Oak golf course in Saucier, Mississippi. The company has two reportable segments: wholly owned domestic resorts and MGM China.

The company owns 51% and has a controlling interest in MGM China Holdings Limited ("MGM China"), which owns MGM Grand Paradise, S.A. ("MGM Grand Paradise"), the Macau company that owns and operates the MGM Macau resort and casino and the related gambling sub-concession and land concession.

The company owns 50% of City Center, located between Bellagio and Monte Carlo. The company has 50% interests in Grand Victoria and Silver Legacy. Grand Victoria is a riverboat casino in Elgin, Illinois; an affiliate of Hyatt Gambling owns the other 50% of Grand Victoria and also operates the resort. Silver Legacy is located in Reno, Nevada, adjacent to Circus Circus Reno, and the other 50% is owned by Eldorado LLC.

The Company has a 50% economic interest in Borgata Hotel Casino & Spa ("Borgata") located on Renaissance Pointe in the Marina area of Atlantic City, New Jersey. Boyd Gaming Corporation owns the other 50% of Borgata and also operates the resort.

MGM's diverse geographic operations and strong brands will allow MGM to translate to a strong position with regulators and online gambling customers.

Caesar Acquisition Company $10.65

Caesar Acquisition Company was incorporated under the laws of the State of Delaware on February 25, 2013 and was formed to directly own 100% of the voting membership units in Caesars Growth Partners, LLC (CGP LLC), a joint venture between CAC and Caesars Entertainment Corporation .

CGP LLC assets are Caesars Entertainment's equity interests in Caesars Interactive Entertainment, Inc., the equity interests of a subsidiary of PHW Las Vegas, LLC, which holds all of the assets and liabilities of PHW Las Vegas, LLC, including Planet Hollywood, the equity interests of Caesars Baltimore Investment Company, LLC , which holds an interest in the Maryland Joint Venture, and investments in bonds previously issued by Caesars Entertainment Operating Company, Inc., a wholly-owned subsidiary of Caesars Entertainment Corporation.

On October 21, 2013, the equity of CAC was made available via a subscription rights offering to the shareholders of Caesars Entertainment, and affiliates of Apollo Global Management, LLC and affiliates of TPG Global, LLC exercised their basic subscription rights in full to purchase $457.8 million worth of CAC's Class A common stock at a price of $8.64 per whole share. CAC used the proceeds from the Sponsors' exercise of their rights to purchase 100% of the voting units of CGP LLC.

CZR's geographically diverse operations, significant customer base tied in through CZR's loyalty program, existing online gambling business and the World Series of Poker brand will make Caesars a leader in the US online gambling market, which is best played through Caesars Acquisition Company.

Conclusion

The online gambling market in the US is at an early stage with only 3 states legalizing online gambling. The trend of legalization will accelerate in 2014 and will provide a strong tailwind for companies operating in this $10 billion segment. I believe existing casino operators with diverse geographical operations will be the biggest beneficiaries as regulatory scrutiny is likely to be tight, favoring operators with existing strong relationships with the regulators. My picks in the space are Caesars Acquisition Company, Boyd Gaming Corporation and MGM Resorts International.

Source: Spotlight 2014: Online Gambling - Boyd Gaming, MGM Resort, Caesars Acquisition