A Hidden Treasure or Risky Business?

13 December 2004

On the day I read that Sportingbet's share prices jumped to an all-time high of 180 1/2p amid rumors of a Hilton/Ladbrokes buyout, I received a copy of the massive report, "Investing in the Gambling/Gaming Industry - Hidden Treasure or Risky Business?"

The detailed industry report, published by MECN, includes results of a survey conducted among financial investors, investor relations departments and state operators. Upon releasing the report, MECN reported that its Gambling Industry Index, which tracks a representative group of 47 gambling companies, had increased by 40 percent over the past 12 months. That means the index outperformed most indices, including the Dow Jones, MSCI, FTSE and many other industry-specific indices.

Stocks of top performers, such as the above mentioned online operator, Sportingbet, and Wynn Casinos, rose by about 320 percent or 181 percent respectively in the past 12 months.

So is investing in the gambling industry a risky business? In the executive summary, it is mentioned that the following recent developments indicate the high growth potential of the gambling industry:

  • With Harrah's buying Caesars for about US$9.4 billion, MGM Mirage offering to buy Mandalay Resort Group for $7.9 billion and Sportingbet acquiring the online poker Web site ParadisePoker.com for $297 million, the signs are promising for an increased number of deals in the coming months.

  • The European Court of Justice and the World Trade Organization have decided against monopolistic and restrictive market structures, and the industry awaits a soon-to-come liberalization.

  • More and more state-run operators are being privatized. The Turkish and Greek operators started the trend; now the U.K. Tote has announced privatization for the beginning of 2005.

  • Gambling is entering the "mainstream," as, for example, Richard Branson's Virgin group is looking at the possibility of entering the gambling market.

The survey shows that the future growth drivers of the gambling industry are Internet gambling, ongoing liberalization and global expansion, as well as the reinventing of online poker: An estimated US$140 million is wagered daily on global online poker sites. The rise of betting exchanges also signifies new market drivers, with huge global growth potential.

The publicly traded gambling companies are the key "investment tool" for investors interested in the gambling industry, as 59 percent of them invest in publicly traded companies. Gambling operators performed especially well--improving by 55 percent and outperforming the technology and service providers (+12 percent)--and the market capitalization of gambling companies reached US$85 billion.

Not surprisingly, seven out of the top 10 stock performers were European companies, mainly operating from the United Kingdom.

Close to 60 percent of the investors surveyed said that the performance of their investments in the gambling industry was "above expectations." Further, about 85 percent of the state operators surveyed expect that the number of privatized state-licensed lotteries will increase in the next three to five years.

In the report, the global betting turnover is estimated at US$325 billion. Some of the leading markets are the United Kingdom (US$36 billion), Japan ($39 billion), Australia ($9 billion) and France ($9 billion).

The report also clarifies what falls in the category of gambling/gaming, which MECN specifies as legal businesses involved in: 1) the operation of lotteries, casinos and/or betting businesses, 2) online gambling businesses and/or 3) technology and services (e.g. online gambling software, lottery terminals or slot machines).

Internet gambling is still perceived as the major growth driver, and mobile gambling is valued as being less important for future growth. Likewise, investors consider mobile gambling unimportant. The online market currently represents only about 5-10 percent of the entire gambling market, meaning there's plenty of room for growth. Land-based gambling still dominates, but online gambling is the growth driver.

Lottery games and betting are especially suited for the Internet, as these services can be entirely digitalized, and online poker, after a triumphant advance in the United States, is a sensational runner up.

Most online poker sites offer poker rooms where participants play head-to-head against each other. Party Poker, one of the major poker sites, offers about 1,300 tables to a total of more than 10,000 players and has pot sizes ranging from $1 to more than $400. Ladbrokes reported that the amount gambled on poker Web sites around the world increased from US$16 million a day in January 2003 to $100 million per day in December 2003, while a new estimation from PokerPulse.com shows that $140 million is wagered per day on global online poker sites.

The Internet darling of the report was Sportingbet, thanks in part to the Paradise acquisition, and this is, of course, fueling the rumors of a Hilton buyout.

The Daily Mail reports that Hilton would prefer a "friendly" deal but it is "prepared to go hostile if necessary," and suggests that a cash offer in the region of £807 million (250p per share) "could be on the cards."

Rob van der Gaast has a background in sports journalism. He worked for over seven years as the head of sports for Dutch National Radio and has developed new concepts for the TV and the gambling industry. Now he operates from Istanbul as an independent gambling research analyst. He specializes in European gambling matters and in privatizations of gambling operators. Rob has contributed to IGN since Jul 09, 2001.