Online Gambling to Bloom in 2011, Assesses Investment Publication

Interactive Investor presents its opinion on the future of online gambling

This week’s issue of Interactive Investor released an assessment of the future of online gambling, based on recent major public company listings and mergers between internet gambling companies in Europe, along with the "slight" possibility of a more liberalized US internet gambling market. Taking all this into account, the publication estimated that the industry is gaining in popularity.

It was also underlined that the world’s biggest online gaming companies experienced stockmarket gains between 2004-2006, which points to how quickly fortunes were made - and lost, according to the iGaming Global Top 30 Index, (an index of the stockmarket performance of the biggest 30 online gaming companies), which soared 40 percent between July 2004 and August 2005.

But there was a whole year of extreme volatility before a drop caused by UIGEA passage in the United States.

Some of the UK companies were the biggest victims of the drop in online gambling investment: for example, PartyGaming - then a FTSE 100 member – saw their shares drop by 58 percent, whereas 888 Holdings and Sportingbet experienced declines of 26 percent and 64 percent respectively, wiping an estimated GBP4 billion off the sector's value.

In 2009, the estimated value of online gambling was $5.4 billion (GBP3.5 billion) overall, but if the market was opened up, this figure could reach $12-$16 billion, assessed analysts.

A particular stress was put to the current position of the States, having in mind that the Republican control of the House need not necessarily spell the end of liberalization moves, since fresh revenues are desperately needed in both state and federal coffers.

"The Federal government’s non-partisan accountants, the Joint Committee on Taxation, have estimated online gambling could generate between $10 billion and $42 billion in new revenue by 2019, depending on the number of states that opt into a federal regulatory programme," it was stated.

In addition, it was specified that the unemployment rates in the States currently move around 10 percent, whereas 48 of 50 states face budget shortfalls. On a federal level the government’s deficit currently amounts to around $1.3 trillion.

"The economic backdrop against which to promote regulation and taxation of internet gambling has arguably never been more favourable," the article claims, adding that the industry giants such as Party Gaming are getting increasingly excited at the prospects of liberalization of the US market in terms of online gambling, which is a hugely popular pastime.

The company’s CEO Jim Ryan explained:"We are seeing things from a legislative perspective that are quite exciting for us." According to the publication, his comments undoubtedly reflect the mood of a growing contingent of gambling operators on both sides of the Atlantic.

Party Gaming’s $3.3 billion merger with Bwin was also assessed as a positive sign, and in a recent note to investors, the Morgan Stanley leisure analyst Vaughan Lewis said: "The overall political tide is moving firmly in favour of regulation, rather than prohibition.

"With its expertise... market-leading technology, strong marketing capability and good brands, we think the combined entity of PartyGaming and Bwin would be extremely well positioned to benefit from any market opening in the US. We include nothing in our forecasts for the US, so any new market here is pure upside."

In its recent research note, Barclays Capital stated: "In the event of Federal regulation, we believe PartyGaming would be the likely key beneficiary.

"Under this hypothetical scenario, we estimate the potential [underlying profits] uplift could be 94 percent for PartyGaming and 58 percent for Bwin and 888. On a state-by-state hypothetical scenario, we estimate the uplift for the group would be considerably lower, but still meaningful."

In relation to this merger, the publication suggests that it has spurred other major industry companies – in particular those companies that have made their peace with the US authorities - to look at alliance possibilities. It also looks into the potential of a few reputable groups in the industry, adding a particularly interesting speculation that Harrah's Interactive, the online division of the giant Vegas land gambling group, could be considering a GBP262 million, or 76p a share run at 888.com.

As another positive sign, the article assessed the successful IPO of Betfair; having listed on the LSE at the end of October at 1,300p, the shares soon touched 1,600p-plus, as tracker funds piled in confident it will canter into the FTSE 250 index at the December review with a market value above GBP1.6 billion.

In terms of individual US states legalizing online gambling independently, the article pointed out the recent movements in New Jersey, which is leading the way but moves afoot in Florida, Iowa and California.

"Whoever wins the race, state or federal, one thing is clear: more and more stakeholders in the US are finally coming around to understand the risks and implication of a ‘do nothing’ strategy. This is an opportunity cost and gambling companies are getting their bets on regardless,” it was stressed.

"But even as gambling industry stakeholders duke it out in the halls of legislatures around the country, as well as on Capitol Hill in Washington, the very fact that the conflict between them is intensifying signals that interest and investment in pushing for online gaming regulation is rising.

"With billions of dollars out there to harvest and market share to win, the entire online gaming sector looks ripe for an upturn in coming months. Investing in online gaming companies has always been a white knuckle ride - and there looks to be every sign this particular circus is once again rolling back into town."

For more information visit: http://www.iii.co.uk/articles/13365/are-online-gaming-firms-set-stellar-2011