Will 2011 be the year of online gambling?

Recent major public company listings and mergers involving internet gambling groups in Europe, along with the “slight” possibility of a more liberalised US internet gambling market, are cited as indicators that the industry is gaining in popularity, according to a lengthy article in the investment publication Interactive Investor this week.
The article points to stockmarket gains of the world’s biggest online gaming companies between 2004-2006 to illustrate how quickly fortunes were made – and lost, quoting 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 it was followed by 12 months of extreme volatility before tanking thanks to the passage of the UIGEA in the United States .
British-based companies were among the biggest casualties in the decline in popularity for internet gambling investment, with shares in PartyGaming – then a FTSE 100 member – plunging 58 percent, while rivals 888 Holdings and Sportingbet saw declines of 26 percent and 64 percent respectively, wiping an estimated GBP4 billion off the sector’s value.
Last year, online gambling was worth an estimated $5.4 billion (GBP3.5 billion) overall, but that figure that could rise to $12-$16 billion if the market was opened up, analysts told Interactive Investor.
The publication outlines the current US position, observing that Republican control of the House need not necessarily spell the end of liberalisation moves as both state and federal coffers desperately need fresh revenues.
“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,” the article notes.
US nationwide unemployment rates are currently estimated at around 10 percent, and 48 of 50 states face budget shortfalls. In a Federal context, the government is currently running a deficit approaching $1.3 trillion.
“The economic backdrop against which to promote regulation and taxation of internet gambling has arguably never been more favourable,” the article asserts, claiming that major companies like Party Gaming are getting increasingly excited at the prospects of a more enlightened US approach to a hugely popular pastime.
“We are seeing things from a legislative perspective that are quite exciting for us,” Jim Ryan, chief executive of PartyGaming told the publication, which noted that his comments undoubtedly reflect the mood of a growing contingent of gambling operators on both sides of the Atlantic.
The $3.3 billion merger between  Bwin and Party Gaming is also a positive sign. In a note to investors recently, 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.”
And in a recent Barclays Capital research note, the investment bank said: “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.”
The article goes on to suggest that the merger has spurred other major industry companies – especially those that have made their peace with the US authorities – to look at alliance possibilities, and examines the potential of several well known groups in the industry.  One of the more interesting speculations is 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.
The successful IPO of Betfair is also flagged as a positive sign. 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.
After looking at the possibilities of individuals states within the US independently legalising online gambling, the Interacive Investor advises that there have been exciting developments, with New Jersey 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,” II observes. “This is an opportunity cost and gambling companies are getting their bets on regardless.
“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.”
http://www.iii.co.uk/articles/13365/are-online-gaming-firms-set-stellar-2011

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