Consolidation is trending in the global gaming industry. In the U.K., tighter regulations that could result in dramatic revenue declines for gaming and sportsbook operators are driving the movement. Both Paddy Power Betfair (PDYPY) and William Hill (WIMHY) are exploring potential mergers with CrownBet; though no deal is imminent. In North America, fierce competition between regional companies has crippled profitability growth; as a result, operators are considering potential mergers. Penn National Gaming (PENN) is in discussions with Pinnacle Entertainment (PNK), to form an entity that would control 45 gaming properties within 12 states and Canada; it would not own any real estate on the Las Vegas Strip.
Howie Long-Short: PENN and PNK and are ostensibly already partners; Gaming and Leisure Properties (GLPI), a REIT owned by PENN, owns most of the land where PNK operates its casinos. Creating a larger “network” of casinos would in theory keep regional players from competing properties, but that seems like wishful thinking to me. Legalized sports gambling is a potential $150 billion market. The big players (MGM, CZR) are coming to town armed with megaresorts; how can smaller operators without the resources compete? I should point out that the Australian entertainment group Crown Resorts, owns a 62% stake in CrownBet (OTC: CWLDY).
Fan Marino: After Michael Flynn agreed to cooperate in the Russia investigation, odds of President Trump’s impeachment soared. Betfair was quoted saying, “Trump has hit his shortest price yet to leave office before the end of his term”; the company has impeachment currently sitting at 4/6 (59% probability). Paddy has the odds at 4/7 (63% probability); the company’s Head of Trump Betting (yes, that’s a title) said that prior to news of Flynn’s cooperation, odds sat at 11/10 (47% probability).
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The NFL, MLB, NBA, NHL & NCAA all publicly oppose New Jersey’s pursuit to legalize sports gambling in the state, but MLS Commissioner Don Garber went on record at the recent Yahoo! Finance All Markets Summit supporting Governor Chris Christie’s efforts. Garber sees an opportunity for MLS to pave the way in supporting change to gambling laws, as his league doesn’t face the same public scrutiny those opposing New Jersey’s stance. The Commissioner noted how gambling is a part of the sport’s “DNA”, referencing in-stadium betting within the English Premier League; and explained how much revenue (an estimated $150 billion/year gambled illegally) would be generated, if gambling were to be legalized and taxed.
Howie Long-Short: There is a prevailing feeling that that the SCOTUS is going to declare that the federal government cannot prohibit states from authorizing legalized sports gambling. If that happens, established gaming sites/apps are going to have a huge lead on the abundance of competition looking to enter the space. The Stars Group (TSG) would be among the companies in the position to benefit. The Poker Stars parent company, which generated $305 million in total Q2 revenue (+ 6.8% YOY) and recently launched Poker Stars Power Up (a poker/video game hybrid), could easily expand their sports book and enter the U.S. market.
Fan Marino: Point spreads and the over/under not your thing? Try prop bets! Paddy Power (PDYPY) is offering odds on the city that will land Amazon’s (AMZN) $5 billion HQ2; with Atlanta, the front-runner at 2-1. Austin (3-1) and Boston (6-1) have the 2nd and 3rd best odds among the 238 cities that submitted bids. Unfortunately, Paddy Power does not accept bets from U.S. residents.
MLS commissioner on sports gambling: ‘I don’t think we can stop it’
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A study published by the Economic Enquiry, found that Twitter (TWTR) is a better predictor of sporting event results than odds makers. During the ’13-’14 English Premier League season, mathematicians at the University of East Anglia (U.K.) used software to analyze 13.8 million tweets (5.2/second). They compared the results with in-play betting on Betfair (PDYPY) and found that at any given second, a positive “combined tone” about one team indicated that team had a better chance of winning than the odds suggested. The software’s recommendations produced an average ROI of 2.28% on 900,000 bets; particularly astounding when you consider PDYPY gamblers lost an average of 5.41% on those same matches.
Howie Long-Short: The predictive power of social media works if you’re analyzing the right sections of the crowd. TWTR can beat the house. Unfortunately, the average gambler lacks the ability to analyze the tone or crowd worth following; and certainly, not in real time. The “wisdom of crowds” isn’t going to put casinos out of business.
Fan Marino: Speaking of gambling, casinos were illegal in Japan until parliament passed a controversial law last December allowing them to be part of larger resorts. Now American gaming companies are actively competing to gain foothold in a market that can be “bigger than Las Vegas”, according to Chairman of MGM Resorts International (MGM) James Murran. Both Las Vegas Sands (LVS) & MGM have repeatedly stated they would be willing to spend at least $10 billion in Japan, while Melco Resorts & Entertainment (MLCO) has expressed it would be willing to spend “whatever it takes” for the opportunity.
Twitter Could Be The Key to Successful In-Play Sports Betting, Says Study
Since Paddy Power Betfair (PDYPY) went public in 2000, the online gambling site is up 40-fold. With analysts projecting double-digit growth in both profits & revenue over the the next several years, it would seem as if investors would be bullish on the company. However, a recent 9% drop indicates otherwise. Investors are concerned about CEO Breon Corcoran unexpectedly stepping down, the company’s recent earnings report which reflected disappointing growth numbers within its online division and questions surrounding Britain’s pending review of the gaming industry. While shares are down 30% from their February high, they are currently trading at a 44% premium on enterprise valuation within the sector. For those who see an opportunity, a growing online sports betting business and strong balance sheet support their case for an investment.
Buy the dip with Paddy Power? A case for not betting on it yet
Howie Long-Short: Corcoran noted during the Q2 earnings call that the PDYPY consumer facing product is “not good enough” and that the “UI is a bit sloppy”. It’s also not an immediate focus for the company, with stack integration consuming 70% of technical resources. For an industry that is moving increasingly online, that must be a cause for concern.
Fan Marino: With college football season just 2 weeks away, I’m going to toss you an early winner. Auburn -34.5 (Caesars) vs. Georgia Southern. Take your antacid and give the 5 TDs.