Friday 20 September 2019

Paddy Power eyes big leagues as bet ban struck out by US court

Supreme Court decision opens up $150bn market to Paddy Power Betfair and US rivals and raises prospect of transatlantic M&A, writes Dan White

Baseball is just one of the sports Americans will be able to bet on after a US Supreme Court ruling brought about the legalisation of sports gambling, an activity previously restricted to places such as Las Vegas. Photo: Getty
Baseball is just one of the sports Americans will be able to bet on after a US Supreme Court ruling brought about the legalisation of sports gambling, an activity previously restricted to places such as Las Vegas. Photo: Getty

Dan White

The share price of Paddy Power Betfair and those of the other quoted bookies soared following last Monday's US Supreme Court decision striking down the federal ban on sports betting. The ruling opens the way for Paddy Power Betfair (PPB) and its rivals to enter the $400bn (€340bn) American gambling market.

By a margin of six to three, the Supreme Court ruled that the 1992 Professional and Amateur Sports Protection Act (PASPA) was unconstitutional. PASPA banned states from legalising sports betting. Only Nevada, where sports betting had been legal since 1949, along with Montana, Oregon and Delaware, which already had state sports lotteries, were exempt from the ban.

The ban on sports betting was challenged by the state of New Jersey and, after several reversals in the lower courts, the Supreme Court sided with the state last week.

In one of life's great ironies the New Jersey case was championed by former governor and prominent early Donald Trump supporter Chris Christie - while the 45th president famously came a cropper in New Jersey with his Atlantic City casino filing for corporate bankruptcy not once but four times.

"The legalisation of sports gambling requires an important policy choice, but the choice is not ours to make," wrote Justice Samuel Alito. "Congress can regulate sports betting, but if it elects not to do so, each state is free to act on its own."

In other words, while Congress would have been within its rights to ban sports betting across the whole of the United States, it couldn't prevent some states from legalising sports betting while at the same time allowing states which had already legalised it to "grandfather" their existing arrangements.

The ban has been strongly supported by most of the major sporting organisations in the United States which, given the number of betting scandals that have blighted American sport down the years, is not an entirely unreasonable position. "The Court's decision is monumental," said Major [Baseball] League Players Association Tony Clark. "The realities of widespread sports betting must be addressed urgently and thoughtfully to avoid putting our sport's integrity at risk as states proceed with legalisation".

While there is nothing in the Supreme Court ruling to stop Congress from enacting an outright ban on sports betting in the US, almost no-one expects that to happen. Although the case challenging PASPA had been brought by New Jersey alone, it is widely expected that several other states will also move quickly to legalise sports betting. Eighteen other states, and the governors of three more, submitted briefs to the Supreme Court supporting New Jersey's case.

One research firm had already predicted that, if the Supreme Court struck down PASPA, 32 states would have legalised sports betting within five years. With only Nevada having fully legalised sports betting, estimating the size of what has up to now been a largely illegal market is necessarily an inexact science. The American Gaming Association (AGA), which represents US casinos, estimates that the total sports betting market is worth $150bn (€127bn) annually.

"Today's decision is a victory for the millions of Americans who seek to bet on sports in a safe and regulated manner," said AGA president and CEO Geoff Freeman.

Some analysts question the AGA's estimates. Extrapolating from UK sports betting figures and adjusting for America's much higher population, Ohio State University economist Jay Zagorsky puts the total size of the US sports betting market at about $67bn, less than half of the AGA's figure but still an enormous market by any benchmark.

However, when guesstimating the possible size of the US sports betting market it is important to bear in mind that the figures being quoted, whether it is the AGA's $150bn or Zagorsky's $67bn, are the gross amounts wagered by punters, not the bookmakers' actual revenue.

It [$150bn] is a headline-grabbing figure. It is not a real reflection of the potential value of the market. From the $150bn you have to deduct what is paid back in prizes, which can be anything from 90pc to 95pc, to leave a net figure of somewhere between $7.5bn and $15bn. However there is so many potential variables it is almost impossible to estimate a potential value at this stage, says Goodbody Stockbrokers leisure analyst Gavin Kelleher.

Even allowing for this note of caution, there is little doubt but that the Supreme Court ruling is positive for PPB and the other quoted bookmakers. PPB's share price jumped by 18pc last week while the William Hill and 888 share prices were up by a similar proportion. Only GVC, which acquired Ladbroke Coral in December 2017 and whose share price rose by "only" 9pc, failed to fully join in the party. The Supreme Court's timing was fortuitous for the UK-quoted bookies, coming in the same week as the Department of Digital, Culture, Media and Sport recommended that the maximum stake on fixed-odds betting terminals be slashed from £100 to just £2. If the DCMS's recommendation is implemented it could knock £35m-£45m off PPB's annual revenues.

The ruling is likely to lead to a major upsurge in M&A activity in the gaming sector. On Wednesday, just two days after the Supreme Court delivered its ruling, PPB announced that it was in discussions with US fantasy sports company FanDuel about a "potential combination" between Paddy Power's existing US business and FanDuel.

FanDuel already has six million customers and its technology platform could be easily converted to sports betting. PPB's US businesses include a horseracing TV channel available in 45 million American homes, an online casino in New Jersey and the daily fantasy sport business, which it acquired for up to $48m in May 2017.

Even before any possible tie-up with FanDuel, PPB is already generating over $100m of revenue in the United States and has customers in more than 40 states.

Virtually all of the attention on this side of the Atlantic has focused on the possible implications of the Supreme Court ruling on the major British and Irish bookmakers. This of course completely ignores the existence of an enormous, and perfectly legal, US gambling sector.

With sports gambling banned in virtually all states, the legal US gambling sector is largely concentrated in giant casinos located in huge resorts such as Las Vegas and Atlantic City and on Native American reservations which, as they aren't subject to state law, have always been able to plough their own furrow on gambling matters.

With a total of $240bn being wagered in US casinos every year, some of these operators are huge. The largest, Las Vegas Sands, has a total market value of almost $62bn, while the second-largest, Wynn Resorts, is worth almost $21bn with number three, MGM Resorts International, having a market capitalisation of $17.8bn.

By comparison with these behemoths, the British and Irish quoted bookmakers appear positively puny. The largest is PPB, with a market of £8.4bn (most PPB shares are traded in London), GVC is worth £5.5bn, William Hill £2.8bn and 888 £1.1bn. In other words, Las Vegas Sands is on its own worth almost two-and-a-half times the entire UK quoted gambling sector while both Wynn and MGM are each worth almost as much as the UK quoted gambling sector.

The idea that these US casino operators will meekly stand by while PPB and the other UK quoted bookmakers steal their lunch is almost certainly fanciful. Far more likely is that they will respond to the Supreme Court's ruling by expanding into sports betting themselves and, with the giant US market as their springboard, expand into overseas markets - Las Vegas Sands, Wynn Resorts and MGM Resorts already have casinos in the offshore Chinese gambling hub of Macau.

However, the US casino operators' expertise is largely in casino gambling - even in Nevada where it is legal the total amount wagered on sports betting in 2017 was a relatively tiny $4.87bn, of which a mere $248m (just over 5pc) flowed through to the bookmakers in revenue. This lack of existing sports betting expertise almost certainly holds out the possibility of deals between the US casino operators and British and Irish sports betting firms.

What form will these deals take? Will they be joint ventures or outright takeovers? Would PPB or one of its smaller UK rivals be able to resist if Las Vegas Sands came calling or would it be an offer the Irish company couldn't refuse? (Despite repeated requests for comment, a Paddy Power spokesperson hadn't responded by the time this article went to press.)

While the Supreme Court ruling didn't rule out the possibility of the Federal Government legalising sports betting itself with a single set of sports betting regulations covering all 50 states, far more likely is that each state will introduce its own sports betting rules. Such state-by-state legalisation almost certainly means that the roll-out of sports betting in the US will be a piecemeal process spread out over several years.

Goodbody's Kelleher reckons that up to five states could legalise sports betting this year with more to follow in the years ahead. "This will over time become a very valuable market," he says.

A very high-stakes game of corporate poker just begun and it's still far too early to be placing bets on the likely eventual winners.

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