With third quarter earnings behind and the holiday season beginning, one’s thoughts naturally turn toward what we’ve seen so far this year and what it portends.
And we’ve seen a lot.
The days of riverboats, plain-felt gaming tables, and coin buckets seem as quaint as a Currier and Ives lithograph.
Likewise, gaming industry business models are evolving rapidly, meaning the investment models are changing, too.
We’ll address these trends in more detail as the year winds down, but here’s the changes we’ve seen and that investors should try to understand:
• Convergence. The divisions are fast disappearing between brick-and-mortar casino operators, online gaming operators, online platform providers and i-gaming operators, lottery and slot machine companies, gambling and playing for entertainment only.
• Social gaming has become the hot topic unforeseen by many just a short time ago.
While attention has been focused on online gambling, social gaming has swept into being as a multi-billion-dollar industry headed, some project $20 billion in worldwide revenue over the next decade.
Several years ago, the space belonged to the geeks of Silicon Valley with their funnily named companies, like Zynga.
Today, the biggest social casino operator is the world’s largest land-based casino operator, Caesars. And the second largest is a slot machine company, IGT.
And land-based companies are jumping into the space rapidly. Paradise Entertainment, though its LT Game division, will be among the first Asian gambling companies to extend this phenomenon to the Far East.
• Just another industry. All of the publicity given to casino saturation and cannibalization in the United States really leads to a larger conclusion – the casino industry has matured.
As such, the story isn’t just about growth, anymore.
It’s about total return, mergers and acquisitions, and financial engineering.
• Total return. Mature industries find that the way to enrich shareholders isn’t just through stock appreciation driven by higher revenues. It’s also about dividends and, sometimes appropriately and sometimes not, share repurchases.
The poster child for this new model is Las Vegas Sands, which is spending heavily on dividends and on buying back shares, yet maintaining a reasonable debt level, and continuing to look for growth opportunities.
Dividends aren’t as exciting as rapid growth, but, as Jeremy Siegel pointed out in his landmark book, Stocks for the Long Run, they provide the greatest total return to investors.
• Mergers and acquisitions. Because mature industries don’t grow fast, corporate leaders turn to buying competitors, or complementary companies, to grow their businesses through economies of scale, greater market share, acquiring new technology and markets.
This has been happening rapidly on the supplier side of the gaming industry, and has resulted in much of the convergence mentioned earlier as lottery companies buy slot machine companies that have bought online companies.
• Financial engineering. The M&A activity on the casino side of the business might be happening in a somewhat different way – through the creation of real estate investment trusts, or REITs.
Penn National started the trend, spinning off its properties into a REIT and with the original company becoming a tenant leasing the casinos from the new publicly traded REIT, Gaming and Leisure Properties.
Pinnacle is now following suit. Boyd has spent $3 million studying the issue. Caesars has proposed a REIT spin off to creditors as a way to unburden its Caesars Entertainment Operating Company of $18 billion in debt.
Eventually, more REITs could be formed specifically to own casinos, or existing REITs in related industries, such as lodging, could move in on casinos.
There are lot of differences between lodging and gaming that could retard such moves, but casino companies adopting the so-called asset light model is definitely a future trend, if not a prevalent one.
• Globalization. Casino companies and their suppliers are now truly international. Novomatic and Ortiz now sell slot machines in the United States. Genting has moved into the U.S. and Korea, Melco Crown into the Philippines and Russia.
Even as vanilla an American regional casino operator as Penn National has looked for overseas opportunities.
Globalization also has been spurred by the internet. British bookmakers are now international sports betting companies. UK-based online gamers are operating in New Jersey, for example.
Combined with convergence, globalization means the rise of companies that will be gaming conglomerates.
