Sega Sammy Seeks Majority Stake in Japan

Sega Sammy Holdings Inc. is all in when it comes to Japan’s casino market. The slot maker will seek a majority stake in any investment partnership in the country. But enthusiasm for the jurisdiction may be waning, as the government of Prime Minister Shinzo Abe has been weakened by defeats in local elections and groups advocating overly strict regulations get the upper hand. President and Chief Operating Officer Haruki Satomi (l.) says the company will pay attention to the entire resort.

Japanese slot maker Sega Sammy Holdings Inc. does not want to be the junior partner in any Japanese casino resort, the company tells Reuters. The gaming manufacturer says it will seek a majority stake in any Japanese casino project.

The announcement came as concerns continue to rise about the budding market. When parliament legalized casinos in December, deep-pocketed international operators started lining up to prepare their proposals, including the Las Vegas Sands Corp., Galaxy Entertainment, MGM Resorts International, Hard Rock, Melco Resorts & Entertainment, Wynn Resorts and others.

But with Prime Minister Shinzo Abe’s influence and popularity on the wane, casinos—which have never enjoyed widespread public support—are becoming a harder sell. And stringent regulations to curb problem gambling could also curb profitability, making those global gaming giants think twice about sinking up to $10 billion into a Japanese IR.

Any foreign investor would need a local partner to qualify for one of the integrated resort licenses. Despite concerns about the legislation, global operators continue to court local real estate, construction and transportation firms, and some are willing to cede the majority investment. Galaxy has said it would not insist on a majority stake, Reuters reported. And Hard Rock has said it would settle for a stake of between 40 percent and 60 percent.

Sammy Sega says it plans to play a leading role. “We definitely want to take a bigger stake in Japan—not just the entertainment part, but the whole resort,” said President and Chief Operating Officer Haruki Satomi at a conference in Tokyo. “We hope to take a majority stake. We are preparing for that.”The Japanese pachinko operator based in Tokyo now holds 45 percent of the new Paradise City resort in South Korea, which opened in June; Paradise Co. Ltd. is the majority shareholder.

Part II of Japan’s gaming legislation, due by the end of the year, will lay out the regulatory structure, detail the tax rates and include other rules for would-be operators. The government is expected to award two to three licenses to start, with Osaka and Yokohama seen as likely locations.

But clouds continue to gather as analysts draw back from estimates that Japan could become a $25 billion-per-year market. Recent election results in Tokyo and Sendai and the results of a new opinion poll point to a decline in public support for Japan’s Prime Minister Shinzo Abe, who propelled the IR bill through parliament.

Waning support for the PM “could easily create a headwind” regarding parliamentary passage this year of legislation for creation of a casino industry, Vitaly Umansky of brokerage Sanford C. Bernstein Ltd. told GGRAsia. “Continued negative coverage of the Abe administration, coupled with political losses for the Liberal Democratic Party may reduce support for the gaming agenda, which already has only limited public support” to begin with, he said.

The July poll cited by Reuters said support for Abe has dropped 10 points, to just 26 percent. The survey also indicated that 56 percent of respondents did not back Abe’s LDP government, 12 points more last month.

“The other geopolitical risk that has resurfaced is North Korea,” wrote Umansky. “Further escalation of tensions, may also reduce political support in Japan to get gaming legislation passed quickly, as the political situation refocuses the Japanese government’s energies.”

Public disapproval of casinos aside, Japan continues its love affair with pachinko. According to the Straits Times, there 4.5 million of the slot-like games in some 11,000 pachinko parlors across the country, compared with fewer than 200,000 slot machines in Las Vegas. Pachinko brought in 23.3 trillion yen (US$210 billion), or about 4 percent of the country’s gross domestic product in 2015, according to the non-profit Japan Productivity Center. Japan also offers legal sports betting on horse, powerboat, motorcycle and cycling races and also has a lottery.

But even pachinko is losing its luster. Pachinko parlors have declined about 40 percent since the 1990s, according to official statistics. Takayuki Miyake, of addiction service the Oneness Group, says the number of gamblers in Japan is also decreasing. “This trend will continue as the population ages, while young people become less interested in gambling and more interested in free forms of online entertainment and games. More young people may try their hand at the casino, while shopping or watching a show at the IR, but we expect a minimal impact on gambling addiction figures.”

Only 12 percent of Japanese residents approved of legalizing casinos and 44 percent were against it, citing concerns about social ills and gambling addiction, a 2016 survey by national broadcaster NHK showed.

Worse yet, Casino.org reports that lawmakers could further quench the excitement by imposing high entry fees on citizens—as much as $100 per visit—as well as prohibiting casinos from extending credit to domestic players and banning cash slot machines.

Word is the companies that once salivated for Japan are now looking at Brazil. The Las Vegas Review-Journal reports that the Sands Corp., MGM and Caesars all are keeping an eye on legislation that could legalize casino gaming there.

“Our company, like all of the companies actively looking at Brazil right now, is going through an exercise in process,” Caesars executive Jan Jones Blackhurst acknowledged. “But you’re looking at what could be significant markets.”

Sheldon Adelson is certainly interested. The chairman and CEO of the Sands Corp. met in May with President Michel Temer and other high-ranking government officials. Rio De Janeiro Mayor Marcelo Crivella then told the O Globo newspaper Adelson may be prepared to invest up to $8 billion in a Brazilian integrated resort.

“If you look at comparable numbers for gaming in that region, it’s clearly a market you need to pay attention to,” said Rob Goldstein, Sands president and COO. “Adelson decided to have a look for himself and he was impressed with what he saw.”

MGM Chairman and CEO Jim Murren also reportedly visited Brazil recently to have a look. As in Japan, the casino companies are waiting to see if the government puts out the welcome mat in Brazil.

“The final outcome will depend on what that legislation looks like,” Blackhurst told the Review-Journal. “Is it at a tax level that allows you to invest the capital they expect? Are the regulations going to be of a standard that will allow United States companies with highly privileged and regulated licenses to be able to comfortably participate?”

Goldstein added that the process is “in the early innings” and that the industry is “still far away from seeing legislation and the approval process.”

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