Shares in several UK bookmakers took a hit on Tuesday after the US Justice of Department released an opinion stating that all online gambling is illegal under federal law.
Shares in 888 Holdings PLC (LON:888), William Hill PLC (LON:WMH), GVC Holdings PLC (LON:GVC), and Paddy Power Betfair PLC (LON:PPB) all fell after the US assistant attorney general Steven Engel published an opinion late on Monday that essentially reversed a previous one from 2011 that limited the scope of a 1960s ban to online sports betting only.
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In the opinion, Engel said that the department had concluded that laws prohibiting gambling were not “uniformly limited” to betting on sports events, adding that he expected the view to be tested in the courts.
The move quickly caused unrest among the bookie stocks, many of whom have been engaged in a land grab in the US since last summer when a US Supreme Court decision on 14 May struck down a 1992 federal law that prohibited most states from legalising sports betting.
The latest development now threatens to potentially derail a series of lucrative tie-ins and partnership deals made amid the mad dash for the US market.
GVC was one of the first to dip its toe in the water in July when it announced a joint venture with Las Vegas casino operator MGM Resorts International (NYSE:MGM) in which both companies have agreed to inject US$100mln.
Given the group has an update on trading next week, any possible response to the development is likely to be watched closely.
William Hill may also be feeling antsy after signing a tie-up with multi-billion-dollar casino chain Eldorado Resorts in September on the back of the legalisation, with plans to open sportsbooks in five of Eldorado’s 21 properties across three US states.
The legal developments could also be concerning 888, given that the firm recently spent US$28mln buying out the 53% stake in the All American Poker Network it didn’t already own as part of a future US growth strategy, a move that may now run into obstacles.
READ: 888 buys out US joint venture partner as it looks to exploit “significant” potential across the pond
Paddy Power Betfair wasn’t off the hook either after merging its US operations with fantasy sports firm FanDuel Inc in May, contributing all its US assets as well as US$158mln of cash to help pay down FanDuel’s debts of US$76mln.
Paddy Power will have 61% ownership of the combined business and FanDuel investors will own 39%. The Irish group will also have an option to take its ownership of the business to 80% after three years and to 100% after five years, although whether that is now viable is up for debate.
Pressure on two fronts
A potential restriction on US betting markets could leave the bookmakers trapped between a rock and a hard place across the Atlantic as the UK continues its crackdown on problem gambling.
Recent developments including plans to cut maximum stakes on fixed-odds betting terminals (FOBT) to £2 and the betting firms agreeing to stop running adverts during live sports broadcasts have piled pressure on the UK market.
Investor reaction overblown?
Despite the market reaction, some in the City see the volatility as a little exaggerated for one key reason … nothing has happened yet.
“Nothing has actually changed of any substance to any company,” a City analyst told Proactive, adding that the opinion only applies to betting across state lines, something that is not currently happening as US states set their own gambling laws, provided the activity does not go outside their borders.
The ongoing shutdown of the US government is also relevant, as there is no official policy response leaving the status of the opinion in legal limbo.
However, there could be potential issues around the pooling of liquidity in online games such as poker and slot machine jackpots, the analyst says, which could expose the gambling firms to legal scrutiny if the opinion becomes policy.
This view is echoed by Greg Johnson, leisure equity analyst at Shore Capital, who says that there is little risk to the current state-confined arrangements but if the scope of the Wire Act, which outlaws cross-state gambling in the US, were expanded to include payment processing for the proceeds of gambling there could be wider implications.
He also agrees that the market reaction has been a little overdone regarding any impact on the firm’s fortunes, as their US presence and cross-state exposure is not extensive.
“There’s not much there at the moment. It’s bad news if everyone’s hoping for it to become a meaningful contributor, but there’s not much in the price for it.”
In fact, Johnson says that if online betting were prohibited, bookmakers could, in fact, make more money within the states through retail sports betting as the prohibition drove customers into the physical outlets.
In late-afternoon trading Tuesday, 888 shares were down 7.6% at 164.1p, William Hill shares were down 3.5% at 162.7p, GVC was down 2.4% at 678.5p, and Paddy Power was down 2.4% at 6,110p.