This summer may bring one of the biggest changes to U.S. gambling regulation in years when the Supreme Court rules on New Jersey's effort to legalize sports betting (Murphy v. NCAA). At issue is the law that places a nationwide ban on sports betting (outside of a few jurisdictions, most notably Nevada), the Professional and Amateur Sports Protection Act (PASPA) of 1992. Were PASPA struck down, it would likely mean an end to the 26-year prohibition of sports betting outside Nevada and set off a flurry of industry and state activity as gaming operators and tax collectors seek to cash in on a new revenue opportunity. We believe there is significant support for legalized sports betting, evident from industry advocacy, public polling data, the widening acceptance of daily fantasy sports betting, and the recent vocal support by major sports leagues, most notably the NBA and MLB. We would expect to see it in some form in several U.S. states soon after any potential repeal of PASPA.
In this report, we answer common questions about how sports betting legalization would affect U.S. gaming operators.
Frequently Asked Questions
Would legalized sports betting be a positive credit factor for the gaming industry?
Yes. We believe that a repeal of PASPA and the introduction of regulated sports wagering in the U.S. would be modestly credit positive for the gaming sector, though the gains will be incremental and not evenly shared, with some operators gaining more than others. We believe that, although hold rates are low and highly variable, the incremental revenue that a gaming operator would gain from the introduction of sports betting at a casino property--from both increased gross gaming revenue (GGR) and greater non-gaming revenue (e.g., food and beverage, hotel, entertainment, etc.) due to increased visitation—would certainly more than offset the low capex and operational expenses that they would need to establish a sports book operation.
Who would be the biggest winners if the U.S. adopts regulated sports betting?
Generally, we expect most gaming operators to benefit in some small way, at least in the short term. We expect many operators that open sports books will see an increase to GGR in the low-single digits, along with additional incremental nongaming revenue from customers who may not have otherwise visited a property.
The best positioned companies are large operators with diversified, national footprints that have experience running their own sports book operations in Nevada and can quickly export their expertise to properties in other markets. Companies like MGM Resorts International (BB-/Stable/--), Caesars Entertainment Corp. (B+/Positive/--), Boyd Gaming Corp. (B+/Stable/--), and Penn National Gaming Inc. (B+/Stable/--), among others, are best positioned to take advantage of legalization because they should be able to establish operations in newly regulated markets quickly and efficiently due to their operational experience, existing sports book personnel, and large cash flow bases that can support spending on promotions and marketing to attract sports bettors to the new, legal platforms. Insofar as the various states allow online or mobile sports betting, we believe that brand recognition will be critically important as bettors decide who to trust online and where to spend their online dollars. We also note that most national operators have their own branded mobile apps in Nevada and have existing relationships with B2B software and technology providers, which should give them an advantage moving sports book operations into newly regulated states. Smaller operators are at a disadvantage from the perspectives of branding, scale, and relationships and would see less upside from legalization.
We also believe U.K. gaming companies may benefit from the new legislation as legal sports betting is far more mature in the U.K. and Europe and years of direct competition have led operators like William Hill PLC (BB+/Watch Neg/--), Ladbrokes Coral Group PLC (BB/Positive/--), and Paddy Power Betfair (unrated)--three of the largest online sports betting companies in the world--to a level of product sophistication (particularly in mobile) that is currently unmatched in the U.S. We believe that many smaller gaming operators in the U.S. will outsource management of their sports book operations to third parties that have more experience and better mobile technology and that the U.K. operators would make logical partners. U.K. operators have publicly stated that they see the U.S. market to be one of their biggest growth opportunities, and we believe they will be important players in a post-PASPA world.
Lastly, we believe U.S. gaming equipment and lottery manufacturers, such as Scientific Games Corp. (B/Stable/--) and International Game Technology (BB+/Stable/--; IGT), are also well-positioned to benefit, particularly if sports betting is allowed at a retail level, because of their broad reach within the gaming industry and with state regulators. Scientific Games, for example, is a licensed instant lottery ticket seller in 38 states and in 2017 acquired gambling software provider NYX with an eye toward potential U.S. deregulation. IGT, meanwhile, has extensive relationships with both gaming operators and state lottery systems across the U.S. and also has exposure to sports betting through its operations in Italy. These companies have the chance to leverage their relationships with both operators and regulators and make use of their B2B capabilities.
Will the legalization of sports betting be a major boon to gaming operators, or a panacea for state budgets?
Almost certainly not. While industry activists and state legislators eager to shore up revenue-starved budgets often throw around large numbers when discussing legalization, we believe that actual revenues and EBITDA from sports book operations will be modest relative to overall gaming revenues. There are three main reasons supporting our assumptions:
Size. In absolute terms the potential handle of sports betting seems large. The American Gaming Association (AGA) estimates handle would be $150 billion nationwide. However, when compared to other forms of gaming the numbers become far less impressive. In Nevada, fully legal sports books are but a minor part of a casino's operations, accounting for only about 3% of money wagered in Nevada casinos. In 2017, Nevada casino patrons wagered nearly 7x as much money in penny slots as they bet in sports books.
Further, sports books just aren't very profitable, with one of the lowest hold percentages of any game offered in a casino. Of the 24 unique casino offerings tracked by the Nevada Gaming Control Board in 2017, sports books ranked tied for last at a hold of 4.8%.
Variability. In addition to being a minor contributor to a property's overall GGR, sports books are also one of the most volatile segments of a casino's operations. Handle is largely seasonal--with more inflows in the first quarter (when March Madness occurs) and fourth quarter (the only time all four major leagues are in play, and the majority of the NFL season)--but hold can vary at any time.
We believe that illegal betting in the U.S. will continue even if legal options become available due to consumer preferences regarding access, usability, and the potentially more favorable odds that unregulated and untaxed offshore operators and bookmakers may be able to offer.
What will the regulation of sports betting look like if PASPA is repealed?
We believe the states will regulate sports betting, as they currently regulate gaming in general, and that regulation will be a determining factor of operator profitability in any given jurisdiction.
How states choose to regulate sports betting will be of tremendous importance to how widely sports betting is adopted, how profitable it will be to operators, and how it may affect credit measures. We believe legislators must make decisions in three key areas that will have major implications for operator profitability.
The availability of legal sports betting will likely be the largest single factor in determining overall operator profitability. We envision three broad levels of access that regulators may opt for:
Restricted. Sports betting limited to physical sports books in existing casinos. In this scenario, we expect legalization would provide a small and stable increase to operating performance as casinos add another product offering to increase visitation.
Physical sports books in casinos along with online and mobile betting. The size of the opportunity in mobile will depend on how easy it is for bettors to sign up and play.
Widespread. Physical sports books in casinos, online betting, and retail betting (for example, in gas stations or convenience stores). This scenario provides the highest revenue base but may pressure profitability by inducing intense competition.
Tax rates affect sports book profitability in two ways, both as a direct expense and as a drag on revenue if untaxed, illegal platforms can attract bettors by offering better payout ratios or odds. Considering the widespread availability of illegal forms of betting, if tax rates are not calibrated correctly, we believe the regulated market's total handle--and win--will suffer as a result.
Licensing requirements are a barrier to entry in gaming and thus favor existing operators. States could opt to limit licensing to existing casino operators, alone or in partnership with a third party, or allow a wider range of operators to offer sports books.
In our view, the more widespread the offering, the more companies that are allowed to participate in sports betting, and the higher the tax rate, the lower the profitability for operators.
If PASPA were to be repealed, would it have any immediate ratings impact?
Most likely not. If PASPA were repealed tomorrow, only a handful of states would be ready to begin allowing sports betting. We believe it will take years for the regulatory frameworks to shake out across state legislatures. Further, sports betting represents too small a slice of overall GGR to have a profound and immediate impact on credit measures, at least in the short term. We expect, at least early on, for legalized sports betting to have a low-single-digit impact on any individual property's GGR and we have almost no issuers whose ratings would change in such a scenario.
However, we believe ratings could change due to consolidation in the industry, which has been a major theme for European and U.S. gaming companies over the last several years. For example, U.S. operators may seek to acquire the technical knowledge and software needed to operate a sportsbook rather than enter into partnership agreements. Further, operators may turn to M&A activity to gain a foothold in markets where sports betting is legal. Insofar as mergers and acquisitions usually increase near-term leverage, the acquiring firms may face negative rating pressure.
Outside of M&A activity, the greatest downside risk is if companies overinvest or are too imprudent in fighting for market-share in newly liberalized jurisdictions. We believe most management teams will recognize that new sports betting revenue is likely to be incremental, rather than transformative, when deciding how much to invest in competing for new customers. However, right-sizing investments and risk tolerance may be a challenge because estimates of the size of a future U.S. sports betting market vary wildly. Some operators may find themselves overinvested if the true market size turns out to be smaller than expected.
If a company came to dominate online sports betting markets there could be some upward rating pressure because of increased scale and competitive advantage. However, differing state regulations may make hegemony difficult to achieve. We also believe sports betting will begin as a very fragmented market and would not expect the competitive environment to reach an oligopolistic stage for many years, if ever.
|Primary Credit Analyst:||Jason Starrett, New York (1) 212-438-2127;|
|Secondary Contact:||Melissa A Long, New York (1) 212-438-3886;|
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