Taking advantage of the opportunities afforded by the expansion of sports betting and online gaming in the US is dependent on one key factor – market access.
As was shown in mid-December by the deal announced by Penn National to buy back the Hollywood Casino Perryville in Maryland, having automatic access to a state’s sports betting market by ownership or by agreement is now driving long-term investments in the US.
The acquisition marks the property’s return to full Penn National ownership after seven years within the Gaming & Leisure Properties (GLP) REIT portfolio. Setting up the REIT structure was intended to give Penn National greater flexibility and fewer debt commitments that go with owning casino properties.
But now, with the ownership of a gaming property in a state being the primary route to a sports betting license, Penn National has decided to pull in a different direction, at least with the Maryland property, which will allow it to launch its Barstool Sportsbook. And this is unlikely to be a one-off scenario.
Sports Betting Access and REITs
Chad Beynon, an analyst with Macquarie in New York, suggests the difference between whether a casino group goes down the REIT road and the question regarding market access is essentially one of time horizon.
“I still believe that a REIT partnership is a way to finance an acquisition or refinance a current property’s capital structure,” he says.
“It essentially provides another financing vehicle for operators. Having market access is similar in the sense that the economics are important, although they can be renewed and adjusted more frequently – 3/5/10-year deals versus a REIT 20/40-year deal.”
“Going forward, depending on the number of skins per license, I think that land-based license holders are in a strong position to partner with online operators, similar to what we saw early on with the REIT/Opco deals.”
Wheel Within Wheels
As Penn National’s Maryland deal illustrates, there are considerable advantages to having incumbency in any state looking to regulate sports betting and potentially online gaming.
“You get to have a shot at determining what form the liberalization will take, and, clearly, you are first in line when it comes to handing out licenses,” says Neale Deeley, VP of US sales and gaming at Sportradar.
This seat at the table is critical when it comes to whether a state wishes to offer more than one skin per sports betting licensee.
For an example of how this can play out, we can look to Michigan. As the analysts at Regulus Partners suggested, it is one of the most attractive state opportunities to date. Online gaming is allowed, it is a large enough opportunity with a population of circa 10 million (i.e., larger than New Jersey), and it comes with an attractive tax rate.
But with only one sports betting and one gaming license handed out to each of the 11 state gaming incumbents (both tribal and commercial), the market is, for now, wrapped up between some of the biggest names, including Pen National’s Barstool, DraftKings, FanDuel and many of leading lights.
“This means that looking at a $1 billion market as a strategic opportunity in the medium-term is only relevant if access has already been secured,” they write. “To this extent, the scramble for access deals is logical and justified.”
The Logical Song
As the Regulus team points out, the shortlist of licensees so far announced excludes some “potentially important names,” including theScore and bet365.
“Anyone not on the list is now in danger of missing out,” suggests Deeley. “This is the logic of market access playing out in real-time. It is logical to think that sometimes first-mover advantage doesn’t necessarily play out as you might hope.
But this isn’t the case in Michigan, a market which is likely in quick time to be worth $1 billion-plus in operator revenues. “In this instance, if you miss out now, you are potentially missing out altogether,” Deeley concludes. “The barriers to entry and now clear for all to see, and the stakes are getting higher, and the big are only going to get bigger.”
The significance of the Hollywood Casino Perryville in Maryland is that Penn National has clearly decided that access is worth the price of admittance – in this case, $31.1 million. Over time, that sum might come to be seen as being cheap.