2 Jul: Weekend Edition No.3
SG strategic review, Q2 earnings preview, OSB-iGaming TAM rise, Sector watch - financial trading, Rank trading update +More
Good morning and welcome to a packed Weekly Edition of E+M. Corporate positioning is very much the theme of the week. On Wednesday, Scientific Games unveiled the results of its strategic review and will offload its sports-betting and lottery units to concentrate on what it sees as the omni-channel gaming opportunity. It was followed yesterday by the news that MGM would be buying up Infinity World’s 50% stake in CityCenter and immediately completing a sale-and-leaseback arrangement with Blackstone that will leave the company with a surfeit of cash. Speaking of rolling in it, we start with a Nevada Q2 preview that suggests the sector is bracing for further forecast-busting earnings announcements, while new analysis suggests OSB and iGaming TAM are also set for more growth.
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Las Vegas Q2 preview
The beat goes on: Analysts are confident Las Vegas Q2 volumes will beat market expectations in the next few weeks. With May GGR on the Strip up 26.7% on May 2019 and up 35.6% MoM to $655.5m, analysts at Macquarie said their survey of Las Vegas operators pointed to “Q2 beats and continued momentum” for the listed groups, with booking trends above pre-COVID levels and leisure demand driving the recovery. Scientific Games’ CFO Mike Eklund also commented on the strong momentum during the group’s strategic review/sale-IPO call earlier this week.
“The quarter is turning out to be very strong again. Momentum has continued from the first quarter into Q2. We are very confident in the consensus numbers which are out there.”
Leisure society: The impact of leisure consumers as the primary source of demand was highlighted by the 10% rise in mass play in April vs. 2019. Daily visitor numbers were at 74% of 2019 levels, however, the 8% rise in drive-in traffic vs. April 2019, “an all-time record”, was “the tailwind in the rebound” and expectations for total Strip revenues have increased 5%-14% since December.
Catch a fire: Following recent calls with operators, Caesars told Macquarie that occupancy levels were around 85% and MGM described Las Vegas as “on fire” during Memorial Day weekend, with occupancy rates “into the 90s” and surpassing 2019 levels. MGM said it expected occupancy rates for October to be above 90%, “almost a year ahead of original expectations given several months ago.”
Record revenues: Slots were performing strongly and management noted that “the propensity to game is the highest in company history, including record slot revenues,” Macquarie added. This was confirmed by Deutsche Bank, which noted that slot revenues on the Strip were up 24.5% vs. May 2019 to $358.3m and hold was up ~7bps to 8.3%, which was up 7.8% on LTM average hold.
Accounting for typical seasonality in May and June, Q2 GGR should increase by more than 30% QoQ, and “conservative expectations” for MGM, Caesars and Wynn should see them enjoy GGR rises of 20%, 25% and 11% respectively. With the market buoyant however there is potential for further upside, “like the 4% MoM decline (vs the typical -9%) in April,” Macquarie added.
Local heroes: LV local and downtown casinos have also been performing strongly. May GGR for locals was up 25.2% on 2019 to $258.5m, with slots up 24% to $219.3m on May 2019. Table revenue was up 33.6% to $39.2m in May 2019. Downtown GGR was up 37.2% to $75.2m vs. 2019, while Reno GGR was up 19.4% to $65.8m.
OSB and iGaming TAM
TAM up: Analysts at Jefferies have set a TAM target of $38.7bn for US online sports-betting and iGaming at maturity, with the group’s model now including both iGaming and more states legalising faster than first expected. iGaming spend per capita is set at $184, double its base case for OSB and fewer states are expected to legalise iGaming (24 vs. 45 states for sports-betting).
“We expect iGaming TAM could reach at least $19bn by maturity, although the timing is less certain,” Jefferies noted.
No winners yet: Online corporates are bullish about their prospects, Jefferies said, but because “the legalisation processes, technology offerings and ultimately M&A are far from determined at this time, we believe the winners and losers are still to be decided.”
Regulated growth: Sector-wide growth will be driven by ongoing regulation in states where there are already active land-based casinos and online sportsbooks. Three states currently offer a full set of regulated iGaming, another three have limited offers and Jefferies expects “legalisation to accelerate as states seek new sources of tax revenue”. Timing remains uncertain however and as E+M noted recently, further iCasino regulation is far from certain and will depend on factors such as iCasino cannibalisation and whether land-based operators will lobby against further regulatory expansion.
App actives: FanDuel’s and DraftKings’ Google Play apps are a close match and are “notably ahead of the competition for both rankings and daily users”, Jefferies noted, although BetMGM is closing the gap on the Google Play Store. William Hill is the fourth most used OSB app in the Store.
MGM/City Center deals
The top line
MGM has agreed to acquire Infinity World Development’s 50% share of CityCenter for $2.9bn (including share of debt), valuing it at $5.8bn or 14x 2019 adjusted EBITDA.
Contingent on completion, MGM will then flip the Aria and Vdara real estate to Blackstone for $3.89bn, meaning MGM takes in circa $1.8bn of cash. MGM will pay $215m annual rental. The transactions are expected to close in Q3.
Swimming in cash: The Blackstone/CityCenter deal represents a continuance of MGM’s asset-light strategy and Jefferies analysts noted that when coupled with the Q1 end $6.25bn of cash on the balance sheet, MGM is now highly liquid. They were also keen to suggest where they think that cash might be directed - digital.
“We expect the use of proceeds could include digital assets related to BetMGM, including its JV partner ENT- LON, for which it had made an initial offer in January 2021 and according to UK takeover laws can make an ensuing offer again on July 19, 2021,” said the Jefferies team.
Shunned: The only slight negative concerned MGM Growth Partners which would appear to have been sidelined in this deal. Truist suggested the emphasis for MGP would be to seek more non-MGM deals while attention might now turn to whether MGM is more likely to reduce its ownership stake. Macquarie said the deal would be positive for all gaming REITS and operators that own 100% of their Las Vegas/Nevada real estate.
Scientific Games analyst reaction
The price is right: Pricing up the soon-to-be-disposed lottery and sport-betting units of Scientific Games, Macquarie’s analysts estimate the lottery arm will raise a price of between 10-15x peak EBITDA of $404m or between $4bn-$6bn. Meanwhile the sports-betting unit – which has already ignited huge speculation – could rise between 3 and 6x sales of circa $125m or between $375m-$750m. Macquarie note that Scientific Games acquired the NYX online gaming and sports-betting business for $631m in 2017.
Sector watch - financial trading
Boyz in the hood: Audacious is perhaps the best word to explain how Robinhood filed for its IPO on Thursday this week, just a day after it was fined $70m by Financial Industry Regulatory Authority (FINRA) for “systemic supervisory failures” and causing “significant” harm to its customers. The float document offers some hype-worthy flannel - “we are all investors” and “our mission is to democratize finance for all” - alongside the key numbers. Total revenues rose 245% in 2020 to $959m while adjusted EBITDA rose to $155m from minus $74m. Further, Q1 revenue rose 209% to $522m and adjusted EBITDA was $155m vs minus $47m. In his introduction, CEO and founder Vlad Tenev, puts the case for why Robinhood and why now:
“Some pundits deride individual stock ownership and say that people should only be investing in passively-managed funds through an adviser. We reject this, and we believe that it’s important - not just for investors but also for the broader markets - to be able to own stocks directly in the companies you love, without any middlemen.”
Meme streets: Robinhood makes much of tech trends being in its favour and the ability of smartphones to “reshape legacy industry growth trends,” which all sounds very familiar to the arguments about mobile betting. Monthly average users hit 17.7m in Q1 while ARPU rose 65% to $137 as US retail investors jumped on a succession of meme stock trends in the first few months of this year. The biggest risk factor comes from how Robinhood makes money from the payment for order flow (or the catchy acronym PFOF), which has drawn scrutiny from the SEC (Robinhood is subject to seven regulatory investigations right now) and was worth $720m to Robinhood in 2020. Another controversial area is cryptocurrency, worth 17% of total revenues in Q1. Crypto assets under custody at the end of Q1 stood at $11.6bn.
Taste the difference: More than a bit overshadowed by the retail financial trading boom in the US, this week UK-listed CFD and financial spread betting operator IG Group completed its $1bn buyout of US-based options trading house tastytrade. The deal is notable not just for the price tag as it pitches IG headlong into the currently juiced-up US scene. First announced in January, the deal was funded by $300m in cash and the rest in new shares and is a landmark acquisition for IG, which has no doubt been viewing the day-trading frenzy in the US with considerable envy.
Rank trading update
London falling: The extent to which continuing restrictions in its home market of the UK and also in Spain are constricting its business operations can be seen in the declines in average weekly NGR like-for-likes for the first six week of trading. Grosvenor was down 17% on May19 levels at £5.5m, Mecca bingo was off by 20% at £2.6m and Enracha in Spain was down by 34% at £0.5m. Worst hit was Grosvenor’s London casino estate where the lack of international visitors, reduced office workers and late-night challenges meant revenues tumbled by 38% on the same period two years previous. The good news was that Rank won a VAT case this week related to an £80m claim. The clock is now ticking on the tax man’s appeal and negotiations around the “exact quantum” of settlement. Rank will report full-year figures on August 19.
Virginia May AGR
The power of four: Four months in, Virginia has passed the billion-dollar mark in handle. In total, $227m was gambled in May and with the hold hitting 10.21% in May it resulted in adjusted gross revenue of $15.7m. In the first four months, AGR stood at $34.4m. Notably, bonusing stood at $5.2m for May and $40.6m in the four-month period. Of the seven operators currently active in the state, only four reported positive AGR resulting in tax receipts for May of $2.4m.
Newslines
Raising Arizona: Arizona is proposing a 10% sports-betting tax according to updated rules published by the Arizona Department of Gaming. An upfront licensing fee of $750,000 has also been set. Meanwhile, Bally Corporation has signed up to be the sports-betting partner of the WNBA's Phoenix Mercury, the first such partnership for a professional women’s team. The 25-year deal gives Bally’s access to its 15th state.
Frankie says: Kindred Group will acquire the remaining 66% of the shares of B2B supplier Relax Gaming for a value of up to €320m. Kindred first invested in Relax in 2013, the acquisition will fast track its focus on strengthening its “product control and product differentiation capabilities”. Kindred will pay an initial cash amount of €80m, with the maximum earn-out payments of €113m payable in 2022 and 2023, subject to targets being met. The transaction will be financed through Kindred’s existing cash and credit facilities.
What we’re reading
Working it from home: Why virtual dealmaking is here to stay.
Feel the unease: When gambling money meets the world of high art (paywall).
Calendar
8 Jul: Entain Q2 update
14 Jul: Casino Beats Summit, Malta day 1
15 Jul: Casino Beats Summit, Malta day 2
Contact us
Scott Longley scott@clearconcisemedia.com
Jake Pollard jake@openmediaservices.com