The full-court press for online poker has begun in earnest and there are some heavyweight alliances forming. Caesars Entertainment is aligned with 888 Holdings, and Wynn Resorts (Nasdaq: WYNN ) formed an alliance with PokerStars, one of the largest online poker companies. The latter pair expressly stated that they would work to pass federal online gaming regulation.
So far MGM Resorts (NYSE: MGM ) and Las Vegas Sands (NYSE: LVS ) are sitting out, but another big dog online, Full Tilt Poker, is yet to form a similar alliance. It may be speculation, but MGM’s wide range of casinos in the U.S. and on The Strip seems like a perfect fit for some sort of deal with Full Tilt Poker.
The potential is enormous
So what kind of an impact could online poker have on the value of gaming companies? The numbers get big awfully quickly. Forbes magazine estimates that Full Tilt Poker alone generated $500 million in revenue and $100 million in profit during 2010. The Financial Times estimated that in 2008 online poker revenue was $5.9 billion worldwide.
Since actual audited numbers aren’t available to us, we are left to make some educated guesses at what the impact might be. I’ve created a table of possibilities that cover modest revenue of $500 million to a high end of $10 billion annually. And since we don’t know exact margins I’ve estimated that EBITDA margin will fall in the range of 20% to 40%. Since there is very little depreciation in online gaming, unlike brick-and-mortar casinos, a huge chunk of revenue would flow to the bottom line.
These millions of dollars would have to be split among MGM, Wynn, Las Vegas Sands, and any multitude of online gaming companies. But the big players would catch most of the cash since poker rooms require a critical mass of customers and advertising dollars for promotion.
If we take MGM Resorts as an example and assume it can obtain a 10% market share of a $3 billion annual market at 30% margins -- that would add $90 million in EBITDA annually. I think that’s a pretty conservative number and could generate more EBITDA than the terribly disappointing CityCenter.
Of the big four, I think MGM has the most upside, with Macau-based Melco Crown (Nasdaq: MPEL ) having little to no impact since it has no U.S. presence. What’s an advantage in live gaming becomes a disadvantage when the game moves online.
It’s unclear exactly how any regulation may play out, but the opportunity for casino giants is enormous. Stay tuned to see how this one ends.
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