Online gambling is suddenly the hottest segment of the international gambling market. DraftKings (DKNG -1.13%)Everi Holdings (EVRI 0.66%), GAN Limited (GAN -2.24%), and even Penn National Gaming (PENN -2.52%) have been shooting higher for the past six months on hopes that online gambling will be a highly profitable business for them. 

But the traditional gambling industry may still have a few tricks up its sleeve. MGM Resorts (MGM 0.87%) is one of the biggest online gambling companies in the U.S. already, and it is slowly expanding its presence. And Caesars Resorts (CZR) is only now starting to take online gambling seriously.

This week, it's Caesars that may be ready to make a big move into the market by buying its online gambling partner William Hill. 

Person betting on soccer on mobile device.

Image source: Getty Images.

Caesars' big move

The news on Friday was that Caesars and private equity firm Apollo have both submitted cash offers to acquire William Hill. The gambling company has a $2.9 billion market cap, so this is a big offer by any measure. But it's not that big when compared to the market cap gains DraftKings and Penn National have made, two of the companies that have benefited the most from online gambling hype, so it's understandable why Caesars wants in on the action. 

DKNG Market Cap Chart

DKNG Market Cap data by YCharts

The only problem is that Caesars isn't exactly cash-rich after the merger between Eldorado Resorts and the old Caesars Entertainment, which wrapped up in July. So it's not clear how it will come up with $2.9 billion -- or more -- unless it adds even more debt or sells stock to fund the acquisition. But finding the cash may not even be the biggest problem. 

The payback on an online gambling acquisition is questionable

It's easy to see why investors are so excited about the potential of online gambling. It could be a bigger market than gambling in casinos because there's no limit on when bets can be made, and it may be a much higher-margin operation because it doesn't require multibillion-dollar casinos to get up and running. But there are more obstacles than that. 

Only 14 states have legalized any sort of online gambling today, and the ones that haven't aren't huge business opportunities. In New Jersey, the most mature online gambling market, total gaming win in August 2020 was $87.8 million, led by $27.7 million in revenue for Golden Nugget and Betfair. By comparison, Atlantic City generated $199.1 million in overall gambling win during the same month, so the casino business is still bigger (for now).

Not only is revenue relatively small today, but new states have been slow to sign on, coming online one at a time over the last few years. Even if online betting is successful in the states where it's legal, there's no telling how long it will take to be legalized nationwide. And only a national business would make a multibillion-dollar buyout of William Hill worthwhile. 

Competition has no borders

What's even more concerning is that competition is only a click away. That'll keep customers searching for the best deals, which may limit margins. 

The competition also isn't limited in the way it is in the physical gambling business. The reason Caesars is so valuable is because of its physical locations in Las Vegas, which would be impossible to replicate. But an online casino is an online casino, no matter the brand on the app. And states seem more than open to having lots of betting sites, so competition could be extensive. If there are a dozen operators in states, the market opportunity will be limited. 

Has Caesars backed itself into a corner? 

Investors have to be wondering if Caesars didn't take online gambling seriously enough to begin with. It could have built its own online betting platform, but it chose to partner with William Hill instead. Now it may have to spend billions of dollars to bring the business back under Caesars' control. That may be its only option, but it's a costly price to bet on the online gambling business.