Rubbing his hands at the prospect of blowing his wad in Vegas later this year, our Guru looks at the bookmaking and casino mini-sectors

Has anyone been to Las Vegas? I haven’t but will be going very soon, and I can’t wait – I’ve already promised not to get married or dress up as Elvis. I haven’t, however, said I won’t have the odd flutter.

Topically, this leads me to the interesting debate in our own market that I’ve been hearing increasingly more about – the attraction of bookmakers versus casino operators. Recent deregulation in the overall market, combined with market flotations and an increased reliance on technology, has made for an interesting gaming sector.

We all know of a bookmaker: not the sort of place your mother would let you go; they had the reputation of a seedy high street dive filled with men with time on their hands. The operation of the turf accountant has shifted somewhat since. As well as the traditional sort of betting, these shops now offer a range of numbers-based bets, via gaming machines – typically seen in the pub – as well as electronic versions of games such as roulette, called fixed-odds betting terminals (FOBTs).

The main bookmakers – William Hill, Ladbrokes and Stanley Leisure – have all been doing well. William Hill floated at 250p and is now worth 540p, operates one of the best-quality betting estates and is the most profitable operator of internet and telephone channels. Stanley Leisure is seen as a ‘pure play’ gambling company, which recently showed profits down 10 per cent, though bookmaking has had a good year. Ladbrokes, owned by Hilton Group, combines a strong betting offer with a hotel estate. Ladbrokes should drive attractive long-term growth as well as cashflows, mitigating earnings risk and upholding yield. The UK casino market is dominated by Rank (25 per cent), Stanley Leisure (31 per cent) and Gala (22 per cent), the remainder operated by smaller players.

The future for casinos is slightly more uncertain, mainly owing to government deregulation. Deregulation is set to cover opening hours, membership, the number of permitted machines and tables and a host of other regulations. Given the lack of clarity in this general area, one cannot conclude very much at the present juncture. The most optimistic time-table will result in legislation in the summer of 2005, not forgetting the UK General Election.

What isn’t in doubt is that there is very considerable external interest in the UK gaming market, especially from the US. It will be difficult to see any major casino operator committing to a multi-million- pound casino development unless there’s considerably more clarity on tax rates, which are still unclear. Likewise securing planning permission will be challenging – and obtaining licensing impossible – until what is being proposed is actually legal. It’s clear from both these points that incumbent operators are likely to have a pretty considerable ‘window of opportunity’ to enjoy the deregulated environment relatively unchallenged.

In addition to the main players outlined above – all of which have casino interests – there is likely to be considerable interest in potential new casinos from domestic players. For example, interest has already been expressed by the likes of Arena Leisure, and new developments have been announced in Wolverhampton and Windsor in conjunction with Gala Group. Hilton Group has made no secret of its desire to re-enter the casino market, via a resort casino at one of its existing large hotel properties. So too has William Hill, so although no plans have yet been articulated as to how it may move into casinos. It’s likely some nightclub and bingo operators, especially those with some of the larger high-street edge-of-town units, will seek to enter this area.

If we’re to compare our bookmaker to the current – albeit more elitist – casino operators, bookies are available throughout the day and offer the full range of services to any over-18s who walk in. Of course they’re small, offer no live entertainment or alcohol and are shut at night. On the other hand, they’re already on every high street, need no fresh capital, have low levels of new competition and have no need to invest in the costs of live entertainment, food and beverage requirements.

It’s estimated that William Hill and Ladbrokes each has approximately 1 million square feet of customer space. It would be preferable to own ten 100,000-square-foot casinos with 4,000 machines each, entertainment and a hotel and a stable customer and competitor base. However, the UK casino industry can’t offer that to investors at the current time. With solid growth and attractive net cash generation, big bookmakers represent an excellent second-best bet (pardon the pun).

There is potentially tremendous demand for gambling; and if enough new products and casinos are introduced, the total demand would grow in response. The driver would currently be machines (those FOBTs). If the machine-based casinos of the US are not proof enough then the success of the UK bookmakers with FOBTs should be. The favoured market as it currently stands must be the seedy old high street, as was. But don’t worry – I’ll let you know when I get back from my fact-finding trip to Vegas.

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