March 14, 2019

Amid the undoubted excitement around PASPA’s repeal, US investors remain cautious according to Barry Jonas.

Interview: Barry Jonas, SunTrust Robinson Humphrey

Amid the undoubted excitement around PASPA’s repeal, US investors remain cautious according to Barry Jonas

Barry Jonas has been following the gaming industry in the US since 2003, holding roles in the finance teams at MGM and IGT before transferring to Wall Street and tackling the industry from the investor’s perspective.

While some may have expected the industry to come out of the starting blocks faster, the senior equity analyst at investment bank SunTrust Robinson Humphrey says he’s unsurprised by the pace of change. 

“Politics and gaming, no matter what form gaming takes, is generally slow moving and well behind whatever time expectation you have,” he explains.

“I am surprised at how many states seem to be exploring this,” he adds describing a kind of snowball effect as neighbouring states to those that have legalised jump on the bandwagon so as not to be left out.

“It’s really amplified in higher-taxed states, with the new tax reforms creating instability by lowering state tax deductibility levels– that creates a real burden on states to bridge increasing budget deficits, so it makes sense that sports betting is one of several areas being explored.” 

From an investor’s perspective the approach to the market differs radically between US operators and those from foreign regulated markets. 

While US businesses see the legalisation of sports betting primarily as a loss leader that will drive greater volumes of traffic to their existing businesses, namely casinos. The Europeans can see a more material benefit from bringing their well-established platforms into the market.

“We don’t cover the European listed players, but we talk to them and we track them actively”, Jonas says. “Clearly this has been a larger focus for them given the materiality, as well as regulatory issues that those companies are seeing in Europe”. 

Meanwhile, the stakes remain too high for many gaming technology companies, who Jonas says are taking a more cautious watching brief at this stage.

In order to build greater certainty in the market, Jonas and the team at SunTrust are heavily focused on building a clearer picture of the market sizing in the US and the profit ramification for investors.

“If you objectively look at per capita spend in various European and international jurisdictions you can easily get to a market sizing of anywhere from $5bn and $10bn or higher” he explains. However, the question remains of when and if that can happen in the US. 

“As we speak to our operators, all they’re willing to under-write at the moment, is gaming as a visitation driver; when we speak to our gaming technology companies, I think they’re hesitant to underwrite any sizable profitability from the US at the moment,” he says.

“Just to give this some scale: If $5bn to $10bn is the range of a fully ramped sports betting opportunity for gross gaming revenue – all of US commercial and tribal gaming is probably closer to $70bn dollars right now.”

With each state feeling its way through the regulatory process and some rolling out legislation involving high barriers to entry, such as the tax rate in Pennsylvania or more recently a likely official data mandate for in-play betting in Indiana, the prospect of growth is not without its challenges. 

That said, the Department of Justice’s reinterpretation of the Wire Act in January, somewhat counter-intuitively, is not dampening spirits according to Jonas.

“Most companies that we’ve spoken to around Q4 earnings have said that it has not affected their strategy overall”, he says. “They don’t belief the DoJ reinterpretation is enforceable and they’re forging ahead with their plans.”

He admits the move could cause hesitancy about pooling poker liquidity but that is looking ahead of where the market currently stands. It doesn’t hinder state-by-state progress and any ramifications for backend processes are generally regarded as unenforceable and therefore a distraction from more important issues.

As well as taking part in panel debates at ICE North America in May, SunTrust is opening the inaugural TEN Investors’ Day on Monday 13 May.

The invite-only half day event is specifically for investors and members of Clarion Gaming’s Executive Network (TEN).

Jonas said the event would be a unique opportunity for investors to network with, and hear directly from, industry participants from an investor perspective.
As states legalise throughout this year, such as New York and other large states, and we get more JVs and partnerships, especially with media companies, sports betting could become a really meaningful discussion point and come back into valuations, so we think the opportunity for investors to hear straight from some of the leading industry participants and to establish relationships via these unique networking opportunities is a brilliant opportunity,” he said.

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