Safe to punt on some reform

Safe to punt on some reform
Colin Kruger

He may abhor poker machines, but the Tasmanian MP Andrew Wilkie sure knows how to gamble.

Whatever is happening behind closed doors in Canberra, it is hard to imagine that the Prime Minister, Julia Gillard, will be able to just tear up the Wilkie agreement on gambling reform that allowed Labor to form government.

All indications to date suggest that reforms may be postponed, while trials are held to firm up the case for mandatory pre-commitment systems on poker machines, rather than legislation being hastily rushed through Parliament before May 8.


Wilkie set this artificial deadline to ensure reform was enacted while his support for the government was still critical to its survival, but his luck ran out last year when the government effectively increased its majority in the lower house.

Wilkie is now going to have to play a longer-term game, and this could go either way. On the one hand, a delay could draw some political heat out of the issue and let the government have a better run at gambling reform down the track. On the other, it could allow the poker machine industry, or the government, to white-ant the proposal.

Pokie industry interests do not appear to be counting on the latter scenario. Clubs Australia stayed in attack mode this week, criticising an Australia Institute report that suggests the cost of reforms could be between $171 million and $342 million, a fraction of its estimate of $5 billion.

Clubs' high figure may be considered a joke, but there is no doubting the fears of reform held by the recipients of poker machines' annual income of about $12 billion.

Mandatory pre-commitment, which essentially forces gamblers to determine how much they are prepared to lose, has its flaws.

While the pokie industry's estimates of the cost of reform border on the farcical, the smartcard system being proposed undoubtedly would cost a substantial amount of money.

The pre-commitment registration process would almost certainly put off some casual punters without a gambling problem.

No one knows for sure what the financial impact of pre-commitment laws would be, but some analysts appear to back Clubs Australia's forecast that mandatory pre-commitment could cut pokie revenue by as much as 40 per cent.

Pubs and clubs won't be the only ones affected. Deutsche Bank analysts forecast that the potential loss of earnings per share (EPS) in the listed gambling sector could range between 5 per cent and 36 per cent.

The biggest impact would be on Tabcorp's casino spin-off, Echo Entertainment Group, whose EPS could fall by as much as 36 per cent because of its reliance on income from poker machines, Deutsche says. By comparison, the fall in EPS for James Packer's Crown is expected to be as little as 12 per cent. Tabcorp and Tattersalls are almost completely removed from the picture because their monopoly on pokies in Victoria expires this year. However, this is all guesswork and ignores one of the most surprising criticisms that independent gambling experts have of mandatory pre-commitment : the paucity of research showing that pre-commitment actually curbs problem gambling.

In fact, some expert testimony to the joint Senate select committee on gambling reform, chaired by Wilkie, indicated that problem gamblers may gain little from pre-commitment legislation because these hopelessly addicted individuals get to set their own limits.

It appears that the promise of mandatory pre-commitment, if it works, is that it will help those in danger of addiction by setting limits when they are not in the thrall of their addiction.

If the Productivity Commission was correct in estimating that 40 per cent of the pokie industry's earnings are from problem gamblers, mandatory pre-commitment doesn't sound like such a bad deal for the industry after all.

If you want to consider a worse outcome, how about a long-term plan to phase out high-impact pokies for their low-impact counterparts over a time frame that reflects the normal replacement cycle for machines?

By low-impact we are talking maximum bets of $1 and maximum payouts of $500, exactly the kind of machines that would be exempt from mandatory pre-commitment under Wilkie's proposal.

While not foolproof in preventing gambling addiction, there is much empirical evidence to suggest this could be far more effective and far easier to implement.

If successful reform does slash earnings from poker machines, it won't be only the clubs, pubs and casinos that will feel the pain. NSW and Victoria rely on pokie revenues for more than 10 per cent of each states' income.

For Ted Baillieu's recently installed government in Victoria, the potential heartburn from pokie reform is compounded by a poisoned chalice inherited from the Labor government it deposed last year. When poker machine licences run out for Tatts and Tabcorp in August, the two companies are meant to receive a combined compensation bill of about $1 billion.

When the former premier John Brumby decided, in 2008, that, despite all evidence to the contrary, the government did not have to pay compensation for the loss of licences, all he did was ensure there would be a day of reckoning with two listed companies that are obliged to protect their shareholders' interests. Neither company has said much but their carefully worded statements make it clear legal action will be taken if Baillieu doesn't pay his predecessor's bill.



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Reshuffles of Bankrupt Vegas Casinos

Familiar faces stay despite overhauls
Howard Stutz INSIDE GAMING

The near financial collapse of several Las Vegas-based gaming companies didn't shake the system.

Gaming revenues in the Las Vegas locals market have spiraled downward some 15 percent since 2008, pushed by the recession, record unemployment, a declining housing market and the diminished construction industry.

The lost business compounded the already shaky corporate financial structures that several casino operators brought upon themselves through leveraged buyouts, development projects or other ill-timed decisions.

Creditors and banks, however, didn't want to run the casinos.

For the most part, debt was restructured and financing was acquired. Management, however, remained in place.

That's why it's not shocking that George Maloof will continue to operate the Palms.

Maloof's ownership in the 1,300-room off-Strip hotel-casino will drop from 85 percent to 2 percent once gaming regulators approve a restructuring of $400 million in debt. The casino's creditors, investment firms TPG Capital and Leonard Green & Partners, will each own 49 percent of the property.

Without Maloof's marketing skills and vision, the Palms is just another attractive Las Vegas casino. The private equity firms are banking on Maloof keeping the Palms on track while the economy recovers.

The same scenario holds true for Station Casinos. The company emerged from bankruptcy last month largely intact.

Creditors had ample opportunity through bankruptcy to dump the founding Fertitta family and break up the 18-casino company. Boyd Gaming Corp. stood ready to acquire all or part of Station Casinos during the restructuring proceedings. Regional gaming operator Isle of Capri Casinos was prepared to manage several of the company's resorts on behalf of the lenders.

In the end, the banks and unsecured bondholders decided to stick with brothers Frank Fertitta III and Lorenzo Fertitta and their existing management.

The Fertittas put $200 million into the deal and own 45 percent of the new company, their largest stake ever. When Station Casinos was publicly traded, the Fertittas held 9.9 percent. Following a $5.4 billion deal to go private in November 2007, the Fertittas had 25 percent.

But the brothers are not in control. It's presumed Deustche Bank AG (25 percent), JP Morgan Chase & Co. (15 percent) and the former bondholders (15 percent) would vote as a bloc on any matter.

The lenders forgave $4 billion of the company's previous $6 billion in debt through restructuring. So it's likely they have the Fertittas on a leash. How long or short is anyone's guess.

The lenders are wagering that the Fertittas and their management team will do what they have done best -- operate the casinos. Before the economy fell apart, the Fertittas were known as decent managers.

That's what the debtholders want to see again, which is why Southern Nevadans have been inundated with the company's "We Love Locals" advertising campaign and a hefty promotional environment. Station Casinos is trying to win back the love of the consumer.

Same with M Resort.

Anthony Marnell III and his family spent close to $1 billion to build M Resort, opening the stylish property during the heart of the recession. The first few months -- helped by a heavy promotional effort -- provided a false sense of security.

Penn National Gaming bought M Resort's $860 million in debt for $230.5 million, a nearly 75 percent discount, less than two years after the resort opened.

At first, it seemed Marnell was out of the picture. Penn executives, however, liked the way he ran the property and gave him a reported five-year deal to serve as the casino's president. Marnell told Nevada gaming regulators he was negotiating with the company for an equity position in M Resort.

Herbst Gaming is the only troubled company that didn't follow the model.

The Herbst brothers, facing $1.15 billion in debt, proposed keeping 90 percent of their slot machine route business while giving creditors 100 percent of the company's casinos. The noteholders objected and the bankruptcy court approved a reorganization that gave senior lenders control of the entire company. The brothers were removed and Herbst Gaming is now Affinity Gaming.

Recently, family patriarch Jerry Herbst formed a slot machine route business -- JETT Gaming -- with the idea of reclaiming the slot machine operations at his company's Terrible Herbst convenience stores.

The more things change, the more they stay the same.