Some thoughts on a new joint venture
Yesterday, MGM Resorts International (NYSE:MGM), Boyd Gaming (NYSE:BYD), and bwin.party digital entertainment (LSE:BPTY) announced a joint venture in the United States. This as-yet-unnamed entity – to be owned 65% by bwin.party, 25% by MGM, and 10% by Boyd – would, according to the Las Vegas Review-Journal, “offer poker to U.S. customers under bwin.party’s brands.”
There appear to be the usual outs for the parties if Congress doesn’t legalize Internet poker. While it may seem that these three are hitching their wagon to federal legislation (no particular surprise for Boyd and MGM), the release from bwin.party mentions the possibility of a state-by-state strategy being adopted. Unlike the federal JV, if the US goes state by state, “[t]he shareholders and shareholdings in a State NewCo may vary, depending on the state concerned and reflecting the contributions to be made by each shareholder. In addition to bwin.party, shareholders in State Newco may include MGM, Boyd and other partners.” Bwin.party seems to be leaving its options open, which is smart for them at this stage.
The various media stories also suggest that the deals are contingent on regulatory approval, i.e., sign-off from Nevada gaming regulators, who are expected to be key regulators under a federal ipoker regime. Will Nevada conclude that bwin.party is a suitable partner? It’s unclear. Bwin.party says it’s “preparing to enter into a suitability review with the Nevada Gaming Control Board in order to secure an advanced finding of suitability in anticipation of future US-facing real money poker opportunities.” Presumably it’s confident that it will succeed.
Bwin.party accepted wagers from US residents pre-UIGEA enactment. In 2009, its predecessor, PartyGaming Plc, signed a non-prosecution agreement with the US Department of Justice, pursuant to which Party is to still paying off $105M in forfeiture ($30M to go – to be paid out next year). (Interesting side note: Does the non-prosecution agreement apply to bwin.party, i.e., to the merged entity with the bwin side of the business rolled in by reverse-takeover? In a prospectus filed in anticipation of the merger, Party took the view that it does. The non-prosecution agreement states that “the protections provided to PartyGaming by this Agreement shall not apply to any successor entities, whether the successor’s interest arises through a merger or plan of reorganization or otherwise, unless and until such successor formally adopts and executes this Agreement.” The real issue is whether additional forfeiture is required in respect of the former bwin. On this point, the prospectus states (page 111): “It is therefore conceivable that, after Completion, the USAO could seek additional forfeiture from the Combined Group in respect of services provided by members of bwin’s group of companies in the US prior to the enactment of UIGEA … [T]he Company would object to that suggestion, but in any event, any such forfeiture would not be expected to be significant in view of the limited revenue bwin generated in the US prior to the enactment of the UIGEA.” So basically: no additional forfeiture obligations, but if we’re wrong, they’re not “significant.”)
This may or may not be enough. Kentucky still has a problem with bwin.party – witness the commonwealth’s civil action against the enterprise, among others, related to the Internet domain name seizure action started a few years ago. The point is that a federal non-prosecution agreement – if it applies the same way to the successor and is capped at $105M – may not matter when it comes to Nevada’s assessment of suitability. True, Nevada approved 888 Holdings as a suitable partner of Caesars earlier this year, but that was in respect of 888 as a supplier where gaming was to be conducted outside of Nevada. This is different. Here, a JV majority-owned by bwin.party will seek to do business in the US, including with Nevadans. I’m not clear on what Nevada will do here.
There’s already been the inevitable commentary about who wins and loses from this deal. It’s been in the works for almost 18 months, which is not to say that people can’t make mistakes after working on something for years, but picking winners and losers here is premature and very difficult without seeing the transaction agreements. If, for example, MGM and Boyd get an aggregate 35% of profits from a JV that doesn’t even leverage their own brands, that could well be a good deal for them and increase shareholder value.
This is actually an important point and not clear from some of the media coverage. In the MarketWatch release from yesterday, it’s confirmed that the JV will offer games under the bwin.party brands and Jim Murren (MGM’s CEO) says that he would be “very interested” in using bwin.party’s technology to operate sites under MGM’s brands, which seems to imply that’s not part of the deal. In the Review-Journal piece and in Forbes, however, the licence to MGM and Boyd to leverage technology from bwin.party to flog their own brands is part of what was put together and announced yesterday. Helpfully, the bwin.party release goes into more detail on this point and expressly references 15-year B2B agreements between bwin.party and each of MGM and Boyd pursuant to which the latter two may offer real-money online poker in the US under their own brands on the bwin.party technology platform. Bwin.party says that it “will receive a share of the online poker revenue generated by those services.”
This matters. It goes to what everybody is getting out of the transactions. Without knowing the revenue share (for example), it’s very difficult to know who’s getting the short end of the stick or, indeed, if anyone is. It could be a good deal for all parties, including US players.
Now Congress just needs to legalize Internet poker.