By Kate O'Keeffe and Alexandra Berzon
The owner of PokerStars, the world's largest online poker site,
has agreed to sell itself for $4.9 billion in a bid to re-enter the
U.S. after being forced out by the Justice Department several years
ago.
Online gambling proponents hope the deal will radically reshape
the industry in the U.S., which has thus far disappointed even the
most pessimistic revenue estimates and now faces increasing
opposition from powerful opponents like Las Vegas Sands Corp. boss
and major Republican donor Sheldon Adelson.
Shareholders of PokerStars parent Oldford Group Ltd. will sell
their holdings to a unit of a small Canadian gambling equipment
maker, Amaya Gaming Group Inc., according to a joint statement from
the companies. Principals of Oldford, such as Chief Executive Mark
Scheinberg, will also resign from their positions with the company.
Oldford's other major online poker brand, Full Tilt Poker, will be
transferred as part of the deal.
The transaction should "expedite the entry" of PokerStars into
regulated markets, particularly the U.S., the statement said.
PokerStars is by far the largest online poker operator in the
world and was once a dominant force in U.S. online poker,
sponsoring poker pros here and funding shows on major television
networks. It remains the biggest brand name in poker in the U.S.
despite being out of the market for three years. In 2013, Oldford
Group made $1.1 billion in revenue and $420 million in adjusted
earnings before interest, taxes, depreciation and amortization,
according to the statement.
The company suffered a major setback in 2011 when the U.S.
Justice Department, which had for years considered online gambling
illegal, cracked down on the booming online poker industry that had
developed in the country by filing civil lawsuits against
PokerStars and other poker sites. The Justice Department indicted
executives from poker sites, including Isai Scheinberg, Mark
Scheinberg's father, on criminal allegations such as bank fraud,
money laundering and illegal gambling operations.
Isai Scheinberg was identified by prosecutors as founder, owner
and principal decision maker for PokerStars. He hasn't been
arrested and remains out of the country. The Isle of Man-based
company and its founder deny wrongdoing. Among its defenses,
PokerStars has said poker is a game of skill rather than chance,
and therefore was legal.
The Justice Department's decision to target PokerStars caused a
significant hit to the U.S. poker market.
But just months after the crackdown, dubbed "Black Friday" by
poker players, the Justice Department in another twist ruled that
states were free to legalize online gambling, reversing its
long-held position.
In an effort to return to the U.S., where its operations remain
blocked, PokerStars in 2012 agreed to pay $731 million to settle
its civil suit with the Justice Department with no admission of
wrongdoing and to buy a rival site. Isai Scheinberg's son, Mark,
became the chief executive, while the elder Scheinberg was
prevented in the settlement from having a direct management
role.
So far the settlement and PokerStars' heavy lobbying efforts had
been for naught with the company still without a foothold in
Nevada, Delaware and New Jersey--the three states that have since
started allowing people physically in their states to engage in
some forms of online gambling. Casino companies hoping to enter the
U.S. online gambling market have argued to legislative bodies and
regulators that PokerStars should not be allowed to participate in
regulated online gambling in the country due to its history.
In December, New Jersey gambling regulators said that
PokerStars' application for a license to operate online poker in
the state would be suspended for two years primarily due to "the
unresolved federal indictment against Isai Scheinberg for the
alleged violation of federal gambling statutes." New Jersey's
Division of Gaming Enforcement said it could reconsider the
application if the company demonstrated "significantly changed
circumstances."
Meanwhile regulated online gambling, which includes Internet
poker, has gotten off to a slow start across the U.S. Gambling
firms had been watching New Jersey--by far the most populous of the
three states to legalize online gambling--for a read on how the
market could develop across the country should more states get on
board. But analysts say the state is only on track to generate
revenue of $130 million to $150 million in its first year, which is
far below even the most conservative earlier forecasts of a couple
of hundred of million dollars.
That figure compares to an estimated EUR25.9 billion (US$35.5
billion) generated by the global online gambling industry, driven
mostly by betting in Europe, according to research firm H2 Gambling
Capital.
Part of the problem for online gambling companies in the U.S. is
that some major banks, concerned about regulatory risks given
online gambling remains banned in most states, won't let their
customers use their credit cards to play.
Another issue is the fact that PokerStars has thus far been
locked out of the market, say some industry observers, including
rival online gambling outfits. They said they believe the Amaya
deal will pave the way for PokerStars to enter New Jersey and other
markets.
"You can't create a market without PokerStars, period," said
Jeff Ifrah, a litigator for the online poker giant.
However, some remained skeptical about PokerStars' ability to
expand in the U.S. Even with the new structure under Amaya,
PokerStars' history means "it's going to be an uphill battle to get
into most states," said Adam Krejcik, Managing Director at Eilers
Research.
A representative from a rival online gambling operator said that
although the company is concerned about PokerStars cutting into its
market share, it welcomes the "800-pound gorilla's" significant
resources in fighting powerful opponents of online gambling,
including Las Vegas Sands' Mr. Adelson, who has said the practice
hurts society because it lets people gamble from home. Nevada
heavyweights MGM Resorts International and Caesars Entertainment
Corp. favor legalizing the practice.
The issue had become so polarizing that even the American Gaming
Association--a once-powerful advocate for expanding online
gambling--recently decided to drop its support for the cause.
Amaya's acquisition of PokerStars will be funded by cash on
hand, new credit facilities and equity financing, the statement
from the companies said. Deutsche Bank, Barclays Bank, and
Macquarie Capital will provide most of the $2.9 billion in debt
financing, and the credit division of Blackstone Group has agreed
to subscribe for $600 million in convertible preferred shares and
to purchase $55 million common shares, the statement said.
Write to Kathryn O'Keefe at kathryn.okeefe@wsj.com and Alexandra
Berzon at alexandra.berzon@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires