Harry Reid's Internet Poker Bill: Deal or No Deal?

Over the last few days I've had some discussions with gaming attorney Stu Hoegner about whether or not the new version of the Reid poker bill would allow an existing poker site (like, say, PokerStars or Full Tilt) to sell itself to a U.S. casino (like, say, MGM) to get around the 2-year exclusion period that is mandated by the Reid bill for poker sites that are not backed by a U.S. casino. Stu has largely convinced me that yes, the new version of the bill would allow that scenario.

It's probably an academic discussion though. Who would buy? Why would they buy and/or why would the sites sell?

Let's tackle the second question first. The most obvious reason for an existing U.S. online poker site to sell itself to a U.S. casino interest is that the site would be able to access the U.S. market at the earliest possible moment. Also, people who own big pieces of the U.S. site could finally "cash out" and go buy an island somewhere. The major downside would be a loss of operational control and becoming a small cog in a much larger gambling conglomerate.

From the casino's side, they'd have instant access to technology, IP and branding, and players so that they would be ready to "hit the ground running" as soon as the 15-month blackout period expires.

But who would buy those poker sites?

Harrah's Caesars WSOP.com already has an online poker partner. Its UK-based poker site is run in conjunction with 888. WSOP also has been registering players through its U.S. play-money site for months. It doesn't need to buy another site, either for the technology, the branding and goodwill, or the players.

That leaves MGM as the main potential suitor for any of the large U.S. poker sites. Maybe Wynn. Maybe some group like the Stations or LVS. But all of those groups would have significant difficulties paying for the acquisition.

There are lots of ways to set a purchase price for a big corporate acquisition. Valuations come in every shape and flavor. One of the simplest ways is to use a multiple of the target's net operating income. Net operating income is a company's operating income after operating expenses are deducted, but before income taxes and interest are deducted. It's a fairly easy, non-manipulable way to get a snapshot of a company's health.

Let's say, for example, that PokerStars' NOI for 2010 is $500 million. Maybe it is, maybe it isn't, but as a ballpark number $500 million probably works. An acquiror would then pay a multiple of that $500 million to buy PokerStars. The multiple depends on negotiation and a host of factors that I'm not going to delve into here. But you can see that we're talking billions of dollars.

When you attempt a multi-billion dollar acquisition, you don't usually pay for it in cash. Most companies don't have billions of dollars in the vault. The consideration is often a combination of cash, equity (shares of the acquiror) and debt. Let me reiterate that I'm simplifying things a great deal here. The payment portion of a corporate deal is often HIGHLY complex.

But back to cash, equity and debt. Have you seen how much debt MGM is carrying on its books? As of September 30, almost $13 billion in long-term debt. They're drowning in debt. The same is true of LVS and isn't the Station group in bankruptcy? None are in a great position to issue more debt, and if I'm the person selling the U.S. poker site, I'm not sure what a great bet I think it is to take a big chunk of debt from such a highly leveraged acquiror.

There might be some cash available -- MGM raised $500 million back in September -- but I'd guess that a sizable portion of MGM's cash is tied up as a debt reserve and/or already earmarked for debt service. Investors don't let you take out $12.9 billion in debt for free. You have to pay for that privilege.

That leaves equity. Do a full equity deal? I guess it's possible. Depends how bullish the target site is on the acquiror. Even there, however, you have problems. Such a sizable equity issuance isn't done easily.

But even if this were to happen, there's only one MGM. There are multiple online sites out there. MGM wouldn't need to acquire all of them, or even the largest of them. They'd need just one site with a decent U.S. player base. Where does that leave the rest of the sites? Fighting to be acquired by LVS or Wynn or the bankrupt Stations?

How about "Without a chair when the music stops" for $500, Alex.