A seismic shift

Philippine President Rodrigo Duterte has made a series of pronouncements since his inauguration in June that have shaken the established order in the Philippines, including rejecting long-term ally, the U.S., in favor of closer ties with China.

The gaming sector hasn’t escaped his reach, with a crusade, since reversed, against online gaming companies and a call for The Philippine Amusement and Gaming Corp. (PAGCOR) to shed its casino assets and focus on its role as a regulator.

The position on PAGCOR is likely to be applauded by most foreign investors, who have been uneasy about its dual role.  

The potential sale of PAGCOR’s assets not only opens up the chance of a properly licensed and regulated market, it also throws up opportunities for operators and investors, both domestic and international, to buy casino real estate in one of Asia’s best-performing markets last year. But what exactly does PAGCOR have on its books, and what sort of revenues is the regulator-come-operator generating from its casino properties?

Big business

PAGCOR is understood to operate 13 casinos across the country; three in Metro Manila, five in Luzon, and a further five in Visayas-Mindanao – all of which come under its Casino Filipino brand. In addition, it also runs 20 PAGCOR Clubs, a more upscale proposition where local residents are permitted to gamble. In terms of revenues, PAGCOR’s share of table game, EGMs and bingo topped PhP22.6 billion ($466 million) for FY15, while licensing and regulatory fees for the same period were a little less at PhP20.8billion. 

Despite the turbulence caused by Duterte’s reign, in the first half of the year license and regulatory fees increased 30 percent YoY to PhP14.2 billion, while game revenues were up 7 percent to PHP11.7 billion. The huge rise in regulatory fees came during the second quarter, with revenues from licensed casinos increasing from PHP4.3 billion in 2Q15 to PHP6 billion in 2Q16. The impact of the President’s clampdown on e-bingo operators and online gaming sites in recent months has yet to be reflected in the numbers.

The property portfolio and balance sheet is likely to pique the interest of other operators and investors, but behind the numbers things are a little less impressive. “Most of PAGCOR’s properties are dated and in need of renovation,” one industry expert who declined to be named, said. “They don’t compare to most private casino operations, especially Entertainment City. The majority are in good locations, but will require significant investment to be viable operations in the current market,” he adds.

An inspired move

Duterte’s request for the operator/regulator to divest its bricks-and-mortar assets could be seen as something of an inspired move. The value of its portfolio is undoubtedly significant, thought to be around $679 million, so the money raised from the sale coupled with the cash saved by not renovating its properties will provide a welcome boost to government coffers. What’s more, whoever buys its assets will cover the modernization costs, which in turn will drive revenues and the amount PAGCOR takes in fees and taxes.

So who will be looking to get out their chequebook?

“The advantages to a private operator are significant,” says Andrew Klebanow, partner at Global Market Advisors. “They would be buying a successful business in an environment where there is limited competition. While most major western operators may not be interested, there are a number of large Asian operators as well as some smaller, more nimble, mid-cap gaming companies that would find the acquisition of some of these casinos very appealing,” he adds.

PAGCOR would undoubtedly like to sell its assets as a job lot, but in reality most investors will want to cherry pick the best. That said, the value of the license is massive, so even current poor performers have huge potential so long as investors are prepared to pump in significant capital in order to bring these properties up to standard.

 A hot topic

PAGCOR’s role in the Philippine gambling industry has been a hot, and, at times, uncomfortable topic. There is a conflict of interest – despite PAGCOR chair Ms Andrea Domingo saying otherwise – in having an operator also acting as regulator. Their products and propositions may not directly compete with each other, but the blurred lines have been enough to deter more established gambling firms from entering the fray in the past.

“It has long been argued that PAGCOR needs to define itself as the primary regulator of casinos and not as a regulator-come-operator,” says Klebanow. “A casino operator would prefer not to have a regulator as a competitor – this is what has kept most major casino investors out of the Philippines,” he adds.

Stability on the horizon?

The end result could be a fully licensed and regulated Philippine gambling market spanning both land-based and online gaming. However, concern over Duterte’s mercurial approach to government, which in the industry has so far manifested itself in a ban on online firms targeting Filipinos, which has since been reversed, may cause concern for overseas investors.

“President Duterte has made it clear he is not a fan of casinos that target Filipinos,” says Klebanow. “There remains uncertainty how he will treat those gaming operators (who acquire PAGCOR’s assets) once they are no longer owned and operated by a government entity.”