SIZING UP THE BRAZIL OPPORTUNITY

Yet another new market may be emerging. The Brazil potential is huge, and real.

 

 

For investors willing to stomach some bumps in the road in 2010, gaming supply could be the best growth segment in all of leisure land.  Brazil is our latest focus, adding to a long list including Illinois, Ohio, Maryland, Kansas, Italy, Singapore, and even Spain.

 

Rumblings about Brazil legalizing gaming surfaced during G2E but the investment community seems to know very little.  We did some research and we are encouraged.

 

Casinos have been illegal in Brazil since the 1940's and gambling is punishable under the 1947 Criminal Convention Act.  Prior to President Lula da Silva shutting down the country’s gaming halls in 2004, there were roughly 60,000 gaming machines primarily concentrated in larger cities. 

 

The proposed legislation, Bill No. 270/03, would legalize licensed bingo and electronic gaming machines and allow for the emergence of gaming parlors with 20-40 devices in some of Brazil's larger cities and a maximum number of 75 devices per location in Sao Paulo.  All slot machines would be required to be connected to a central server, which would be overseen by the Ministry of Finance.  An earlier draft included ten casino resorts but the provision for full fledged casinos is not included in the current bill.  Other details of the proposed Bill 270/03 include:

  • Payout ratio equal to or greater than 80%
  • 17% tax on gaming revenues
  • Maximum of 3 bingo hall licenses per each license holder

In mid-September 2009, a draft version of Bill 270/03 passed in the Chamber of Deputies by a 40-to-7 vote.  The Bill is now awaiting debate and vote in the lower house of the Brazilian Congress.  While the Bill was given the green light to go to floor a few weeks ago, it appears that the debate has been delayed because of a provision dealing with the retirement age of public servants that was tacked onto Bill 270/03.  With the Christmas holidays approaching next week, it’s unlikely that anything gets passed this year, but the bill probably has a decent chance of passing as long as a vote takes place in advance of the October 2010 Presidential election.  Should the Bill pass in early 2010, we could see as many as 40,000-60,000 units shipping into that market. 

 

Similar to the gaming expansion in Italy, legalized slots in Brazil would be huge for WMS and BYI and additive to IGT.  As we wrote about in our 11/25/09 post, "ONE IN THE HAND IS WORTH TWO IN THE BUSH", analysts may be overestimating 2010 unit sales given the sharp drop off of new/expanded casinos.  However, looking past a potentially choppy 2010, we can see a pretty strong growth pipeline for the slot companies.


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