Marketing Operators Management Assistant .Net

Privatization of State-Controlled Gambling Operators

Only hype or a reality in the near future?

London/Munich, July 2005

In cooperation with:

Introduction

Competition is getting tougher we cannot compete on equal terms we cannot ignore that the

competition is here to stay - (Jesper K rrbrink, CEO of the Swedish state lottery Svenska Spel).

Hard-to-control Internet gambling offers and the intensive debate about increasing liberalization make life

difficult for state-controlled operators. Although they recently won some battles, according to many experts

business will not get any easier for them, and the value of state-controlled operators will probably decrease

rather than increase in the future.

This fact combined with tight budgets might lead a growing number of state shareholders to see the regular

contributions to state budgets in jeopardy and prompt them to consider privatizing their gambling operations as

soon as possible. Indeed, recent and current privatizations, such as those of the Greek OPAP and the UK tote,

show that this is not just idle speculation. Furthermore about 73% of the experts surveyed expect that the

number of privatized state gambling operations will continue to increase in the near future.

But what exactly are the advantages and disadvantages of privatizing the gambling sector besides filling up

state coffers? Many complex issues have to be analyzed closely in advance, for example:

Are state-controlled companies really inferior and inefficient compared to private operators? While

some state-controlled operators, such as German WestLotto, work even more efficiently than some

privatized companies, others are indeed far more inefficient.

How could a privatized operation be regulated to prevent excessive gambling or other negative side

effects?

What are state-controlled gambling operators worth and how could they be valuated meaningfully since

the number of examples to refer to is limited.

The report addresses primarily state shareholders and provides an objective analysis of all relevant issues as

well as firsthand information about possible options for privatization and their implementation. The results are

based in part on a survey of more than 90 industry insiders who offered their unique insights. The report is

coauthored by many renowned experts, among them the investment bank Sal. Oppenheim and industry

insiders such as Rob van der Gaast and Wulf Hambach.

Sample pages of report

Table of contents

1 Executive summary

2 Status of privatization worldwide 7

2.1 Privatization - Only hype or a reality in the near future? 7

2.2 Developments driving privatizations 8

2.3 Key regions and sectors for privatization 12

2.4 Overview of different types of state-controlled gambling operators 13

3 Examples of privatizations in process 15

3.1 Privatizing the Turkish lottery Milli Piyango 15

3.2 UK tote - long planned and now executed 16

3.3 Others 17

4 Advantages of privatization 19

4.1 Advantages from introducing market competition 19

4.2 Are state-controlled companies inefficient compared to private operators? 20

4.3 Private operators - putting an end to the regressive tax discussion 21

4.4 Regulation vs. self-regulation 22

4.5 Freedom to choose 22

5 Disadvantages of privatization 24

5.1 Increase in negative social externalities of gambling 24

5.2 Lottery - A need for a natural monopoly? 25

5.3 Guarantee of a basic supply of gambling products 25

6 Possible options for privatization 26

6.1 Overview of alternative modes of sale 26

6.2 Placing shares on the capital market 26

6.3 Trade sale to a strategic or financial investor 27

6.4 If selling to private companies - who would be best suited? 29

6.5 Sale to foreign state-controlled gambling operators 30

6.6 Sale to other state-controlled bodies 31

6.7 51% vs. 49% - how much to sell? 31

7 What are state-controlled gambling operators worth? 33

7.1 Methods, peer groups, and multiples for valuation 33

7.2 Valuation of relevant state-controlled gambling operators 35

7.3 Potential increase of valuation in case of privatization 35

8 Explanation of the trade sale process 37

8.1 Analysis and preparatory phase 37

8.2 Marketing and due diligence phase 37

8.3 Negotiating phase 38

8.4 Ancillary conditions imposed by the seller in privatization processes 39

9 Case studies of privatized, formerly state-controlled gambling operators 41

9.1 UK National Lottery 41

9.2 OPAP 42

9.3 Maltco 43

9.4 Tabcorp 44

9.5 UniTAB 45

9.6 Casinos Lower Saxony 45

9.7 Others 46

10 Outlook and recommendations 48

10.1 Increase of privatizations in the near future? 48

10.2 Recommendations for state shareholders 49

10.3 Recommendations for potential investors 50

11 Relevant links 51

12 Methodology 52

13 Appendix 53

14 About the authors and contact information 55

15 Related MECN reports 57

Exhibits

Exhibit 1: More privatizations: What state-controlled gambling operators think of the issue Results of MECN survey

Exhibit 2: Level of success of privatizations so far Results of MECN survey

Exhibit 3: Drivers of the privatization discussion

Exhibit 4: Key regions for future privatization activity Results of MECN survey

Exhibit 5: Key industry sectors for future privatization activity Results of MECN survey

Exhibit 6: Different types of state-controlled gambling operators

Exhibit 7: Structure of directly owned state gambling operators Examples

Exhibit 8: Most relevant advantages of privatization Results of MECN survey

Exhibit 9: The most cost-efficient state-controlled gambling operators

Exhibit 10: Economies of scale at state-controlled gambling companies

Exhibit 11: Most relevant disadvantages of privatization Results of MECN survey

Exhibit 12: Alternative modes of sale

Exhibit 13: Main privatization methods in the OECD

Exhibit 14: Bookbuilding process

Exhibit 15: Alternative transaction procedure

Exhibit 16: Potential groups of strategic investors

Exhibit 17: Predominant forms of privatization Results of MECN survey

Exhibit 18: Best suited private companies to run former state-controlled gambling operators Results of MECN survey

Exhibit 19: Multiples in the lottery sector

Exhibit 20: Multiples in the betting sector

Exhibit 21: Multiples in the casino and online gambling sectors

Exhibit 22: Value and value/turnover multiple of 14 top state-controlled gambling businesses

Exhibit 23: Potential value of top state-controlled gambling businesses in case of privatization

Exhibit 24: Example of the auction and bidding process

Exhibit 25: Areas and structure of a due diligence process

Exhibit 26: Multi-stage pricing- and terms-based competition

Exhibit 27: Development and estimated number of privatizations in the next 2-3 years Results of MECN survey

Exhibit 28: Likelihood of 19 top state-controlled gambling operators to be privatized in the near future Results of

MECN survey

Exhibit 29: Major shareholders of survey participants

Exhibit 30: Industry sectors of survey participants

Appendix 1: Shareholder structure of Casinos Austria

Companies mentioned in this report

OPAP

Admiral Sportwetten GTech

Philippine Charity Sweepstakes Office

An Post National Lottery Hotel Sacher GmbH

Players Group

PV Ingenio

PMU

Associated Supplies Intralot

Raiffeisenbank Holding

Austrian Lotteries Irish National Lottery

Rehab Lotteries

Austrian Mint / M nze sterreich Jockey Club of T rkiye

Royal Mail Enterprises

Austrian National Bank JP Morgan Nominees Australia

Sazka

Autotote Corporation Koc

Schellhammer & Schattera

Berjaya Sports Toto Berhad La Fran aise des Jeux

Scientific Games

BetandWin Ladbrokes

Sisal Group

Black Management Forum LAE

Soci t du Cheval Fran ais

Cadbury Schweppes LLI Investment

California Lottery Loterija na Makedonija Sports Toto Malaysia

Camelot Loto-Qu bec Svenska Spel

Casinos Austria Lottery Romania Swisslos

Casinos Austria International Lotto Bavaria Szerencsej t k

Casinos Baden-Wuerttemberg Maltco Tabcorp

Casinos Lower Saxony Mauritius National Lottery Tattersall s

China Sports Lottery Medial Beteiligungs GmbH Thales Electronics

Citicorp Nominees MGM Mirage UK tote

Unitab

CONI Milli Piyango

Uthingo Management

Czech Sports Association Motswedi Technology Holdings

Veikkaus Oy

Dansk Tipstjeneste MTB Private Foundation

Virgin

De La Rue NAFCOC Investment Holding

WestLotto

De Lotto New South Wales Lotteries

Westpac Custodian Nominees

Dogus New York Lottery

West Virginia Lottery

EssNet Norsk Tipping

William Hill

Far East Asset Berhad OECD

Youbet

Fujitsu Services ONCE

About the authors

MECN

MECN is a network of experts on issues concerning the media and entertainment industry. Together we

provide in-depth knowledge, analysis, and advice to global clients. For the gambling industry, we provide

market insights and strategic support to various clients ranging from bookmakers to state lotteries.

Sal. Oppenheim

Sal. Oppenheim is one of Europe s leading private banks and has an investment banking branch focusing

especially on the public sector. Sal. Oppenheim fosters a comprehensive advisory approach that

combines competence with absolute discretion and independence; the bank was involved in more than 50

privatizations in recent years and enjoys an excellent reputation as privatization experts.

Dr. Wulf Hambach

Dr. Wulf Hambach is a partner in the law firm Hambach & Hambach and specializes in international and

European betting and gambling law. He is coauthor of the Internet Gambling Report, and his work has

appeared in a variety of publications, including the WorldOnlineGamblingLawReport, the legal paper Sport

& Recht (sports and law), and the Frankfurter Allgemeine Zeitung.

Rob van der Gaast

Rob van der Gaast is one of the best known gambling research analysts and contributed to LotteryInsider,

igamingnews, the Internet Gambling Report, and the European Lottery Files. He has a background in

sports journalism, sports marketing, and developing creative TV & gambling program ideas. After

developing a completely new sports betting concept, he returned to his journalistic roots.

Paolo Pinotti

Paolo Pinotti is an expert in the field of privatization. He is researcher at Fondazione ENI Enrico Matteo

(Milan) in the group Privatization, Regulation, and Antitrust and is also teaching assistant at Universitat

Pompeu Fabra (Barcelona). He holds a Master Degree in Economics from the University of Chicago.

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