Privatizing PAGCOR

As the Philippines’ state-run gaming corporation takes its first steps to becoming just a regulator, Macau-based gaming operators and junkets may be interested in the bid, under certain conditions, analyst says

The Philippines Amusement and Gaming Corporation (PAGCOR) announced it will start privatizing 17 casinos exclusively run by the state-corporation next year, media outlets reported over the weekend.
Reasons for privatizing the state’s gaming assets range from: the need to raise funds for public coffers to address concerns linked to conflicts of interests tied to PAGCOR’s role as both a regulator and an operator.
No valuation for the 17 casinos is available at the moment, according to Malaya Business Insight.
The state-run corporation currently operates 46 casino properties countrywide. The first batch of 17 casinos to be sold concerns those not run as joint ventures, but exclusively managed by PAGCOR.
According to a report published by Morgan Stanley in June, gross gaming revenue generated at PAGCOR-run casinos amounted to PHP32 billion (US$628.81 million/MOP5.06 billion) in 2016, representing 24 per cent of the total.
The VIP, mass, and slot breakdown over the year-long period was estimated at 19 per cent, 36 per cent, and 45 per cent, respectively.
By law, PAGCOR is required to give 50 per cent of its annual gross earnings to the Bureau of the Treasury. The funds are earmarked for use in community and social projects of the government.
Quoted in regional media, the Philippines Finance Secretary Carlos G. Dominguez III said the government will continue to benefit from the revenue stream from casinos once they are privately-run, by collecting taxes on revenues generated.

Macau bid
Grant Govertsen, co-founder and managing director of Union Gaming, a boutique investment bank and advisory firm, told Business Daily in an email that ‘many international operations will explore their options as it relates to potentially acquiring PAGCOR assets,’ considering that gross gaming revenue in the Philippines over the recent years has recorded ‘strong growth.’
In its published report from June, Morgan Stanley estimated that gaming revenue in the Philippines could reach some US$5 billion by 2020.
The group further claimed they expect ‘the Philippines to emerge as the largest entertainment market in ASEAN (Association of Southeast Asian Nations),’ […] thanks to favorable policies and infrastructure that drive the market for both locals and foreigners’.
Although foreign bidders might be interested, the managing director of Union Gaming argued that ‘the larger international operators would likely only have an interest in Manila and would not likely be interested in the PAGCOR properties as these properties wouldn’t generate enough cash flow to make sense for one of the larger operators.’
The bidding equation would also include junket businesses, ‘clearly interested in expanding their bases of operations, including transitioning from an agency to a principal model,’ commented Govertsen.
Among the Macau-based junkets, Suncity Group has been more openly marketing the expansion of its operations, with the group already operating several VIP rooms in Melco properties in Manila, and developing casino-resorts in Vietnam.
As with casino operators, Govertsen highlighted that junkets’ interest in acquiring casino assets in the Philippines will again ‘come down to the economics associated with any potential transaction and the cash flow potential of the properties in order for a deal to make sense.’

Case by case approach
The Philippines Finance Secretary said that casinos ‘will be treated individually’ in the privatization process, given that PAGCOR has different types of partnership models in place.
‘They lease it and operate the casino, [while for] others, they go into joint ventures with the hotel and they share their revenues,’ Dominguez was quoted as saying by Malaya Business Insight.
He added that the method of privatization will be ‘figured out’ as the government completes all the necessary studies by the end of the year, signalling that the process might take several years to complete, the Inquirer noted.
The first casinos to undergo privatization are, for the most part, spread across a number of provinces, such as the one PAGCOR runs in Fort Ilocandia – some 485 kilometres north of Manila.

---
Since 2007, PAGCOR has been allowed by federal regulations to establish joint-ventures, having granted licenses to four Integrated Resorts (IR), currently located within the vicinity of PAGCOR’s Entertainment City along the Marina Bay. These include:
- City of Dreams Manila, by Melco Crown (Philippines) Resorts Corp. (opened 2015)
- Solaire Resort & Casino, by Bloomberry Resorts Corp. (opened 2013)
- Okada Manila, by Tiger Resort Leisure and Entertainment, Inc. (opened 2017)
- Resorts World Bayshore City, by Travellers International Hotel Group (expected 2018).
Source: Lex Mundi Global Gaming Law Guide