Leaving Las Vegas

As many of you know by now, the Federal Bureau of Investigation seized assets belonging to some of the world’s biggest online poker sites, including the cash accounts of their vast network of American players. (It’s still okay if you pretend in front of your boss that the primary reason you take the iPad to work is to read the Journal.)

Customers outside the U.S. can still access the sites, including PokerStars, Full Tilt Poker and Absolute Poker, but the government crackdown on gambling online will have a substantial impact on the American gaming ecosystem, if it is here to stay. While affluent veteran players say they’re not hard hit, even if the fed keep their online gambling account holdings, it is the small fries that may become insecure and never lay another cyber chip on the digital green felt again. All in? Try all out. All of a sudden, investors in regional casino operations could look very smart for betting on the house.

ESPN took what was not too long ago considered a seedy hobby and turned it into a televised international sport, in the process making online poker a hit. Now for the first time, millions of jilted card fiends are itching for a hit, and there’s only one way to get it safely: take your money to the house.

This offers middle market PE firms an abbreviated opportunity. Investors may need to look downstream for local investments as jilted Texas hold ‘em players try to get lucky in person on the river. Earlier this month, Tangent Gaming snagged riverboat gambling operation Horizon Casino Hotel from Carl Icahn’s Tropicana Entertainment. (Tangent continues to seek deals, says Steven Haynes.) And separately, Marc Lasry’s Avenue Capital Group earned approval from New Jersey casino regulators to control the Trump Entertainment Resorts. This Tuesday, racetrack and casino operator Indianapolis Downs LLC will be auctioned out of Chapter 11. It is anticipated that other major gaming operators will continue to shed under-performers to shore up capital.

“They’ll be happy to get some cash back on” an under-performer, Kevin Karo, a partner with BDO, said of gaming strategics.

Small firms have plenty of examples and reminders of why they need to stay off The Strip. Lately, investors in big Sin City casinos are better remembered for coming up 2-7 than pocket cowboys. Deutsche Bank looks to have jumped on the wrong side of a bad beat with its Cosmopolitan of Las Vegas investment. Station Casinos Inc., which went bankrupt in 2009 after the Fertitta family bought it, is being reorganized now with the same family controlling most of its properties. And Carl Icahn, who bought the Fontainebleau resort in Vegas out of bankruptcy, hasn’t even finished the glitzy casino’s construction.

The sweep against poker sites marks a shift in the Obama Administration’s and the Justice Department’s stance against online gambling, one that will drive more tax revenue toward the U.S. gaming industry and state tax coffers. Karo predicts a short-term boost for regional operators. After all, slot machines make up an overwhelming majority of the gaming revenue. Even if site operators strike back, they will lose customers to traditional gaming operations in what’s likely a lengthy court process. This could leave investors in smaller casino operations feeling as if they just flopped the nuts.