September 1, 2010 8:48 pm

Japan’s proposed casino bill spurs deal-making interest

This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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Japan’s move to legalize casino gambling has been met with great interest from the global advisory and investment community, according to Toru Mihara, one of the nation’s top experts on gambling law and casinos. Mihara, who was speaking in an interview with Mergermarket, is currently advising the Japanese government as a member of the casino advisory board called the Bipartisan Legal Movement for the Promotion of International Tourism.

“We have already seen interest not just from US casinos such as Wynn and MGM, but global manufacturing firms and real estate developers,” Mihara said. “Of course, there is also a great amount of domestic interest – Konami is interested, as are a slew of other firms,” he added.

When asked about possible tie-ups between Japanese and foreign firms, Mihara said it would happen, as local companies do not have the know-how to operate and manage casinos. At the same time, as the Japanese market has limited equity to inject into casino projects, foreign investment will be necessary, he added.

The president of Japanese pachinko machine maker Universal Entertainment, Kazuo Okada, reportedly said several years ago that it would submit a bid, along with US-based Wynn Resorts to operate casinos in Japan once it is legislated.

Meanwhile, a CLSA report in 2007 speculated that a consortium comprised of Las Vegas Sands, Melco/PBL, Genting, MGM, Wynn, Sega Sammy, Konami and real estate developer Mori could win casino licenses.

When contacted by this news service, Sega Sammy declined to comment on the matter, while a Konami insider said it would have to wait and see whether the casino bill was passed. However, if it was passed, Konami would view it as an “opportunistic business chance,” the insider said.

Grand Korea Leisure (GKL), a listed South Korean casino company, is interested in entering Japan to expand its market coverage, a company source said. However, a South Korean sector analyst said that it would be difficult for South Korean casino companies to make inroads into markets other than Macao and Singapore, and that Japan could be conservative when it comes to allowing foreign casino companies to reap gains from local consumer losses.

At the same time, Stuart Witchell, senior vice-president of the corporate advisory firm International Risk, said some pachinko operators are already in the midst of setting up JVs with US casino operators in anticipation of a change in the law, saying he had been conducting due diligence on this matter. “If a change in law does go through it could mean an awful lot of business for the advisory community,” he said.

When will the casino bill be passed into law?

On 5 August, the advisory group introduced a skeleton draft proposal of the bill. “However, the draft bill is not perfect; core information regarding taxes has not been fixed yet,” Mihara said, adding that outstanding issues would be discussed at an extraordinary session of the Diet next month.

He said it would take about six months of discussions between shareholders, investors and the private sector before a formal bill can be submitted next year. “If Congress approves the bill, things will start moving very quickly,” he said, adding the next step would be the creation of a Casino Control Authority that would establish the relevant regulations. This would take about one or two years, he said.

There are two “integrated tourism zones” that are under discussion to be licensed by the government for casino development, although more may be established at a later date, Mihara said. Tokyo, Yokohama, Hokkaido and Okinawa are some of the locations being evaluated.

Once local governments get the green light, they will be able to tender casino development projects to domestic and/or overseas firms, he said.

Political Hurdles

The biggest hurdles in passing the bill would come from Congress and the public. At the same time, political chaos could also play a factor in delaying the bill. However, there are differences in opinion among various parties, regardless of party affiliation, Mihara added.

“The time is now,” he said. “Once the next election comes up, everything we have worked for until now will come to an end, as we will have to start over with the new government,” he said.

Mihara said that the main reason the bill failed in 2006-07 was because the LDP-run government had proposed that a state agency be the distributor of the funds acquired through casino taxation. “This move was hugely criticized,” he said. Thus, he has proposed to the government that tax revenues be directly allocated to pension funds. That way, he said, Japanese citizens benefit and there would be no debate between public agencies over control of the casino space.

According to a 2002 study by the Tokyo Metropolitan Government, a casino and hotel facility could generate JPY 57bn (USD 673.8m) in earnings, resulting in total tax revenues of JPY 13.84bn.

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