American casino companies that placed big bets on the British market may soon be re-evaluating their chances now that the British government announced a major change to proposed gaming legislation.

Casino operators have announced a flurry of large casino projects for the U.K., contingent on Parliament's deregulation of gambling. The government originally had set no limits on the number of Las Vegas-style regional casinos, opting to let market forces set the number; industry participants had estimated 20 to 40 such facilities.

Earlier this week, the government proposed an initial limit of eight regional casinos, in response to widespread opposition to the legislation from members of Parliament, religious groups and citizens concerned about the social impact of a sudden increase in flashy gambling venues with unlimited slot-machine jackpots. The government said an initial pilot phase would allow it to assess the effects of the new large casinos.

The legislation, known as the Gambling Bill, would dramatically liberalize gaming in the U.K., allowing people to walk off the street into huge new casinos and hit the slots and game tables right away. Under the 1968 Gaming Act, casinos operate as members-only clubs, and new members must wait 24 hours before they can gamble. Each club can have only eight slot machines, with 50 pence (93 U.S. cents) as maximum stakes and prizes up to 2,000 pounds (U.S. $3,706). There were 126 of these casinos in England, Scotland and Wales as of March 2003, according to the government.

Observers note that details of the Gambling Bill remain subject to revision, as the legislation must now pass through a committee of lawmakers before going to the House of Lords early next year. Adding to the uncertainty, a government spokesman said the length of the initial pilot phase has yet to be determined.

Nevertheless, industry watchers said the government's new limit could crimp plans by some of the big U.S. gaming companies.

"You're now looking at probably one-fifth of the casinos, and one-fifth of the slot machines that people had been expecting," said Simon Holliday, a partner at U.K.-based Global Betting & Gaming Consultants. "There almost aren't enough casinos to go around now."

For a sense of how the initial cap might affect plans of companies that trade on U.S. exchanges, just start tallying their announcements over the past couple of years.

Harrah's Entertainment ( HET) alone reaches the limit; last year it said it would develop eight regional casinos throughout the U.K. in a 50-50 joint venture with the Gala Group.

MGM Mirage ( MGG), which is in the process of merging with Mandalay Resort Group ( MBG), also has grand plans. In April, it announced a deal with Peel Holdings PLC to develop gambling and entertainment complexes in four cities: Liverpool, Manchester, Salford and Glasgow. That followed February's announcement that the company would team with the British Land Co. and spend between $364 million and $455 million on a casino next to the Meadowhall Shopping Center in Sheffield. Last October, MGM Mirage said it would partner with Earls Court and Olympia Group to build a $255 million casino in London's Olympia Exhibition Centre.

Meanwhile, Caesars Entertainment ( CZR), which in July agreed to be acquired by Harrah's, last month announced plans for a $600 million gambling and entertainment complex next to London's Wembley Stadium.

And Bahamas-based Kerzner International ( KZL) is planning to develop casino resorts at the Millennium Dome in London, at the Scottish Exhibition and Conference Center in Glasgow, Scotland, and at Sportcity in East Manchester, England, where the Manchester City soccer team plays.

Given the sheer number of their planned projects, Harrah's Entertainment and MGM Mirage could suffer the most from the new cap.

"MGM was looking to build not only some of the larger mega-casinos, but also some smaller ones, so if they end up limited to one license, they've got a lot to lose," said Matt Quinn, senior lodging and gaming analyst at Zack's Investment Research.

Quinn cautioned that his earnings estimates for gaming companies don't yet account for any possible benefits from U.K. deregulation, given variables in the legislation, such as the eventual tax rate for gambling operators. Current share prices of MGM Mirage, Mandalay Resort Group, Caesars and Harrah's don't appear to reflect the effects of future British developments, although investors likely view the plans as favorable opportunities for the companies to expand their markets, he said.

"Overall, the stocks are pretty fairly valued where they are now," said Quinn, who has "hold" ratings on shares of all five companies. (Quinn owns no stock in the companies he covers and Zack's does not do business with companies its analysts cover.)

For its part, MGM Mirage said it's too soon to assess the impact of the watered-down bill. "If they have introduced a cap of eight, how long does that last, where are you going to decide where these casinos will be, when will the review period be?" said Lalu Dasgupta, a consultant working for MGM Mirage in the U.K. and speaking on behalf of the company. "There are still so many unknowns that in truth, that figure of eight doesn't offer any opportunity to re-evaluate the market opportunity."

Government officials have indicated that new casino projects will be assessed on "economic regeneration" -- their ability to rejuvenate economically struggling areas.

In that regard, Kerzner's plans for the Millennium Dome have the "highest likelihood" of successful competition of any of the major projects announced by non-British companies, wrote Bear Stearns analyst Mark Abramson in a research note. The dome, which was built to commemorate the millennium, is located on London's Greenwich Peninsula, a site undergoing massive multi-use redevelopment, including housing, stores, parks and entertainment and is near the city's new financial district. (Bear Stearns does and seeks to do business with companies covered in its research reports.)

A Kerzner spokeswoman could not be reached for comment in time for this story.

Harrah's Entertainment is less well-positioned, however, according to Abramson. "The company's joint venture with Gala Group had envisioned eight to ten large casinos around the U.K., resembling the type of properties operated by the company in St. Louis, MO," he wrote. "It seems unlikely that many of these will be developed."

A Harrah's spokesman did not return a call seeking comment.

Abramson sees existing British gaming operators The Rank Group PLC and Stanley Leisure Organization as the biggest beneficiaries of the initial cap on regional casinos, because they will be exposed to less competition.

Caesars Entertainment is one U.S. operator that appears to be poised to do well, according to Quinn, at Zack's Investment Research. "It has one very good site," he said, referring to its planned casino and entertainment complex near London's historic Wembley Stadium. Its joint venture with Quintain Estates is part of a larger multi-use redevelopment of the area surrounding the stadium.

Robert Stewart, Caesars spokesman, said: "It's too soon to have a detailed comment until we see the full depth and breadth of the government's legislation, although we are encouraged by the direction the legislation seems to be taking. I think the focus on regeneration is a very positive development for our project."

Slot-machine makers like Alliance Gaming ( AGI) and International Game Technology ( IGT) will benefit as new regional casinos purchase slot machines, although the number they'll be able to sell won't be as high as it might have been.

The Gambling Bill would set a maximum of 1,250 slot machines at each casino. Multiply that by eight, and the regional casinos would create a market for 10,000 new units. Quinn said those are "still pretty good numbers" for the suppliers. Yet Holliday at Global Betting & Gaming Consultants views the lost opportunity -- at least initially -- of having even more casinos. The high end of previous estimates would have meant a regional casino market for as many as 50,000 machines, he said.

A spokeswoman at IGT declined to comment, and an Alliance spokesman did not return a phone call.

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