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'Cleansed' grey market bookies to dominate Ontario's legal betting market: analysts

Hamilton Tiger-Cats player Cariel Brooks celebrates in front of an iGaming Ontario logo at Tim Hortons Field. Wall Street analysts predict Ontario's legally-overhauled sports betting market will be dominated at the onset by former grey market bookies. (Photo by John E. Sokolowski/Getty Images)
Hamilton Tiger-Cats player Cariel Brooks celebrates in front of an iGaming Ontario logo at Tim Hortons Field. Wall Street analysts predict Ontario's legally-overhauled sports betting market will be dominated at the onset by former grey market bookies. (Photo by John E. Sokolowski/Getty Images)

Wall Street analysts expect the start of Ontario's newly-expanded legal betting industry will be dominated by internet bookies that employed offshore servers and foreign gaming licences to skirt the law since the early 2000s.

Looking to redirect the flow of billions of dollars following the federal legalization of bets on single games and events, Ontario Premier Doug Ford's government has offered a penalty-free, "business-like transition" to internet sportsbooks and gambling platforms that for years have handled the betting action of Ontarians from beyond the law's reach.

Once approved by the Alcohol and Gaming Commission of Ontario (AGCO) and its subsidiary iGaming Ontario (iGO), these firms are free to compete with companies that resisted the lucrative online legal grey zone.

iGO has promised financial figures for the new, legally overhauled industry, but so far none have been released. U.S. consulting firm VIXIO GamblingCompliance estimates the market will be worth $2.36 billion by 2023.

Bet365 is among those widely expected to benefit from its years of experience in the Ontario market. The privately-owned U.K.-based gambling giant's legal app went live on April 4, the first day Ontario allowed private companies to lawfully compete with its province-run betting site.

Last Thursday, the CEO of Guernsey-headquartered Super Group (SGHC) said his company's Betway online sportsbook has made a "smooth" transition from Ontario's grey market to the regulated one. Super Group says it plans to launch its "Spin" casino brand in the province shortly.

"It's a unique situation in Ontario, where grey market operators have been allowed to sort of become cleansed," said Barry Jonas, managing director of Truist Securities. "They have an obvious advantage, given that they've been taking bets from players for some time."

Grey market operators that submitted documentation to the AGCO before April 4 received a grace period to continue operating in the province while their applications were being considered. Such is the case with BetRegal, which has a multi-year partnership with the Canadian Football League (CFL) and the Hamilton Tiger-Cats.

BetRegal branding seen at Hamilton's Tim Horton's Field on Aug. 16, 2022. (Jeff Lagerquist)
BetRegal branding seen at Hamilton's Tim Horton's Field on Aug. 16, 2022. (Jeff Lagerquist)

"There clearly is a mentality of 'as long as you're headed towards regulation, you're okay,'" Jonas added. "Whereas in the U.S., it's more mixed. Some [state] regulators in the U.S. have been willing to look the other way about grey market activities outside of the country."

Macquarie Group analyst Chad Beynon expects a headstart on customer acquisition will translate to more initial market share for Bet365, Betway, Bodog, and others with grey market roots.

"The government has permitted them to just basically transfer players over to a new regulated app," he said. "I'm not really sure why they chose to go the route."

Last summer, Beynon warned Ontario's market will be intensely competitive, with companies forced to spend heavily on promotional offers like sign-up bonuses to lure customers.

theScore promotes its sports betting app in Toronto's Yonge-Dundas Square. (theScore via Twitter.)
theScore promotes its sports betting app in Toronto's Yonge-Dundas Square. (theScore via Twitter.)

Banned from referencing such "inducements" in their Ontario advertising, Australia's PointsBet Holdings (PBH.AX), Toronto-based Score Media and Gaming (now owned by Penn National (PENN), and other new legal entrants to the market, have leaned on celebrity endorsements, as well as partnerships with sports leagues and media organizations, to raise their profiles.

Despite the fanfare, just one-in-five surveyed by Deloitte Canada in March said they were aware that federal laws on sports betting had changed with the June 2021 royal assent of Bill C-218.

"A lot of customers didn't realize that on April 4, the [Ontario] market turned white for private operators, and just continued to bet with their grey market operator," Beynon said.

"Almost without a doubt, the grey market guys will have a huge leg-up," said Stifel analyst Jeffrey Stantial. "I think you'll see a really nice print out of the gate from the legacy, grey market operators."

Boston-based DraftKings (DKNG) is a top sportsbook in many U.S. legal states. Earlier this month, CEO Jason Robins warned his company isn't likely to claim as strong a position in Ontario.

"There was just a lot of continuity between the grey market and now, versus, U.S. states, which when they open up, it's really more greenfield," he told analysts on an Aug. 5 conference call. "We have projected 10 per cent to 20 per cent in Ontario, as opposed to 20 per cent to 30 per cent in U.S states."

Beynon says FanDuel, BetMGM, and others have made similar forecasts.

"Pretty much everyone across the board . . was very transparent that grey market operators have a legitimate incumbency advantage between brand awareness and their database," he said.

The challenge in Ontario comes as recession fears and rising interest rates take an axe to capital-intensive growth stocks with far-off projections for profitability. DraftKings shares have fallen nearly 60 per cent in the past 12 months. Penn shares have dropped more than 47 per cent over the same period.

Beynon says the competitive landscape in Ontario will likely shift as former grey market operators adjust to paying taxes in the province, leaving less money to reward customers with bonuses. At the same time, he predicts technology-focused companies like Score Media and Gaming will gain customers by continually improving their user experience.

"When you're not paying taxes, you can give more away to customers with free bets," Beynon said. "Eventually, those free bets won't be as generous. Then the platform kind of matters."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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