Editorial: A Special Set of Rules for Loto-Québec?

Loto-Québec is doing what it can to stay successful in the increasingly competitive international marketplace, but does its recent purchase of a French casino operator contradict its objectives as a WLA member and a provincially licensed operator?

The state-owned joint-stock company has taken a stake of 35 percent in the French Moliflor Loisirs casino chain. The Bank of Ireland will finance the transaction, which is valued at 58 million euros. U.K.-based Bridgepoint Capital Limited, a leading private equity group has controlled 90 percent of Moliflor Loisirs since Nov. 17, 2005.

Moliflor held a 9.3 percent share of the French casino market in 2004, placing it behind the Barrière group (32 establishments and 31.1 percent share) and the Partouche group (46 establishments and a 27.1 percent share), and in front of the Tranchant group (18 casinos and an 8.4 percent share). Since 2000, Moliflor has acquired 10 gaming houses and opened one of its own.

Ingenio

The internationalization of Loto-Quebec began with the creation of its Ingenio unit in 1998. Ingenio is a world leader in lottery research and development, and as stated in the company's 2005 annual report, "a major contributor to maintaining the corporation's reputation and position at the forefront of the global gaming industry."

The subsidiary specializes in the design and production of innovative games and has forged partnerships with numerous global lottery corporations. Among its many innovations, the group has developed a Web-based solution that enables the downloading of multimedia lottery games that are activated with an access code obtained when purchasing an instant lottery ticket from a traditional lottery retailer. Its viability has been demonstrated in New Jersey as implemented through Oberthur Gaming Technologies' "Cyber Slingo" game, offered by the state lottery. In its financial report released in September 2005, the New Jersey Lottery Corporation attributed a 5 percent increase in its instant lottery ticket sales directly to the new game.

Ingenio received close to $1.1 million in fees and royalties in fiscal 2005 through the marketing of its games. The portion of its revenues originating from the sale of its products outside Québec has risen steadily from 40 percent in 2001-02 to 68 percent in 2003-04 and 90 as of the end of 2005.

Alain Cousineau, president and CEO of Loto-Québec said the Moliflor acquisition will enable the company to "pursue our growth and development strategy, while at the same time, generate positive economic spin-offs for Québec, particularly for professional service suppliers."

He added, "To be financed through borrowing, this expansion abroad will have no effect whatsoever on the government's debt load and will allow us to increase our revenues."

Loto-Québec already operates Casino de Montréal, Casino du Lac-Leamy and Casino de Charlevoix, all in the French-speaking province of Québec.

The Moliflor deal, Cousineau said, comes at a time when the company's revenues in Québec are leveling off.

"[The acquisition] represents an excellent business opportunity that we must not fail to capitalize on, particularly because Moliflor is a very well managed Group showing excellent profit margins," he said. "In addition, changes to regulations in France to be implemented in 2006 will open a series of highly promising development possibilities."

Nevertheless, the deal seems to contradict Loto-Québec's stated mission: to ensure the systematic and effective operation of games of chance in the province.

The company's objectives are, among other things, to refrain from increasing overall game offerings, and buying shares in a French company doesn't seem to fall in line with this.

Jean-Pierre Roy, the director of media relations Loto-Québec, argues otherwise.

"You are quoting correctly one of the elements of our mission statement," Roy said. "But, as specified later in that statement: 'Loto-Quebec is also active in international markets, offering products and services developed within its various areas of competence.' So while Loto-Québec refrains from increasing overall game offerings in the province of Quebec, we are open to sell products and develop partnerships outside the province."

But even if the acquisition is consistent with Loto-Québec's mission statement, is it likewise consistent with provincial policy? A provincial act regarding the "Société des loteries du Québec" states, "The company may do anything necessary for the attainment of its objects but shall not, without the prior authorization of the government: . . . b) acquire, hold or alienate interests in any undertaking."

Roy was quick to point out, however, that Loto-Quebec has received permission from the Quebec government to make the deal.

"With the Quebec gaming market nearly saturated," he said, "one of the best avenues for Loto-Quebec's evolution is to sell its expertise in various countries."

Clearly, Loto-Quebec has gone to great lengths to assure that it has covered its bases at home, but the matter is further complicated by its affiliation with the World Lottery Association, whose bylaws state:

Suspension and Expulsion of Members
The Executive Committee may suspend or recommend for expulsion, for a final decision by the next General Meeting or Special Meeting, any Member who: 6.5.2 fails to take effective action to prevent advertising, sales or distribution of its products, either directly or indirectly, in another jurisdiction, if that activity is in contravention of the laws of that jurisdiction.

It seems that state-owned gambling companies have there own regulations.