Chicago gets connected: Accel Entertainment is preparing to switch on video gaming terminals (VGTs) at its first Chicago locations within weeks, putting the Illinois distributed-gaming leader at the front of a market that it believes could eventually generate around $1bn in annual gaming revenue.

• The Illinois Gaming Board issued its first establishment licenses for Chicago VGT locations in June, followed by another round in July.
• Of the 39 establishments approved by the state by the time of Accel’s second-quarter earnings call, 17 were Accel locations.

The route ahead: That does not yet mean those businesses can begin operating. Chicago’s Department of Business Affairs and Consumer Protection must also issue a city video gaming license. The state board can then permit the terminal operator to connect the machines to Illinois’ central communications system and go live. But the process has moved further and faster than analysts had expected.

• Accel’s outgoing CEO Andy Rubenstein said the first establishments could begin operating “in the coming weeks,” although he allowed that the starting date could slip into the next couple of months.
• “We’re really close to that starting point, and whether it’s weeks or a couple of months, we don’t know,” he told analysts on the company’s Q2 call this week.
• “There aren’t any additional hurdles that we foresee at this point. This is the last hurdle.”

First-mover advantage: Accel’s initial 44% share of approved establishments is above its ~30% share of Illinois locations. The company is not assuming it can retain that early advantage as the Chicago market broadens.

• Incoming CEO Mark Phelan said Accel would “probably” secure a similar share in Chicago to the one it holds statewide
• “Relationships in Chicago will roll out over time, and I wouldn’t expect a big difference between the two entities.”
• Accel has equipment staged, routes mapped and servicing infrastructure prepared. Its existing Illinois operation means the incremental cost of adding Chicago should be relatively low.
• “Because we already operate at scale across Illinois, the incremental cost for us to stand up Chicago is low, and we can move as quickly as the city process allows,” Phelan said.

The shape of things to come: Accel expects full-year capital expenditure of $60m-$70m, with the precise amount partly dependent on the timing of Chicago approvals and deployments. Most of that spending, however, remains replacement capital across the wider business rather than Chicago-specific expenditure.

• Phelan said the city was “probably worth about $1bn in total revenue,” of which terminal operators collectively receive about one-third.
• But Accel does not expect Chicago to approach maturity quickly. Rubenstein put the full deployment period at “five-plus years,” leaving considerable uncertainty around the eventual number of locations, terminal productivity and Accel’s market share.

Open the gates: Texas Capital believes a mature Chicago market could contribute more than $45m annually to Accel. Citizens estimates the opportunity is worth ~$40m over the next several years and expects little near-term EBITDA impact, with a more meaningful contribution beginning in 2027.

• The upside case assumes that once initial locations demonstrate the model, more applicants will follow. Rubenstein said some prospective participants appeared to be waiting to see what the market looked like before applying.
• “I think that once the doors open or the gates open, you’ll have a more normal flow of applications,” he said.

Expanded horizons: For Chicago, VGTs offer a route to expand regulated gaming without relying solely on a destination casino. They can distribute gaming and its associated tax receipts through existing neighborhood businesses.

• More widely, the rollout will provide another test of whether distributed gaming complements or cannibalizes casinos and other regulated products.
• Accel’s Illinois performance suggests demand for hyperlocal gaming remains resilient: Q2 revenue from its Illinois distributed-gaming operations, excluding Fairmount Park, increased 6% YoY.
• Average location hold per day rose 9% to $992 despite modest declines in location and terminal numbers.

Head above the parapet: A market approaching management’s $1bn estimate will almost inevitably attract scrutiny over density, enforcement and its effects on other gaming channels. The first challenge is getting terminals operational; the next will be demonstrating that the system can expand without sacrificing regulatory control.

• Chicago offers Accel something unusual in gaming: a potentially significant new market adjoining its largest existing operation.
• That makes the opportunity strategically attractive and comparatively inexpensive to pursue. But this will be a licensing story before it becomes an earnings story.

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