Gambling is as old as history, because of mankind’s urge to take risks and tempt fortune. In the early years of the casino industry in Las Vegas, Nevada, it was characterised by the involvement of organised crime. For this reason, governments took steps to regulate and control the industry to ensure high standards, player protection, and an ethical and accountable industry.  The regulated casino gaming industry is still relatively new in South Africa, because before 1996 there was a flourishing illegal gambling industry. It was almost entirely controlled by whites, offered players no protection against fraud, was readily available to minors and totally ignored problems associated with compulsive and problem gambling. More than a decade later, there are 37 legal casinos in all nine of South Africa's provinces, and include such players as Gold Reef Casino, Peermont Global, Sun International and Tsogo Sun.

Gold Reef Casino Resorts, which operates Gold Reef City Casino and Theme Park, also has interests in a number of other casino licences throughout South Africa, including Silverstar Casino, Queens Casino, Mykonos Casino, Garden Route Casino and the Golden Horse Casino. The Gold Reef group reported a flat set of results for the year ended December 2009 as the recession adversely affected South African consumer's disposable income and access to credit. Nevertheless, additional market share were gained in all provinces except KwaZulu-Natal. Group revenue increased by 1% and ultimately translated into a 1% increase in diluted HEPS. For the period under review, cash generation was good while final dividend declared remained unchanged at 65 cps. Gold Reef is a quality company with high margins, a decent ROE and strong cash generation.

In February 2010, Gold Reef and Tsogo entered into an agreement for the merger of their gaming and hotel businesses into a new entity. Gold Reef will acquire the entire issued share capital of Tsogo Sun and the purchase consideration will be offset by the issue of Gold Reef shares. Brewing giant SAB Miller said that it will exchange its 49% stake in Tsogo Sun for a 39.7% holding in the new group, which will remain listed on the Johannesburg bourse. The merger will create not only a premier gaming and hotel company in South Africa but a business of significant scale, ranking amongst the largest listed gaming groups. The proposed transaction with Tsogo is likely to result in a reverse listing of Tsogo, with Tsogo becoming the major shareholder of the combined entity. However, this transaction is still subject to precedent conditions. Should the merger become successful, we believe the new entity is favourably positioned to capture further growth opportunities through its diversified portfolio of both Gold Reef and Tsogo. The share appears to offer value trading on a historical P/E of 14.3 times and at 2.1 times its NAV. However, given the limited information on the proposed merger, we advise investors to hold their shares until further clarification is provided.

The share price of Goldreef is trading below its short term moving averages and has recently crossed below its long term, 200-day moving average too. The share is oversold at the moment, suggesting a buying opportunity, with a possible price target near 2250c. It seems that this gambling share has the odds stacked in the investors favour?