Bidder tied to Mexican gaming company only remaining applicant for Illinois online sports betting license. But it may be forced to drop out.

The nascent sports betting industry is booming in Illinois, growing into the third largest market in the U.S. after just two years of pandemic-disrupted operation.

But the state may soon come up empty in its efforts to add three new online-only sportsbooks to a roster already loaded with national players such as DraftKings, FanDuel and BetMGM, the increasingly dominant leaders of the online segment.

Four companies applied to the Illinois Gaming Board in December for the three online licenses, which are not tethered to casinos, racetracks or sports venues, but carry a hefty $20 million licensing fee — twice the maximum for online sportsbooks with bricks-and-mortar partnerships. Three companies have since dropped out or been eliminated. And the remaining applicant, Tekkorp Digital Acquisition Corp., is facing increasingly long odds that it will make it to the finish line.

Tekkorp Digital, a Las Vegas-based blank check company looking to acquire Caliente Interactive, a Mexican gaming company with ties to a controversial Tijuana businessman, is holding a shareholder vote Oct. 13 to determine whether to extend the merger deadline or dissolve the company, according to a Securities and Exchange Commission filing.

The company declined to comment on the merger extension vote, but the SEC filing said if it is not approved, Tekkorp will begin winding down operations Oct. 26. Morris Bailey, who founded New York-based JEMB Realty, is the largest shareholder and chairman of Tekkorp Digital.

“We do not comment on individual pending applicants,” said Joe Miller, a spokesman for the Illinois Gaming Board.

If the state strikes out on all three online-only licenses, it may reopen the competitive application process, Miller said.

Overcoming setbacks has been the name of the game since the state’s first sportsbook opened at Rivers Casino Des Plaines at the onset of the pandemic in March 2020, only to close within days amid statewide stay-at-home orders. In June 2020, BetRivers became the first Illinois sportsbook to offer online betting, with the state temporarily waiving an in-person registration requirement while casinos began reopening with capacity limits.

Online sports betting has been leading the way for the fast-growing Illinois market ever since.

Illinois sports betting generated $8.5 billion in wagers and $611 million in adjusted gross receipts — the money kept after winnings are paid out — in fiscal year 2022, according to an annual wagering report released by the state this month. That represents a 61% increase in revenue during the fiscal year, which ended June 30. At a 15% tax rate, the state collected $92 million in tax revenue, along with another $50 million in licensing fees.

The state has nine operating retail sportsbooks, seven of which offer online sports betting. In March, Illinois permanently waived the in-person registration requirement, allowing online platforms to compete for customers across the state. Online wagering accounted for 96% of the sports betting revenue generated in Illinois during fiscal year 2022.

FanDuel, which is associated with the Fairmount Park horse racing track near St. Louis, was the state’s top sportsbook, with more than $253 million in adjusted gross receipts for the year, according to the report. DraftKings, which is partnered with the Casino Queen in East St. Louis, was the state’s No. 2 sportsbook with nearly $148 million in adjusted gross receipts, followed by BetRivers at about $99 million.

Nevada was the only state with legal sports betting until a 2018 Supreme Court ruling opened it up to other states. It is now legal in 30 states, with 22 offering online wagering.

Illinois ranks third in total handle among the states that have legal sports betting, according to a September report by Eilers & Krejcik Gaming, a California-based research and consulting firm. New York, which launched online sports wagering in January, tops the list, followed by New Jersey. Nevada ranks fourth.

The Illinois Sports Wagering Act was approved in 2019, allowing the state’s 10 casinos, three horse tracks and the seven largest sports facilities to acquire a sports gaming license at an initial fee of no greater than $10 million each.

With six new casinos slated to open, including Bally’s, which filed an application with the gaming board last month to build Chicago’s first casino, the number of sportsbooks at bricks-and-mortar facilities could hit two dozen within the next few years. In December, the city of Chicago approved sports betting at sports venues, with plans for a DraftKings sportsbook at Wrigley Field and a FanDuel sportsbook at the United Center in the works.

Getting the three online-only sportsbooks off the ground, however, has proved to be a challenge.

Tipico, an international sportsbook based in Malta, applied after the Dec. 3 deadline and was rejected by the gaming board.

Digital Gaming, a Florida-based company, withdrew its application after filing. The company did not respond to a request for comment.

Fubo Gaming, a new division of New York-based streaming service FuboTV, was notified in April that “it did not meet the minimum qualifications and was disqualified from the selection process,” according to the gaming board. In an email, the gaming board referenced the relevant rule, which states that an online sports wagering applicant is not eligible if “any key person … has been convicted of a crime involving dishonesty or moral turpitude.”

On Tuesday, a Fubo spokeswoman referred to an April 28 statement in which the company “respectfully disagrees with the decision,” and offered no further comment.

“Fubo Gaming has been issued operating licenses by gaming regulators in other states, each following extensive background investigations into the company and its principals,” the company said in its April statement. “The basis for which the company has now been disqualified in Illinois did not preclude its licensure by these other states.”

That left Tekkorp/Caliente as the only remaining applicant, which turned out to be no slam dunk either.

In May, a Washington, D.C.-based nonprofit called Stop Predatory Gambling sent a letter to Gaming Board Administrator Marcus Fruchter expressing concern that Caliente Interactive is part of Grupo Caliente, a Mexican gaming company owned by Jorge Hank Rhon, the former mayor of Tijuana. The group raised decades-old allegations that Rhon was involved in everything from money laundering and drug trafficking to the illegal transportation of endangered wildlife, asking the board to reconsider its decision to advance the license application.

Incidents cited by the group included Rhon’s 1995 arrest at the Mexico City airport after a customs inspection found suitcases filled with carved ivory and rare animal pelts that he had not declared. In 2011, Rhon was arrested by Mexican federal authorities after a raid on his Tijuana compound turned up 88 guns and nearly 10,000 rounds of ammunition. In both cases, charges were dropped.

Caliente Interactive was established in 2014 as an independently operated entity through an agreement between Grupo Caliente and Playtech, a publicly traded London Stock Exchange technology company, according to the Tekkorp disclosure statement filed with the gaming board.

“Caliente Interactive is not part of Grupo Caliente, nor is it owned in any way by Grupo Caliente or any individual or entity involved in the ownership of Grupo Caliente,” said Gilbert Brooks, an attorney representing the Tekkorp/Caliente bid.

Miller said the pending Tekkorp application is “being processed and investigated per the requirements” of the gaming board’s competitive selection code. But financial difficulties may render that decision moot.

In its Sept. 13 proxy filing, Tekkorp said “capital market conditions have deteriorated significantly since the transaction was initially contemplated,” and the merger with Caliente “is no longer being pursued in the same manner.” While Tekkorp is exploring “alternate opportunities” with Caliente, there isn’t enough time to hammer out a new deal before an Oct. 26 merger deadline, the company said.

If not enough shareholders agree to the merger extension, the state’s fourth and final online sports betting applicant will be dissolved, according to the filing.

While the state will likely reopen the competitive process for the online licenses after the Tekkorp application is resolved, near-term economic and competitive headwinds may produce a similar result, according to Chris Grove, a partner with Eilers & Krejcik Gaming.

Grove cited the high cost of capital amid tightening credit and the outsized market share being “hoovered up” by DraftKings and FanDuel as significant deterrents to potential Illinois applicants.

“People are a bit more cautious and a bit more judicious when it comes to attacking the online gambling opportunity than they were when Illinois passed its bill,” Grove said. ‘There’s a good chance that you will see increased interest in entering the Illinois market over time. Right now, I think, is a uniquely tough time to convince someone to pony up $20 million.”

rchannick@chicagotribune.com