The founder of Empire Online, the internet gaming group, has ditched its ambitions to acquire a fellow web betting company, preparing instead to hive off the firm's $260m cash pile in a separate investment vehicle to protect it from the increasing threat of litigation in the US.
This year the company, which is 22.4% owned by its chief executive and founder Noam Lanir, considered a number of online gaming operators with a view to making an acquisition. It is understood to have come close to making an offer for BetonSports, which has since found itself the target of a grand jury indictment in the US. Its former chief executive David Carruthers is among the named defendants and remains under house arrest while he prepares his defence.
It also emerged yesterday that London's Ritz Hotel, which is owned by the Barclay brothers, proprietors of the Daily and Sunday Telegraph newspapers, has closed its online gaming website. A statement on the site said:" "In light of the current confusion and inconsistency in online gaming legislation worldwide, the owners of the Ritz Club London Online have, regretfully, decided to close the site to new customers with immediate effect."
Empire said it had abandoned its acquisitive ambitions because of rising "regulatory uncertainty". State and federal prosecutors have in recent months launched a crackdown on unlicensed online gambling operators that target US customers. Meanwhile, the Senate majority leader Bill Frist is seeking to push through a bill to strengthen existing anti-gambling laws.
Empire said that in the light of regulatory risks it would "fully review carefully all uses for the company's surplus capital in order to maximise shareholder value". It is believed to be considering spinning off a separate vehicle that would target investments in industries less risky than online gambling, such as a tractor business in India.
Aim-listed Empire specialises in recruiting punters through its "skin" websites which use gaming services of operating groups. A contract dispute over how much the "skin" website group should be paid by PartyGaming resulted in a $250m settlement for Empire in February - cash the group earmarked for an acquisition.
Yesterday Mr Lanir told analysts that the online gambling sector, despite heavy share losses and high levels of cash generation, remained overvalued. He said the sector should be trading on between three and six times earnings because of the growing shadow cast by US regulators. PartyGaming is valued at about 9.5 times earnings, 888 at 8.7 times and Sportingbet at 6.7 times. Empire is trading at a small premium to the value of its cash.
The London Stock Exchange has in recent years become a locus for fast-growing online gambling operators seeking access to capital. Many firms based in offshore tax havens have floated in London, with some admitting their activities are likely to be illegal in the US. Many of the City's most reputable investment houses have embraced the new ventures while their founders have sold down their stock holdings, amassing personal fortunes.
Israel-based Mr Lanir fears the campaign by the US justice department and politicians could severely damage the industry in its largest market.
But many industry analysts say tougher legislation will face strong opposition in the Senate, even if its backers manage to squeeze it into what is already a tight timetable.