Net-gaming shares in meltdown

By Jim Armitage
Updated: 09:18 EDT, 2 October 2006

Billions of pounds were wiped off the value of Britain's vast online gambling industry today as investors reacted to the shock banning of internet betting by the US Congress.

PartyGaming shares crashed 60%, wiping £2.6bn from the value of the world's biggest online gambling company. It was one of the largest one-day falls recorded by a FTSE 100 business.

Rival operator 888 tumbled 35%, equivalent to £200m off the company. Sportingbet lost 59%,wiping off £457m, as investors faced the prospect of years of vastly reduced profits.

PartyGaming and 888 instantly suspended their US-facing operations while the legal position was being clarified. Several others, including Sportingbet, World Gaming and Leisure and Gaming, said they would continue in the US in the short term.

Off the record, most now admit their US businesses are almost certainly finished, leaving them to review their businesses.

PartyGaming chief executive Mitch Garber warned his move would have a significant impact on profits, of which about 77% come from US gamblers. 'This development is a significant setback for our company, our shareholders, our players and our industry,' he said.

888 Holdings added: 'Suspension of our US activities will have a material adverse impact on results for this year and beyond.'

Sportingbet, whose then chairman Peter Dicks was freed by a New York court on a Louisiana charge of taking bets illegally by computer, said it was still taking legal advice on the situation and would issue a further statement in due course. It has scrapped its takeover talks with World Gaming in the light of the new law. World Gaming, which relies on US gamblers for almost all of its business, was the heaviest percentage faller, losing 81% of its value.

President Bush is expected to sign the Bill in the next fortnight. Then there is a 270-day period where the precise legislation is drafted, Sportingbet pointed out.

The surprise Bill, driven through Congress by a ploy tying the legislation in with an uncontroversial but vital piece of law about security at American ports, was seen as a victory for the conservative politicians of the religious southern states. Its sponsor, Senator Bill Frist, said: 'Gambling is a serious addiction that undermines the family, dashes dreams and frays the fabric of society.'

The Bill effectively bans online gambling by making it illegal for banks and credit companies to process bets.

Analysts were scrambling to work out how much money the companies could make without US customers. 'It's just impossible to tell. How much will it cost them to lay off US-facing staff? What impact is the loss of the US going to have on profit margins? How much growth can we expect in Europe and Asia? We just can't make valuations right now,' said one.

Another pointed out that the bigger players still had substantial non-US operations, particularly PartyGaming and 888. While the new environment would deprive them ofms of players, they still had manyms more on their books. PartyGaming's non-US business took $150m (£80m) in revenues in the first half of the year. But others, such as Leisure & Gaming and Excapsa with only very small operations outside America, would struggle.

Payment processing companies Neteller and FireOne also saw their share prices collapse. Neteller's lost 60%.

Now investment banks look for a mergers bonanza

While online gambling shareholders were sobbing into their spreadsheets today, investment bankers were smacking their lips at the prospect that a tide of consolidation could now sweep through the industry.

Having already made millions advising internet betting companies on their flotations, corporate financiers are now weighing up who could take over whom.

'You've got to predict a lot of activity in coming months, when all this settles down,' said a senior leisure industries financier. 'These firms have just lost a huge chunk of their business and now have to cut costs and look for synergies.'

He said it was impossible to rule out 'mega- mergers' between the biggest players such as 888 and PartyGaming, as well as smaller deals to mop up bombed-out businesses at the lower end of the market.

One banker added: 'Take the risk associated with operating in the US out of the equation and these companies look like a solid growth bet.' Most will still see strong profit growth from their non-US operations.

Most of the big players are still majority-owned by wealthy individuals with no financial need to sell up. PartyGaming founders Ruth Parasol, Russ De Leon, Anurag Dikshit and Vikrant Bhargava may have seen nearly £1.7bn wiped off their combined shareholdings today, but they have already cashed in £1.2 billion of shares since last year's float.

Another potential block to deals is the uncertainty over the legality of internet betting in continental Europe. French authorities recently arrested two gambling executives for running online sites there, and concerns linger about other countries.

PartyGaming was floated by DKW which, along with other advisers, made $88m (£47m) in fees. HSBC is thought to have made as much as £15m floating 888, and Numis Securities scooped a windfall by listing Empire Online.