Play your cards right
Flushed with success?
For many gambling companies, September 2006 saw the realisation of their worst nightmare; the US effectively banned online gambling in the country – cutting off billions in revenue at a stroke. But the sector has proved resilient and the predicted rash of company collapses has failed to materialise.
For a company that lost 55% of its business overnight in October last year, posting profits up 34% year on year must be considered a result.
Like many online gambling firms 888 Holdings plc was hit hard by the US’ Unlawful Internet Gambling Enforcement Act (UIGEA), but nonetheless the company still made a profit of $90 million (£45 million) for 2006 – more than a third up on 2005.
Considering the loss of business, these figures may seem surprising, but 888 was savvy enough to not put all its eggs in a US-shaped basket. The jump in profits was attributed to 888’s non-US business bringing in $157 million – 27% up on the previous year. The company has also launched well received new products in the past 12 months, according to 888’s chief executive Gigi Levy.
Indeed, Gibraltar-based but FTSE-listed 888 is becoming increasingly bullish, including going on the acquisition trail as it seeks to diversify its product base. In March, it snapped up the online bingo business of Belize-registered Globalcom for $32.4 million in cash.
After the panic of the UIGEA, which saw all online gambling companies’ share prices plummet, 888 is also recovering favour with investors. From 146.5p just before the UIGEA was passed, 888’s shares hit a low of 93.5p in late October, but have now climbed back to 124p at the time of writing.
888 is also determined to remain an independent player. It was an acquisition target for rival Ladbrokes , but talks recently ended after several months. Levy has since said that he sees the company as an acquirer, rather than a target.
While Ladbrokes’ expansion plans hit a buffer here, it has had more success elsewhere, buying Sponsio, an online gaming firm in Sweden, Norway, Denmark and Finland in January for £36 million.
Hedging bets
Ladbrokes’ confidence is borne out of the fact that it has emerged unscathed from the UIGEA fallout, having never traded in the US. “It [the US] was always a grey area as to whether gaming was legal,” explained Ciaran O’Brien, Ladbrokes’ head of PR. “We took the view that until it was clarified and no longer a grey area… we [wouldn’t] enter the market.”
Instead, Ladbrokes focused on the European market, where the legal issues are clearer, and is now an established brand on the Continent, giving it an advantage over rivals that have turned their attentions to Europe post-UIGEA. However, O’Brien admits that competition has increased since last September.
But not every company has fared as well as 888 or Ladbrokes. Partygaming , for instance, saw its 2006 pre-tax profits fall by 57% compared to the previous year, although it still made £70.8 million. The company also recently warned investors that its profit performance in the short term will be hit by the expense of marketing for new customers. But its chief executive, Mitch Gerber, remains positive about Partygaming’s prospects in the medium to long term.
Indeed, Gerber is confident enough in Partygaming’s prospects to make acquisitions. In December 2006, it clinched the £19.2 million acquisition of rival Empire Online’s gaming assets.
Buyer beware
Empire said at the time that it had sought a deal because the UIGEA had made it impossible for the company to remain independent. At the time of the deal, analysts were predicting a wave of consolidation in the industry as others followed Empire’s lead.
But since then, M&As have been relatively few and far between as businesses have concentrated on restructuring to mitigate the effects of the UIGEA, rather than sell out.
Indeed, the UIGEA could stifle M&A activity, according to David Pope, an analyst at stockbroker Brewin Dolphin . With legal issues still unclear, and even the threat of imprisonment – executives at Sportingbet had warrants out in Louisiana for their arrest until recently – operators will be loath to take on any extra risk.
“Any buyers would acquire any potential liabilities, so I don’t think there will be much merger and acquisition activity,” Pope said. “Every company will be different relative to the legal situation, but if you are… going to be acquiring one of these businesses you have to consider it in the due diligence process.”
Pope believes that gaming firms will instead focus on marketing activities to try and up their market share. “If the stock market prices are significantly lower than the [cost of] acquisition of the customer, then there might be corporate activity,” he said. “That isn’t the case at the moment.”
Feeling lucky?
While the effects of the UIGEA have not been as keenly felt as some in the industry feared, the prospects for Internet-based gaming and betting firms are still mixed, with success depending largely on which geographic and gaming markets they are strong in, according to Pope.
“It is on a company by company basis,” he said. “Where[as] the land-based operators, you can say yes, they are strong, because the regulatory hurdles… are in place and people are gaming more.”
However, Ladbrokes’ O’Brien is more optimistic about the sector’s prospects. “At a European level it is becoming more open in terms of competition because the EU are taking action against countries where there have traditionally been monopolies and the Far East and potentially America long-term will open up,” he said.
Indeed, US Democrat Congressman Barney Frank has submitted a bill - the Internet Gambling Regulation and Enforcement Act of 2007 - which aims to repeal the UIGEA and replace it with a regime that focuses instead on licensing, taxing and regulating some forms of online gambling.
But Pope warns that this bill may not be the panacea to end gaming companies’ woes because it would allow US operators to compete on a level playing field, something that under the old legislation they could not. “[Frank is] trying to… allow open competition in the States, which would allow the American operators, which [have] proven brands, to compete… which means the market will have a huge amount of capacity put into it and people will gravitate towards the brands they know, which will be the American brands.”