Bad News for PartyGaming and PartyPokerArbuthnot Securities, a UK-based investment banking and brokerage firm is painting a bleak picture for PartyGaming's future. The parent company of online poker's number two brand, PartyPoker, PartyGaming had to pull out of the US market last October with the passing of the Unlawful Internet Gambling Enforcement Act.
Though the company has recovered somewhat since that time and has positioned itself as a potential acquisition target for European companies, the news from Arbuthnot Securities is yet another obstacle for the one time online poker powerhouse, which in 2004 was the biggest IPO in London.
The Arbuthnot report is titled Italian Gambling Sector – The Italian Job. Despite a lot of recent good news for the online gambling industry, Arbuthnot believes the outlook is not as positive as many believe. Arbuthnot believes the share prices for listed online gambling giants such as PartyGaming are heavily over-inflated.
"Offshore strategies remain mixed Before the 2006 licensing regime, Italy blocked most offshore gambling operators. Operators have now had an opportunity to apply for a betting licence, though gaming remains illegal. We are encouraged that 888 has a new licence and is therefore able to generate legitimate earnings in this region. The status-quo for Sportingbet is a 2005 licence, which means little change though potentially increasing competition. We are highly concerned that PartyGaming does not have an Italian licence and believe that this highlights increasing regulatory risk across many major jurisdictions as governments recognise online gambling and turn it from a ‘grey’ legal area to a dangerously black and white one".
Needless-to-say, folks on the PartyGaming Stock Forum aren't all too thrilled with the news. One stockholder offered his arguments regarding Arbuthnot's findings:
1) AS believes that there will be little long-term growth and the growth seen since December will fizzle out in 4 to 6 months due to player attrition. PG lost 80% of their client base 7 months ago and now are almost back to the same numbers so attrition isn’t as bad as AS seems to project. I know that micro-limits were added and high-raking players left so that negates some of the player growth. However, there has been steady growth recently.
2) Much of their arguments hinge upon using Italy licensing (PG has no Italian license yet) as a representative case study for all EU nations and that PG will eventually end up with EU regulatory issues down the road. AS seems almost “certain” that this will happen as they are “certain” that US laws will not change in favor of PG. I question how certain either of these positions are but it seems that AS is choosing to be certain only about factors that will hurt PG. I think in light of recent WTO and EU rulings, AS should be far less certain about PGs future demise. I also think using one country, Italy, as a baseline for what other EU countries will do is quite shaky.
3) Does AS seem to think that PG is only looking toward the EU for future growth? Where is the mention of the possibility of Asian, African, and South American markets? Certainly these possibilities should be factored into the target sp. Once again, it seems as if AS believes “as Italy goes, so goes the rest of the world.”
4) AS uses a PER of about 18 to set their price of 15p. I seem to recall that a stock is worth what the market says it is worth. In January, the sp hit 25.5p and this was under the darkest of dark clouds. Since that time, most news has been good news. There are bills being presented in Congress that *might* open up the US market to PG down the road, the WTO rules against the US, several EU rulings are favorable, player numbers and revenues are up, the UIGEA might hurt US facing operators, etc. How can 15p be considered reasonable if the market was willing to buy PG for 25p with a much worse atmosphere?
5) There is a rising tide of online players which should lift all boats. As technology penetrates more markets and also makes it easier to gamble (hand-helds, for example) there should be nice growth in this sector.
6) PG might be acquired which would drive up the sp. Yahoo!, Microsoft, Vegas, who knows?
Another shareholder chimed in:
Overly bearish? well maybe. But you need to be optimistic to buy in a sector where Eu executives languish in American jails and trading in company shares get suspended overnight. I dont see any return to the American market for years if ever, in fact Frank killed off all those hopes. As for growth sectors, you need to go back to company guidence, and they see growth in europe as the opportunity. Handhelds and other mobile devices, very risky with disconnects, I cetainly wouldnt risk doing that and I play online all the time. In fact the trend to keep reducing the decision time given to players makes that even more problematic. EU regulation has to come, all countries have licenses for operating mobile phone networks so why not for gambling? But these are all medium term consideratons, as much as everything the market is about volumes and how many losing players there are and how rich they are, most of the rich fish were in America, but the EU rich rich fish have gone to sites which still serve the American rich fish, short term the real question is how effective the American government is at closing the American facing sites.
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Christopher Costigan, Gambling911.com
Originally published May 22, 2007 1:37 pm ET
