This time last year, online gaming operators looked unstoppable. New members were flocking in their thousands, and the publicly listed heavyweights seemed a sure bet for investors. Revenues were rising. And so were share prices. James Walker finds out what happened next...
Subsequent events led to what can only be described as tantamount to media frenzy: would the bottom fall out of the internet gaming industry following the signing of the Unlawful Internet Gaming Enforcement Act? Who would hold? Who would fold? And, perhaps most importantly, who would be buying whom?
Taking to the idea that M&A activity would serve as a crutch for many online operators, industry observers and journalists across the globe said the controversial US legislation would act as a catalyst for consolidation. But to what extent have their predictions come true?
Following the passage of the UIGEA, online poker giant PartyGaming announced that it would “suspend all real money gaming business with US customers.” As a result of the action, the company’s stock dropped 60 per cent in 24 hours, and it was moved from the FTSE 100 to the FTSE 250 Index less than 10 days later.
As the dust began to settle, PartyGaming was linked to a series of potential mergers with a wide array of companies, including 888 Holdings, Bwin, MGM, Pacific Poker and even UK bookmaker Ladbrokes. At the end of December, the group signed deals to buy the internet gambling operations of Empire Online and Intercontinental Online Gambling for US$66.3m.
PartyGaming said the companies being bought - which operate several popular sites, such as NoblePoker.com, Clubdicecasino.com and MagicBoxCasino.com - would lift earnings in 2007 and provide at least $8.5m in EBITDA before stock option charges.
iNTERGAMINGi spoke to John Shepherd, director of corporate communications for the company. He said the 10-year-old firm continues to remain active in M&A, and, as we will see, this certainly appears to be a core part of many of the larger online gaming companies’ current business strategy. For operators such as PartyGaming, this does indeed stand to reason: before it pulled out of the US market, consumers there represented a massive 75 per cent of the group’s revenues.
After PartyGaming decided to suspend its US operations, privately held PokerStars became the largest online poker cardroom in the world. Many private companies addressed the US law differently to listed companies, and have kept their doors firmly open as a result. With a market value in the region of $3bn, PokerStars is one of the world’s largest privately held gambling companies, and has itself recently been the subject of financial media speculation regarding a possible IPO or merger with a publicly listed rival.
Elsewhere, exactly one month after the UIGEA was ratified, gambling software maker Playtech agreed to buy rival Tribeca for $75m to create a company twice the size of its nearest competitor. Playtech said the deal was in line with its strategy of extending its geographical reach and product range, and specifically cited the US ban as a factor in the transaction.
We cannot deny that the online gaming industry is currently being swept by a wave of consolidation - but to what extent is this due to the UIGEA? Although the media on both sides of the Atlantic has carnivorously taken to the idea that a ‘fever of consolidation’ has ensued following the US action, iNTERGAMINGi spoke to numerous operators who were adamant that the UIGEA was actually not as significant as many have implied. PartyGaming’s Shepherd said there was “plenty of rumour and speculation” about industry consolidation long before the SAFE Port Act was signed into law.
“Industry consolidation will not surprise anyone, and nor will it surprise anyone to see companies making acquisitions that help them achieve strategic objectives to diversify into new products and territories and also bolster existing operations,” he continued. “We have completed four acquisitions in the last 12 months, the last one of which was the purchase in August of Gamebookers.com, the non-US facing sports book, for around €100m.”
Mark McGuinness, marketing director for the Betdaq betting exchange, also played down the significance of the UIGEA on M&A activity in the online sector: “The trend even prior to the SAFE Port Act introduction saw many operators vying for Europe and the UK. To an extent the US situation shall only accelerate the market penetration of Europe by many operators.”
It thus seems that the new US legislation should not be viewed as the sole catalyst for consolidation - because the wheels of consolidation were already in motion. Rather, in acknowledging that the goalposts have most certainly shifted since October, operators see the UIGEA as merely stoking the fires of M&A activity.
This is reinforced by Karin Klein, a spokeswoman for Austrian sports betting group Bwin, who noted that the companies affected most by the SAFE Port Act were the ones who had the majority of their customers in the US. Prior to UIGEA ratification, Bwin generated 73 per cent of its gross gaming revenues in the European market, against just 22 per cent on the US market. The company, however, continues to remains acquisitive, regardless of the fact that the US represents a non-core aspect of its business.
Since Bwin is a leading online gaming provider in continental Europe, it currently has a lead over its competitors that focused on the US market before the US SAFE Port Act was signed into law. “US-focused operators have much larger restructuring requirements which in turn ties a lot of management capacity on their side,” Klein said.
In an interesting twist, however, while European players have an advantage at the moment, they are perhaps conscious that they must not become complacent. This is one potential factor that has resulted in the increased levels of M&A activity in non-US focused operators as well, as it could be seen as a pre-emptive move to buffer against the likely formation of an industry behemoth.
While speculation over possible mergers and buyouts has peppered industry headlines recently, none has perhaps focused more than upon UK bookmaker Ladbrokes and 888 Holdings. In early November, Ladbrokes finally announced it was planning to buy the online casino giant.
Newspaper reports claimed the sale price might fetch up to £490m. While analysts have said PartyGaming would still be interested in purchasing the Israeli-owned firm, it is thought that 888 would prefer to be bought out by a traditional gambling operator rather than another online firm, which may be also be reeling from the effects of the UIGEA.
Of course, the transaction would significantly bolster Ladbrokes’ online presence, in line with the company’s current strategy. “We are not surprised to see traditional bookmakers trying to take advantage of the currently depressed valuations among online gaming companies,” commented Klein on behalf of Bwin.
“Both companies are leaders in their respective fields,” added McGuinness. “And with Ladbrokes signalling a more public focus on Europe, any potential transaction between the two would certainly create a European gambling behemoth which has scale and financial resource across the product portfolio and would leave the company well positioned to be a market leader.”
888 Holdings was unavailable for further comment over the talks it is conducting with Ladbrokes. However, turning to chief exectutive John Anderson’s statement that came on the heels of the company’s third-quarter results, we are able to catch a glimpse of the company’s current outlook.
During the period, the group saw net gaming revenue outside the US reach $38m, up 20 per cent on the comparable period in 2005. Despite the suspension of real money gaming operations in the US, the group’s business continues to be sound.
“The results…demonstrate the resilience of our business model and are a direct result of careful implementation of our long standing strategy to diversify our product offering and geographical spread,” Anderson said. “As it stands, 888 is debt free and has ample liquid resources to both fund our operations and participate in attractive opportunities for market consolidation.”
Some have argued that a shift in power in Washington could bring about a reversal of the UIGEA. However, David Stewart, a legal expert in the gambling sector, said on the matter: “If it comes up again, they’re going to say, ‘We’ve already dealt with that issue.’ They were exhausted by this latest effort.”
Although the true lasting significance of the UIGEA on M&A activity in the sector has been thrown into question, signs of consolidation after the act was passed have served to inject life into the stock market values in the industry. And although it is easy to focus on the big money deals, we must remember that the online gaming market is far from mature, and so consolidation is an inevitable, natural process that should ultimately help the industry to move in a positive direction.
