What do you tell your shareholders when hundreds of millions of dollars are stripped from your shares in the course of a day? That’s the quandary internet gambling companies faced on October 2, 2006, the first day of trading after the US Congress banned online betting. The news came as a total surprise to the market as the anti-gambling legislation was tacked on to a broader bill on port security. With big UK players like PartyGaming and Sportingbet getting more than half their revenues from the US, shareholders were naturally spooked.
‘You can see it was a shock to the market by the various share price drops,’ comments Richard Hunter, a gaming sector analyst with Hargreaves Lansdown in London. PartyGaming had 75 percent of its business in the US, which is close to the amount shaved off its share price after the bill passed. ‘There was mild panic in the market based on the theory PartyGaming would be left with just 25 percent of its revenue,’ adds Hunter. Within a week, the world’s largest online poker company had to give up its treasured position in the FTSE 100.
Sportingbet’s price slumped 67 percent on the news. ‘We had been watching the [anti-gambling] bill ever since Senator Bill Frist got involved but we knew it couldn’t pass just by going through the Senate on the floor,’ recalls Sportingbet CEO Andy McIver, who officially took over as chief executive on that fateful day. ‘In the end, he made it part of the bill that people would vote on: he put it in the defense budget.’
The flop
Over the next two weeks, as they waited for President Bush to sign the bill into law, online gambling companies weighed their options. ‘We knew we couldn’t sell the company at value; we couldn’t get anyone to pay up front. But we had to sell before the business became illegal,’ says McIver. In the end, Sportingbet sold its US operations for $1 to Jazette Enterprises and took a £252 mn ($489 mn) one-time charge.
PartyGaming also exited the US, taking a hit of £133 mn, while Leisure & Gaming sold its US operations to its CEO. Meanwhile, World Gaming was forced into administration because the bulk of its business was stateside. Others, like UK-based 888 Holdings and Austrian online betting firm bwin, simply ceased taking credit cards from US residents.
‘We had close to 20 percent of our gross gaming revenues coming from the US and that is now gone,’ says Konrad Sveceny, head of IR at Vienna-based bwin. ‘We had to take down expectations for the year, which is a pity because the fourth quarter is usually very strong in the online poker and casino business as people tend to spend more time at home when there is less daylight.’
While not as hard hit as its larger peers, bwin had to shift focus to concentrate on its continental European operations and scale back on marketing and branding costs. Because the US clampdown was unexpected, investors and analysts were not about to start blaming management. ‘The market saw how much a surprise the announcement was and investors were now interested in what these companies would do strategically,’ comments Hunter. ‘Management [teams] don’t have a crystal ball; they weren’t negligent,’ says another sell-side analyst covering the sector. ‘These are some of the brightest people in the market.’
The river
As 2006 came to a close, PartyGaming’s share price had lost 72 percent of its value; Sportingbet’s has dropped 80 percent since Congress rushed through the bill. ‘The irony is that the price for those two stocks is now reflecting what the businesses are worth, so they shouldn’t fall much further,’ predicts Hunter. ‘PartyGaming is still the biggest European poker site but if you lose three quarters of your revenue, it’s bound to be hard times for a bit.’
Both companies have revamped their costs and set out aggressive growth strategies for their non-US operations. ‘Shareholders thought we did the best we could manage in a finite period,’ reports McIver. The newly crowned CEO had only two weeks to dispose of his company’s US arm, realign its cost base and give investors an idea of what the business would look like going forward.
‘Financially, some people had taken a bit of a knock so they wanted to know how we are going to rebuild for the future,’ McIver adds. The company is now focusing on its operations in Australia and Europe, which account for about 60 percent of its business.
Investors were already a bit shaken in the run-up to the bill’s passage after two senior executives from UK firms were arrested while visiting the US. On September 7, Peter Dicks, Sportingbet’s nonexecutive chairman at the time, was arrested upon landing in New York (see Busted flush, page 17). Two months previously, BetOnSports’ then CEO David Carruthers was charged with fraud and racketeering while passing through Texas. He is now under house arrest in St Louis awaiting trial early this year. The arrests brought the sector down but the market already knew these companies were vulnerable to US regulation. In their prospectuses, both PartyGaming and Sportingbet warned that any action by US authorities could have serious consequences for their businesses. ‘The market was already discounting the stocks to an extent,’ confirms Simon Holliday, a partner with UK-based Global Betting and Gaming Consultants (GBGC). ‘PartyGaming floated at 116p per share – at 170p, there was still some discounting.’
Despite high turnover in Sportingbet’s shares after the bill passed, the company still held onto Fidelity, its largest shareholder at 15 percent. ‘The second biggest was Merrill Lynch but it has gradually been disposing of the stock over a period since Dicks’ arrest,’ says McIver. In terms of sell-side coverage, many of the bigger houses like Goldman Sachs and Morgan Stanley are now producing less coverage on Sportingbet, but other banks have picked up coverage since the share price took a hit.
The rebuys
Now that the worst has happened, investors are looking for reassurance that management is well aware of the regulatory risks associated with European expansion. EU countries are taking different approaches to online gambling: some are embracing international gambling operators while others are attempting to shut them out. ‘Companies have to demonstrate to investors that there is certainty while also highlighting risk,’ explains Holliday. ‘They need to tell shareholders they have a safe, stable core to their businesses but also communicate that there is potential for growth.’
McIver certainly sees the potential for growth and identifies Argentina, Mexico and Brazil as target markets for expansion. ‘The competitive landscape still hasn’t changed for us,’ he says. ‘PartyGaming is a poker company that has lost its US business and we are a sports betting company that lost its US business.’ Despite its steep share price drop, Sportingbet’s investment story remains the same, he adds: ‘We are still a growth stock.’
