Chilly Investors Thawing on I-Gaming Investment Case

17 December 2008

One I-gaming equity analyst thinks institutional investors will likely warm to the sector if PartyGaming and others make monetary amends with the United States Department of Justice.

"Many institutional investors have shunned the online gaming sector since 2006 due to overhanging threat of US Federal legal action," Ivor Jones of Evolution Securities wrote in a note on PartyGaming Wednesday.

"If Party is able to agree to a settlement, and its peers follow suit as we expect, then this 'black mark' against the sector will be removed," he said. "With only 'normal' risks to worry about (weak economy, high margins, competition) we expect more investors to show an interest."

With Tuesday's surprise news regarding Anurag Dikshit, a PartyGaming founder and major shareholder, PartyGaming's share price -- as on previous United States-related news -- reacted strongly.

The tailwinds of Mr. Dikshit's deal with the Justice Department blew into Wednesday, buoying the London-listed operator a further 14.25 pence, or 8.07 percent, after a 27 percent gain Tuesday.

As expected, talk of consolidation has resurfaced between Party and its Gibraltar-based peer, 888 Holdings. Since Tuesday, buyers of 888 have added 32 percent to the company's share price, which has slumped since October.

With both companies the subject of brokerage downgrades in recent months, the price uptick comes as a welcome but ephemeral reminder that interest in the sector -- despite the wider economic downturn -- remains strong.

Mr. Jones suggested an 888-Party tie-up would occasion an opportunity to eliminate duplicated central costs, exploit cross-selling synergies and bolster poker liquidity.

"Appealing" for PartyGaming, Mr. Jones said, is the potential for poker software business-to-business deals in America.

He hypothesized that potential b-to-b poker clients, both in the Americas and Europe, have been cautious on PartyGaming due in no small part to the Justice Department issue.

"A resolution should give potential b-to-b customers more comfort that PartyGaming will be around to provide them software services," he said. "In particular, state operators, put off from transacting with a company facing prosecution from the US Federal courts, would be more willing to use PartyGaming's services."

However, with a California study bill to be reintroduced to the state Legislature sometime in 2009 -- and the next-most-recent state-level poker bill squashed in North Dakota in 2005 -- PartyGaming's North American prospects would appear far from ripe.

As for a conclusion to the Justice Department negotiations, PartyGaming is keeping it all close to the chest. Talks are at an "advanced stage," it said in a stock exchange statement Tuesday, but carefully, the company reminded there can be no guarantee that a deal will be reached.

Chris Krafcik is the editor of IGamingNews. He lives in St. Louis, Mo.