Crypto Possible M&A Target of Party, 888, Analysts Say

22 September 2008

For a second straight quarter, CryptoLogic Ltd. has forecast less than rosy financials. While the warning had mixed impact in the markets today, analysts believe the struggling company could soon become attractive prey for its acquisitive rivals.

The Dublin developer announced this morning that it is likely to incur an operating loss of between $1 million and $1.5 million -- this on top of a foreign-exchange loss of approximately $3.6 million, which the company attributed to the rapid appreciation of the United States dollar against the British pound and Euro.

The company said third-quarter revenue, which Roth Capital Partners projects at $16,920, has been "in line with seasonal trends and current market expectations." An exact figure, however, was not given.

Todd J. Eilers and Adam Krejcik, analysts with Roth Capital in California, wrote in a research note this morning that if third-quarter revenue indeed reflects seasonality, then Crypto's operating costs are likely tracking higher than expected -- leading to the greater-than-expected operating loss.

"We also believe that the loss of Littlewoods in Sept. [to 888 Holdings] also impacted the company," the note went on. "Finally, we believe the company should consider hedging its FX risk rather than moving cash between currencies to minimize volatility."

While the specific reasons behind the company's increasingly public decline are not known, when asked, analysts suggested that the company -- via its strong casino software, a lucrative licensee like Intercasino and considerable breadth of offering -- could find itself in the crosshairs of PartyGaming or 888.

"Party should buy them tomorrow," one analyst, who wished not to be named, told IGamingNews by telephone this morning. "Just to give you an idea, Jim Ryan was the former finance director at Crypto.

"It would be silly if he wasn't looking at this right now," the analyst continued. "He knows the business quite well -- he wants to get a state-of-the-art casino product because they haven't got it at Party. CryptoLogic is not going to be around in weeks and months, rather than years."

When contacted by IGN, John Shepherd, Party's corporate communications director, declined comment.

Like PartyGaming, 888 has history with CryptoLogic. In May, 888 did a three-year deal to license certain of CryptoLogic's games; but in July, 888 did a business-to-business deal with Sportech -- a former licensee of Crypto's.

"I think 888 makes sense with Crypto," another analyst, who also requested anonymity, told IGN by e-mail this morning. "They both need a leg up in terms of poker liquidity. As you increase the liquidity even at the lower to medium levels you have more in the tank to attract the bigger fish over time.

"I doubt Crypto have enough in the closet to attract 888 unless anything they are doing in Asia shows potential," the analyst added. "Today's warning suggests not."

888 could not be reached for comment by press time, but Gigi Levy, the company's chief executive, acknowledged to IGN earlier this month that with CryptoLogic struggling, "there's relatively little competition in this area (b-to-b services provision)."

As for CryptoLogic's future beyond the current quarter, Mr. Eilers and Mr. Krejcik expect fourth-quarter revenue to pick up on the back of new licensee launches, but maintain that the loss of William Hill as a poker licensee would undoubtedly have a negative material impact on Crypto's business.

Exclusivity on CryptoLogic's poker contract with Hills expires this January.

On the London Stock Exchange, Crytpo's shares closed up 14.75 pence, or 4.41 percent, to 349 pence. On the Nasdaq, however, the company was down 66 cents, or 9.52 percent, to $6.27.

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