Market Briefs - Nov. 14-18, 2005

Profit Warnings

Bookmakers William Hill, Ladbrokes, Paddy Power and UKbetting all issued warnings Friday that profits won't meet expectations due to poor racing results. The bookmakers have been battered by a racing season filled with many meetings in which the favorites have won. Meetings at Epsom and Aintree took their toll earlier this year, then as the books where finally beginning to recover, Keiron Fallon rode three winners at the Arc de Triomphe meeting, and recently punters had huge success at Cheltenham.

Some analysts, however, are suggesting that the poor results can be attributed to more than just punters' luck. At least two investment banks, Bridgewell Securities and Morgan Stanley, published reports placing at least part of the blame on "structural" issues. Specifically, the banks believe the off-course bookmakers are performing poorly because they get their starting prices from on-course bookies. The on-course prices may not be accurate because they are affected by betting exchanges. (On-course bookies use the exchanges to hedge their risk.) Spokespersons from both William Hill and Ladbrokes have indicated that they might develop their own starting prices and hedge their bets with betting exchanges.

UKbetting Plc (UKB.L) - After his company released its profit warning, UKbetting Chairman Peter Dubens stated, "Our sports betting margins have been low for the last two years because our book is not big enough." Referring to the run of poor racing results, he also revealed that, "The first two months of the second half were the worst two months for UKbetting in the last four years." Although the company warns that EBITDA for the full year will be toward the lower range of market estimates, revenues are expected to exceed the top end range of estimations, driven by the company's strategy of obtaining new customers from its network of sports content sites. At the end of October, UKbetting ceased running advertisements for competing gambling companies on its Web sites and has experienced a 30 percent increase in click-throughs since then and a 25 percent increase in the number of new registered customers throughout November. Investment firm Seymour Price appears to be impressed with UKbetting's business strategy and has kept its rating for the firm's stock as "buy" despite the decrease in EBITDA.

Paddy Power Plc (PAP.L) - Ireland's largest bookmaker says turnover has continued to grow strongly in line with expectations, but poor racing results have lead to a disappointing win percentages in the second half of 2005. Gross win over the past three weeks has been about 4 million euros below expectations, and the company now forecasts operating profits of 30 million euros for the year 2005, about 5 million euros less than previous expectations.

William Hill Plc (WMH.L) - William Hill reports that in the 18 weeks ended Nov. 1, gross win in the retain and telephone channels was broadly flat, though it was up 16 percent in interactive channels. The company says the integration of Stanley Retail Betting is going well, and it expects to report between £230 million and £240 million in annual profit before interest, tax and exceptional items for the enlarged group.

Ladbrokes - Hilton Group Plc (HG.L) issued a trading statement in which its explained that a 52 percent increase in e-gaming gross win has been offset by a 58 percent decline in telephone betting results, which has caused betting and gaming profit to decline slightly.

More Acquisitions for Leisure and Gaming

Leisure and Gaming Plc (LNG.L), the parent company of Curacao-based sports book and gaming operator VIP Management Services, is expanding its portfolio by acquiring U.S. sports book Nine.com (licensed in Curacao with operations in Costa Rica) and Antigua-based casino operator English Harbour.com. Nine was acquired for an initial consideration of US$36 million ($21.6 million in cash and $14.4 million in shares) paid on completion of the deal. An additional deferred payment of up to $21.1 million will be paid depending on the profitability of the Nine brand for the years ending Dec. 31, 2006, 2007 and 2008. Initial consideration for English Harbour was $16.5 million--$8.25 million in cash and $8.25 million in shares--and deferred consideration of up to $6.75 million dependent upon the profitability of English Harbour for the years ending Dec. 31, 2006 and 2007.

Reporting

German online casino operator Gaming VC Holdings S.A. (GVCq.L) issued a trading update in addition to its third-quarter interim results to inform the market that its lack of marketing spending led to a decline in net revenues per day during the period. Net revenue per day was about 7 percent below the second quarter mark at 100,000 euros. The decline is slowing, however, thanks to an ad campaign in August. October was a very successful month for the company, as over 3,000 new customer registered and revenue improved by 6 percent compared to the previous month. The company's directors say they will declare a final dividend in March that will be based on the cash available.