Tuesday, October 31, 2006

Two leading online poker and casino firms, PartyGaming and 888 Holdings,
have held talks about a £1.6bn merger as the industry scrambles to replace
revenues lost through the United States' crackdown on internet gambling. The
online gambling industry has been devastated by legislation passed in
Washington this month preventing banks and credit card firms processing
payments for bets. Analysts reckon PartyGaming earned between 75% and 80% of
its revenues from the US. The ban caused shares across the sector to
collapse. PartyGaming, which has dropped out of the FTSE 100, has made no
secret of its plans to seek a deal with rivals to bolster its business. The
firm cancelled its dividend shortly after the US ban and said at the time it
hoped to take advantage of slumping share prices. Its chief executive, Mitch
Garber, said in a recent interview consolidation was the "most sensible way
forward" and told analysts he was in talks with several companies. The Stock
Exchange might force a statement today. The desperate state of the industry
has led to a frenzied round of talks among leading players. 888 was forced
to put out a statement recently denying it was behind a bid for another UK
listed firm. "I don't think it will come as a great surprise to learn that
all parts of the industry are talking to each other," said one industry
source. "How concrete those discussions are is another thing. Consolidation
is absolutely on the cards. But I think we might see companies waiting to
see how things pan out a little. Companies need to sort out their cost
bases, for example." Discussions between PartyGaming and 888 are said to be
at an early stage. The firms at least don't have far to go: they occupy the
same office block in Gibraltar. A source close to 888 said they had not
progressed further than "a coffee and a chat". Another industry source said
PartyGaming was also pursuing other options, but an 888 tie-up would have
obvious benefits. "Casino and poker are the mainstay of both businesses," he
said. The US accounted for a little over 50% of 888 revenues, with the
remainder largely from Britain and other parts of Europe. It still has
around $100m (£53m) cash, even after it pays a planned special dividend. But
its shares have also fallen sharply and the company has dropped out of the
FTSE 250.

Online gambling firms are under pressure. The sudden disappearance of a
large number of players makes online gaming less attractive to customers
both because there are fewer people to play against and the companies are
not able to offer the same kinds of jackpots.

Neither PartyGaming nor 888 would comment on the merger discussions.

Culture secretary Tessa Jowell yesterday called for an international
agreement on the regulation of online gaming, before an international summit
at Royal Ascot. Delegates from 30 countries, not including the US, will meet
tomorrow to discuss methods for protecting vulnerable people and keeping the
industry free of crime. Ms Jowell said companies would be welcome to operate
in Britain but only after agreeing to a "very tough" code on social
responsibility.

At its peak, PartyGaming was valued at £7bn on the London Stock Exchange.
Despite 33 pages of warnings in its float prospectus, including over a
possible ban in the US, investors piled in and the directors cashed in more
than £1bn. London became the centre for the industry to raise money. Since
the US ban PartyGaming shares have dropped by 70% to 30p and 888 shares have
declined 24% to 108p.