Saturday, October 07, 2006

Internet casinos were fighting for survival today after they were left
stunned by law makers in the United States who called 'no more bets' and
sent shares crashing this week. Billions of pounds were lost when Congress
effectively shut down online gambling operations in the US and deprived
casinos such as Party Poker firm PartyGaming and 888 Holdings of their main
source of revenue. It also left investors in a state of panic as the
subsequent fall in share prices revived memories of the dotcom crash. More
than £4bn was wiped off the value of the online gaming sector in one day -
more than halving its value - with shares in PartyGaming down by as much as
65%, 888 off 28%, Sportingbet 67% lower and World Gaming losing an
astonishing 92%. The sector is now looking for ways to rebuild its
reputation and cashflow with investors more nervous than ever on taking a
punt on internet casinos. Richard Hunter, of Hargreaves Lansdown
stockbrokers, said: 'These companies represent high risk investments and as
such will tend to be suitable only for the most hardened of investors - or
gamblers perhaps.' For a long time online casinos generated enough cash not
to need large bank loans but analysts now fear firms could be forced to look
for credit to make up for lost revenues and falling profits. Reports have
suggested that PartyGaming will have to negotiate a new loan facility with
its banks within 30 days of anti-gaming legislation being approved.
And smaller player World Gaming - which generates more than 95% of its
revenues from the US - has already entered talks with creditors as it
struggles to deal with its debts. A wave of consolidation is now expected in
the sector as online casinos look for new gamblers outside the US to revive
their fortunes.

Ukbetting became the first to reveal it had received an approach as it
admitted that its decision not to operate in the US made it a valuable
takeover target. Most of ukbetting's gambling customers are British and it
also owns sports news websites such as teamtalk.com and football365.com.

City analysts said 888 was behind the preliminary approach but added that
its approach was made before the change in legislation in the US.

888 went on to say that it was not 'currently' in discussions with ukbetting
although the company is widely thought to be on the acquisition trail. 'The
talks apparently started prior to the change in US regulation,' said Panmure
Gordon analyst Charles Hall.

'As far as 888 is concerned the deal makes good strategic sense, given that
it would further strengthen the company's UK position.'

But he added: 'This may well have made sense last week but in the new
environment the company may feel it has more pressing issues to deal with as
well as not wanting to tie up all of its cash resources.'

Both PartyGaming and 888 still generate a lot of cash without their American
punters, and PartyGaming has also suggested it is on the look out for
acquisitions.

Its share price was given a welcome boost by talk that it is in renewed
discussions over a bid for smaller rival Gamesys.

A marketing push away from the US is also expected in the coming months to
attract new players to its websites. Both PartyGaming and 888 have courted
customers around the world as the threat of anti-gaming legislation in the
US loomed.

In the first six months of the year, 888 attracted 370,000 new members to
its casino and 380,000 to its poker tables - two-thirds coming from outside
the US, which now accounts for just over half its revenues.

PartyGaming has managed to reduce its reliance on the US from 90% to around
75% in the last year. Mr Hunter said: "The obvious next strategic move for
these companies would be the traditionally rich gambling mentality in Asia
and also the largely untapped European market.

'Even in these localities, depending on the country, there are some
difficult legal hoops to get through before the likes of PartyGaming and 888
can begin to replicate some of the revenues they have lost.

'There is also, now more than ever, the likelihood of consolidation within
the sector, particularly as many of the smaller companies will find it
increasingly difficult to survive.'

Investments in online gaming stocks have been something of a gamble since
the sector took off around 18 months ago.

Share prices have lurched violently up and down on a daily basis with the
enormous popularity of games such as online poker offset by ongoing concerns
over the legality of internet betting in the US.

PartyGaming warned of the threat of changes in regulation in the US when it
listed on the stock market in London in June last year. But investors threw
their chips onto the table and sent its value soaring to £7bn - more than
four times its current value of £1.6bn.

The US authorities raised the stakes over the summer when they arrested two
British executives - BetonSports chief executive David Carruthers and
Sportingbet chairman Peter Dicks - on American soil.

Despite the warnings, few in the City expected the controversial Unlawful
Internet Gambling Enforcement Act to be passed by Congress. However, it was
approved after Senate majority leader and 2008 presidential hopeful Bill
Frist attached it to the back of a totally unrelated Bill on security at US
ports at the last minute.

The successful ambush gave American conservatives and the religious right -
who have compared the evils of gambling to those of crack cocaine - an
extraordinary coup.