Canadian Internet gambling companies were rattled Monday as their stocks
took a nosedive in the wake of legislation passed by the U.S. Congress that
effectively outlaws online wagering in the United States. Shares in leading
software company CryptoLogic Inc. (TSX:CRY) took the biggest hit, retreating
more than 19 per cent, or $4.76, to $19.87 on the Toronto Stock Exchange.
The legislation, part of a port securities bill passed by the House and
Senate on Saturday, prohibits the use of credit cards, cheques and
electronic fund transfers for online gaming. CryptoLogic said it had been
preparing for that eventuality for five years and effective immediately
licensees of WagerLogic, the company’s licensing subsidiary, will stop
taking wagers from U.S.-based players. Last week, the company announced
plans to move its head office from Toronto to Dublin, noting that more than
70 per cent of its licensees’ revenue now comes from outside the United
States. The company’s chief financial officer Stephen Taylor said in a phone
interview that the company will remain “strongly committed to Canada.” “We
have a technical staff of in excess of 200 people based in Toronto and so
that operation will be staying,” he said.

“There will be an impact on our financial results … and it will take some
time before things shake out and get back to more normalized earning
levels,” Taylor added.

Other Canadian companies involved in the industry found their stock
similarly stricken by the news.

Dynasty Gaming Inc. (TSXV:DNY) dropped three cents to 50 cents Monday as the
company, headquartered in Montreal, said it would sell three non-core
subsidiaries and focus on rolling out a play-for-points mah-jong game in
China.

Vancouver-based Chartwell Technology Inc. (TSX:CWH) was down 35 cents or
16.3 per cent to $1.80, and ESI Entertainment Systems Inc. (TSX:ESY) fell 40
cents, or 15 per cent, to $2.20 on the TSX.

Shares in software firm Las Vegas From Home.com (TSXV:LVH) tumbled four
cents or 26 per cent to 11.5 cents on the TSX Venture Exchange, while
Internet bingo firm Parlay Entertainment Inc. (TSXV:PEI) lost 44 cents, or
29 per cent, to $1.06.

Parlay is one of the Canadian companies with the most exposure because it
generates 60 per cent of its revenues from the United States, said Paradigm
Capital Inc. analyst Gabriel Leung.

“We believe there could also be a wave of consolidation given the financial
infeasibility for some of these companies to exist as standalone companies
in the event of a complete loss of U.S. player activity,” Leung added in a
financial report.

Spencer Churchill, an analyst for Clarus Securities, said he expects to see
an impact on Canadian companies, though he doesn’t anticipate any major
domicile shifts outside of the country.

“Canadian institutional investors are basically going to take a big pass on
this base for some time until we see a major shakeout of the revenues
(generated from the U.S.) that are basically going to zero for most of these
companies that have U.S.-facing operations.”

British online gambling companies, including Sportingbet PLC and PartyGaming
PLC, also saw their stocks dive on Monday. PartyGaming, the world’s biggest
online gambling company, said it would pull out of the U.S. if President
George W. Bush signs the legislation into law.

The companies hit hardest by the ruling offer betting markets denominated in
U.S. dollars, and usually operate from bases in the Caribbean or Central
America. Most of the big British and Irish sites, by contrast, keep their
operations in Europe and take deposits only off credit cards denominated in
pounds and euros.

Sportingbet, which does more than 60 per cent of its business in the U.S.,
said the impact of the legislation was unclear. However, the company called
off talks about a potential bid for World Gaming.

Shares in PartyGaming plunged 60 per cent to 43 pence (81 cents US), and
shares in 888 sank 48 per cent to 76 pence ($1.42). Sportingbet shares
dropped 67 per cent to 60 pence ($1.12).

The U.S. decision comes as some countries are focusing on legalization and
regulation of online gaming.

In the United Kingdom the government has moved to regulate online gambling
sites. Italy backed away from its original position against Internet
gambling and now plans to make the websites legal as early as 2007.