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Copyright 2005 Times Newspapers Ltd.

November 4, 2005

HEADLINE:
Decline and fall of a poker Empire

BODY:
When it comes to management style, Richard Segal appears to have learned his trade from listening to Kenny Rogers' The Gambler. The chief executive of PartyGaming has played the threat of Empire Online by using some expert holding and folding.

But will he know when to walk away, and know when to run?

After being instrumental in lowering Empire's stockmarket value by more than half over the past two months, PartyGaming said today it is considering buying its partner-turned-rival. This approach may not be the simple act of sector consolidation it first appears.

The world's biggest online poker house has maintained its lead position in part thanks to Empire, which markets "skin sites" that direct customers onto PartyGaming's tables in exchange for a cut of the pot. These skins helped keep PartyGaming's customer-base growing even as the market became saturated with me-too rival sites.

Problem was, this vicious competition resulted in the skin sites offering increasingly generous incentives. Schemes such as rake-back -- returning some of the pot to regular players --- meant the interlopers were providing a more attractive proposition than PartyGaming itself.

PartyGaming's first bluff came in September, when SportingBet offered to pay 270p a share for Empire. That deal would have threatened to redirect all skins players from PartyGaming's site and on to SportingBet's rival Paradise Poker. However, the bid collaped within a month amid talk that PartyGaming's contracts with its partner had proved unbreakable.

The second bluff came last month, when Mr Segal ring-fenced PartyGaming's own gamblers from those playing via the skins. Separation meant Empire's customers had a smaller pool of players, which meant fewer rubes and novices for its high-rolling clients to profit from. It was a canny way of dealing with its faster-growing rival in a market that had gone from growth to consolidation.

Now -- with Empire shares starting the day some 60 per cent below their level just two months ago -- PartyGaming has chosen to announce it will consider buying the company; albeit only at "the right price", and providing it can pass "a number of material pre-conditions" including an examination of Empire's accounts.

The takeover would be a smart strategic move for PartyGaming. Not only would Mr Segal's company increase player numbers back to pre-ringfencing levels, it would also gain Empire's better marketing nous and the $100 million on its balance sheet.

The concern for Empire shareholders must be that, for PartyGaming, no takeover could prove an equally smart move. The firm has already shown it can throttle Empire's revenues if it chooses, and today's statement provides more get-out clauses than overtures. If PartyGaming's due dilligence fails, what would that suggest about Empire's value?

Reports today suggest a takeout price for Empire of 140p a share - about half what SportingBet was offering for the company in September. Mr Segal has undoubtedly proved he knows a thing about holding and folding. If he now chooses to walk away from the deal, there may be some Empire shareholders keen to test whether he also knows when to run.

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