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Copyright 2005 Guardian Newspapers Limited

September 13, 2005

HEADLINE:
Online poker deals punters a bad hand

BODY:
For three months it was the hottest deal in town. So, asks Heather Connon, what went wrong with PartyGaming?

There were 27 pages of risk warnings in the prospectus for the flotation of PartyGaming, the online poker company, covering everything from the threat of regulation in the US to the prospect of its directors being jailed. But none mentioned the risk that, just three months after flotation, the directors would discover its growth rate was slowing and that the amount it was making from each poker player was falling.

PartyGaming was supposed to be the hottest growth story around. True, no one was promising the market could continue to grow at the 366 per cent achieved last year, nor even the 100 per cent predicted by industry analysts this one.

But the profits warning breaks what one banker describes as rule number one of new issues: make sure the first announcement after the float does not disappoint. 'In fact,' he adds, 'rules two three and four are exactly the same.'

The profits warning dealt an equally savage blow to the reputation of DresdnerKleinwortWasserstein, the investment bank that brought PartyGaming to the market. Its own analyst, previously one of the most bullish about the company's prospects, made the most swingeing cuts in forecasts, slashing 12 per cent off next year's figures and 25 per cent off the following year's.

The reaction was predictably savage: the shares plunged by a third, crashing below the 116p issue price; and those who had warned that the flotation was flaky were quick to say I told you so.

'It is a wake-up call to investors,' says Gavin Oldham of the Share Centre - who is doubly sore having highlighted it as a short-term punt just a week ago, despite having warned about the risks ahead of the flotation. 'Online poker is just a fad and growth had to come to a halt.'

'PartyGaming is one of the more extreme examples of the low-quality IPOs (initial public offering) that were launched earlier this year,' says Threadneedle, the fund manager, which shunned the issue.

The company, clearly shocked at the City's reaction, was working flat out to repair the damage. First came the explanation: the US's World Series Poker - apparently the third most watched sport on American television, which usually leads to a spurt of new sign-ups - was six weeks later than usual this year.

This can hardly have been a surprise, however, and rivals such as Sportingbet, which rushed out a trading statement to reassure its investors everything was fine, do not seem to have been affected by the change in timing.

Next came the justification for the lack of warning about the importance of the World Series in its prospectus. While Marks and Spencer and Unilever can predict, with reasonable accuracy, what their customers will want in the next month, the pace of change in online gaming is so fast that working out how many new players would sign up, never mind how much they will spend, is extremely difficult.

But that begs the question of why, if it is really so hard to predict even three months into the future, the business was being publicly floated at all. It raises the suspicion that its owners - Ruth Parasol, Russ DeLeon, Anuraj Dikshit and Vikrant Bhargada - who made £1 billion between them from the sale of less than a quarter of the business, were keen to sell out while the going was good.

Finally, there was the promise to do much better in the future, with the introduction of new games next year - although no details were forthcoming for fear of alerting competitors - and techniques for analysing its player base to ensure that it concentrates on those that will be most lucrative.

The industry is certainly young; as little as three years ago, online gambling was virtually unheard of. Today there are more than 200 internet poker sites, and 10 times as many other ways of gambling, ranging from casinos through slot machines to blackjack. And, as the growth statistics show, there has been plenty of interest.

That may continue: while a fifth of the travel industry has already migrated to the internet, only 5 per cent of gaming is currently carried out online.

But PartyGaming's own figures show how hard it is to keep the punters interested: its results show that fewer than three in every 10 of the customers it signed in January are still around in June. Analysts think the attrition rate could get worse still, as ordinary punters realise that.

'A couple of thousand expert poker players are winning loads of money from the thousands who are just not very good at it,' says Greg Feehely, leisure analyst at Altium Securities. 'They will wise up and go and put their money on the horses or play an online casino game.'

He thinks that PartyGaming's travails do not necessarily spell disaster for the rest of the industry. Its business relies much more heavily on poker than rivals such as Sportingbet, and it is much more exposed to the US, where on-line gaming is comparatively well-established.

Rival 888.com will be hoping the rest of the City shares his view. It formally announced its intention to float last week and is currently making presentations to investors to determine the final issue price and valuation of the company.

Its business is mainly online casinos, where growth has been much more pedestrian at 10 per cent or so a year. And, with punters fully aware that the chances of winning depend on the spin of the ball rather than the expertise of your poker opponent, its customers may prove rather more loyal.

Hugh Sergeant, a fund manager with SG Asset Management, thinks PartyGaming's problems may partly be due to the distractions of working on a float.

'These kinds of companies are lean in management and in a fast-moving industry. The IPO process itself can lead to problems,' he says.

But he thinks 888.com should still be able to float - if the price is right. One investment banker said the company had been pitching itself at a 20 per cent discount to PartyGaming. After last week's price collapse, that will make it cheaper still - but possibly too cheap for the owners to want to sell. There are no certainties in this business.

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