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Copyright 2005 Guardian Newspapers Limited
September 13, 2005
deals punters a bad hand
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
'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
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
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
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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