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By Richard Hunter, Hargreaves Lansdown
"Italians come to ruin most generally in three ways, women, gambling, and farming. My family chose the slowest one." -Pope John XXIII Online gaming company PartyGaming was floated at a price of 1160p (adjusted) in June 2005. The company caught the imagination of the investing world and the shares raced ahead to peak at around 1800p, along with inclusion in the FTSE100 index, and a market valuation of £4.6 billion. In October 2006, the US introduced the Unlawful Internet Gambling Enforcement Act, which effectively outlawed the practice for overseas operators as it banned the transmission of money for payments. The announcement of the US legislation effectively wiped out 80% of PartyGaming's revenues and the shares, along with those other online companies with a US interest, were savagely marked down. PartyGaming shares bottomed at around 95p in November 2008 and currently stand somewhere around 230p, with a market valuation of £920 million. Other companies such as 888 holdings (50% of revenues from the US) and Sportingbet quit the US market along with PartyGaming and their share prices suffered similar fates. More recently, there have been some interesting developments. The co-founder of PartyGaming, Anurag Dikshit, pleaded guilty in December 2008 to a New York court to a charge of online gambling and paid a forfeiture of $300 million. Meanwhile, the company itself accepted that some of its third party transaction processing had contravened US law and paid a forfeiture of some $105 million earlier this month. This comes at a crucial juncture in the online gaming debate. In March of this year, the European Commission said that US prosecution of European companies was probably in contravention of World Trade Organisation rules, as were laws banning online gaming. Meanwhile, the US House financial services committee is due to meet shortly, where it is expected to table a bill to Congress to regulate some forms of online gambling. For PartyGaming, the fact remains that it is a cash generative business and has arguably reverted to the stage of development it found itself in just a couple of years ago. Since that time it has worked hard on its multi-lingual offerings and continues to study new markets in some depth, whilst being quite open regarding its acquisitive attitude. The absolute optimists would additionally argue that now the share price has taken such a resounding hit, the loss of their US operations is actually factored into the share price and, as such, the shares are now at realistic levels. That must assume, however, that the online gaming industry does not find similar resistance in some of the countries they will be planning to target. On the whole, perhaps things can only get better. It remains a mystery to some that in terms of US regulation, it is possible to visit Las Vegas as an American citizen and gamble away the family treasure, and yet placing a bet online from the privacy of the home environment is not possible. Any hopes for a backlash from the US consumer, however previously forlorn, may just gain some traction now. Meanwhile, the online gaming companies are becoming more focussed in those areas where gambling is integral to the way of life, whilst continuously updating and broadening their offerings to attract new customers. From an investment perspective, perhaps it is fitting that these shares tend to fall higher up the scale in terms of risk. Indeed, these (now) smaller companies could even be described as speculative. The market consensus for these shares perhaps reflects this - PartyGaming (strong hold), 888 Holdings (buy) and Sportingbet (strong buy). This is despite some strong performances over the last six months - PartyGaming up 51% and Sportingbet up 84%, for example. Potential future industry consolidation is also being factored into the mix. These are not companies without risk, however - the uncertain regulatory, let alone economic, environment and currency headwinds in particular remain threats. For now, risk averse investors will be wondering whether these companies are stable enough to risk betting your shirt on. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Stockbrokers Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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