No Deal with PartyGaming - Empire Would Rather Sue than Sel

The growing conflict between PartyGaming and its holdout skin, Empire Online, reached a boil today, with Empire rejecting Party's acquisition bid and a possible lawsuit looming.

The rejected offer came in at 60p per share, which would value the company at about £175 million (US$300 million).

Negotiations started at the beginning of the month with an informal offer that would have reportedly valued Empire at about £400 million ($708 million)--10 percent of the newly formed company that would have emerged from the deal--but lowered its offer as Empire's share price declined steadily during due diligence.

Empire says the revised proposal is "at a level that cannot be recommended" and plans to sue PartyGaming for the damage caused to its business by PartyGaming's decision to separate Empire Poker's players from those in the main PartyPoker network.

Empire's share price was listed at around 120p on Nov. 3, when the two companies revealed that they were in negotiations. Neither firm disclosed the value of any offers, but analysts accurately estimated the starting point to be in the £400 million range.

In the days that followed, PartyGaming conducted "an extensive review of the business," which took into account "PartyGaming's view of Empire's prospects together with potential synergy benefits."

Empire has stated that the due diligence process was "protracted" and filled with "continued delays in the timetable." In the meantime, Empire's share price continued to fall, due mainly to incidents for which Empire says PartyGaming was responsible; Empire's business has suffered since mid October, when Party announced its decision to segregate Empire's players, and things got even worse after PartyGaming's announcement on Nov. 11 that it had cut its ties with its other three skin clients, thereby confining Empire Poker's players to an even smaller network. Shares of Empire closed Friday at 57p--less than half their value when the companies began negotiating.

When trading resumed today, Empire announced that it had terminated discussions by rejecting PartyGaming's new offer, which was "significantly different both in terms of the price and structure." Empire also stated that its directors had received legal advice and "intend to institute and vigorously pursue legal proceedings as soon as possible . . . in relation to damage caused to it by the conduct of companies within the PartyGaming group in separating the poker system used by PartyGaming players from that of its 'skins.'"

"We're not taking a decision to litigate lightly," Andrew Burnett, Empire's head of mergers and acquisitions, said, "but having taken that decision on good legal advice, then we will pursue it very vigorously."

Empire has not specified what legal grounds on which a potential complaint would be based. PartyGaming, meanwhile, stated that it is "highly confident of a successful outcome."

Analyst Robin Chhabra told Reuters that Empire's legal action could be posturing.

"I don't think PartyGaming have to worry," Chhaabra said. "As a worst-case scenario, they'll settle out of court, but it won't be material for PartyGaming."

The Outlook for Empire

The business strategy for Empire Poker will likely be determined by the outcome of the litigation, but the company assured investors through a trading statement today that it still has plenty of power.

Empire's plans lie in driving growth across its newly acquired platforms, Club Dice Casino and Noble Poker, which account for a growing proportion (50 percent in the fourth quarter of 2005) of its new real-money players. This month Empire is averaging more than 500 new real-money players per day across its networks. The company has also hinted that it has received several commercial strategic opportunities.

Empire expects to deliver net profits broadly in line with its revised levels announced after the segregation of its players from the main PartyPoker network. The company says it expects net profit of around $37 million to be generated from its businesses not having any relationship with PartyGaming, while the balance of net profit for the year will be derived from Empire Poker.