PartyGaming Confirms Empire Acquisition Bid

PartyGaming, the world's largest online poker room operator, on Thursday confirmed that it has bid to acquire Empire Online, whose EmpirePoker site funnels new players to PartyGaming through a partnership agreement.

Both companies are stressing that negotiations are only in a preliminary stage and are, therefore, not disclosing the value of the offer.

According to a press statement from PartyGaming, "There can be no certainty that any agreement will be reached or that any offer will be forthcoming or as to the terms of any such offer. Any offer proposal would depend upon, in particular, PartyGaming being satisfied as to a number of material pre-conditions, including due diligence and the prospects for Empire's business."

Although Empire is a partner to PartyGaming, the Israel-based licensee has obtained enough players to become a formidable rival, prompting some analysts to suggest that an acquisition of Empire is in Party's best interest. As Financial Group Smith Barney stated in a report in August, "We see Empire as a troublesome child to PartyGaming, small but growing faster and taking more than its fair share of the budget. We think PartyGaming's best option is to tie Empire in by buying it."

Under the current agreement, Empire pays a royalty on its players for being allowed to use the PartyGaming platform. Empire's players account for about 4 percent of PartyGaming's earnings before interest and tax, which may seem unimportant until one considers that PartyGaming makes less profit on Empire players than on players who come directly to its flagship site, PartyPoker.com. Smith Barney estimated that PartyGaming's 2005 EBIT would have been about 11 percent higher if Empire's players returned the same amount of profit as PartyPoker's players.

Empire is believed to control about a 9 percent share of the total global online poker market, and if it were to reach a partnership agreement or acquisition deal with another poker company, it could plausibly redirect its players to the other firm's poker network, thereby decreasing PartyGaming's market share. In early September, Empire seemed keen to enter such a deal when it revealed that Sportingbet, operator of ParadisePoker.com, had offered £791 million (US$1.4 billion) to purchase the company, but the deal collapsed within a matter of two weeks. PartyGaming could eliminate both the inefficiency of competing with Empire and the threat of its being acquired by another firm by purchasing the company for itself.

Timing and Market Value

For the most part, Empire's share price remained unaffected after Sept. 6, when PartyGaming revealed in its first financial interim report that its revenue growth was slowing as retention rates and player yields declined at quicker rates than expected. PartyGaming shares plummeted more than 30 percent when it released that financial report, and Empire's might have been expected to fall as well, but shares remained high because the company had announced only days earlier that Sportingbet had proposed a bid. (Empire's price did actually fall from 271.5p to 235p on Sept. 6, but immediately rebounded to 258p the next day).

It wasn't until Sept. 20 when Sportingbet pulled its bid that shares in Empire began to suffer the loss of faith that the investing community was inflicting on public I-gaming companies. Shares fell to from 254 to 211.5 on the day and then proceeded on a steady downward spiral.

By the time PartyGaming announced on Oct. 10 that poker players from EmpirePoker and Party's three other licensing partners would no longer be aggregated into the same massive network as its own PartyPoker players, Empire's share price had fallen to 179.5p. The segregation translates to less liquidity--a key driver of new traffic and revenue--for EmpirePoker, whose share price fell 59p (33 percent) to 120p on the day.

Over the days that followed, Empire's share price fell steadily to an all-time low of 82p on Oct. 20, but began to recover after PartyGaming revealed an upbeat trading statement.

With Empire's shares now at 115p, PartyGaming's bid is likely to be far below the £791 million offered by Sportingbet in early September when Empire was trading at around 255p. A far more likely price is probably about half of Sportingbet's bid, or about £400 million ($708 million).

Perhaps the most noteworthy aspect of Empire's two-month trading history is that the most important driver of the company's appears to be the performance and strategies of PartyGaming.