PartyGaming Float Still On Schedule

On June 15th Gibraltar-based PartyGaming published its 200-page flotation prospectus, which among other things revealed that the company would seek a market valuation between $8 billion and 9.2 billion (£4.4 billion and £5.1 billion). The valuation is significantly lower than the $10.5 billion (£5.8 billion) figure that the company originally indicated it would seek only a couple weeks ago. The company's prospectus declares the new valuation a "realistic assessment" of the company's worth, but many news analysts have speculated that the decrease in value is a response to investors' concerns. Chief among those concerns is how the company, which derives close to 90 percent of its business from the US, will cope with the legal uncertainty of online gambling in the US.

If all goes well for PartyGaming, its shares will begin trading on the London Stock Exchange through conditional dealings on June 27th, with unconditional dealings beginning on June 30th. The company wants to offer 781.8 million shares (20.6 percent of its issued shared capital) at a pricing of 111p to 127p. If the figures hold, the company's float will be the biggest in London since technology company Dimension Data began trading in July 2000, and the offer size will be the largest since Friend Provident in July 2001. The company would also enter the FTSE 100 share index.

CEO Richard Segal has stated that the company would use its new funding to build the Party brand in broader geographic areas, to create new games and to exploit new deliver channels, such as mobile devices. He also affirmed that strategic acquisitions would be a possibility.

PartyGaming's IPO road show is now underway in the UK and Europe, but investors in the US and elsewhere are not permitted to participate in the offering due to the uncertainty surrounding online gambling around the world. The U.S. Department of Justice has once again stated its belief that online gambling is not legal in the U.S. and has threatened to prosecute PartyGaming's four largest shareholders—Ruth Parasol, Anurag Dikshit, Vikrant Bhargava and James Russell DeLeon.

An unnamed senior justice department official told the Guardian, "Any business offering online gambling services that are in the United States or can be accessed in the US are illegal. The focus today is on how we can do more about it and how we can charge people. If they are American citizens, it would be a little easier for us. They can face prosecution if they enter the United States."

He continued, "If they're taking bets in the UK, and it's legal there, that's fine; but if they're taking bets in the U.S., that's illegal, and they will be prosecuted."

PartyGaming, like a lot of experts in I-gaming law, insists that the DOJ is incorrect in its interpretation that online gaming is forbidden by U.S. law. According to the company, "The U.S. does not have legislation in place specifically regulating online gambling and therefore there is uncertainty as to its legality."

Meanwhile, Professor Joseph Kelly of the University of Buffalo, who has assisted other countries in drafting I-gaming regulations, speculated on the probability of U.S. action against PartyGaming by stating, "It's so remote that the chances approach those of being hit by lightning."

Still, the uncertainty of activities in the U.S. is proving a heavy burden on the plight of PartyGaming. Rumors abound that the company is not getting enough backing from investors and may have to ask for a lower price.

"I have a real problem with investing in a company where 85 percent to 90 percent of its revenues come from the U.S., where the legal status of online gambling is vague, or at least open to doubt and interpretation," one fund manager told the Guardian.

He continued, "I don't want to have to justify to my investors why I have put money into a company where Elliot Spitzer [Attorney General of New York] could come along in two months' time and torpedo its ability to communicate with 95 percent of its customers. If this company manages to float, I believe it will reflect badly on the London stock market and Dresdner."

To its credit, Party Gaming has been entirely blunt and forthright in informing investors of the potential pitfalls of its business.

Among some of the statements found in the prospectus are:

There is uncertainty as to the legality of online gaming in most countries, and in most countries including the U.S. the group's services are considered to be illegal by the relevant authorities.

The enactment of any legislation prohibiting or restricting the use of credit cards… for online gambling… could severely and adversely affect PartyGaming's business and financial position.

The group is based in offshore tax havens. If it is found to have been tax resident elsewhere… this may significantly increase the amount of tax payable by the group.

New entrants… may lead to a significant decline in customer base, revenues and margins.

Maintaining and enhancing PartyGaming's brand has become increasingly difficult and expensive and this is a trend which the directors expect to continue.

PartyGaming also revealed that its call center in Hyderabad, India was raided by police six months ago on the suspicion that it was breaking Indian gambling laws, but authorities pressed no charges after discovering no gambling took place on the premises. The company also disclosed that its gaming licenses through the Kahnawake Gaming Commission may not be completely legitimate. According to the prospectus, "directors have been advised that the extent of the group's operations and presence in Canada may be sufficient for criminal or civil action to be taken." The company apparently believes there could be doubt as to whether Kahnawake holds the authority to issue I-gaming licenses. To eliminate this risk, PartyGaming will move its casino and bingo server from Kahnawake to Gibraltar in August. The poker server will be moved in November.

Despite all the disclaimers, the flotation of PartyGaming is still set to reach its June 27th date, although there is legitimate concern that worried European investors may succeed in forcing an initial share price that is lower than the current estimate of about 119p.

FIGURES

In 2004 PartyGaming recorded $371.1 million in pre-tax profit on sales of $601.6 million.

Revenues for the first quarter of 2005 rose 93 percent compared to the same period in 2004 to reach $222 million. Operating profit rose 81 percent in the first quarter of 2005 to reach $128 million.

PartyGaming employs over 1,000 people, more than 900 of which are located in India performing customer support and software development. The head office is located in Gibraltar and its marketing staff is located in the UK.