PokerStars on the Block - Let the Bidding Begin

The owners of the world's second largest online poker room, PokerStars, have tapped investment bank NM Rothchild to help them unload the business through either a sale or a float on the London Stock Exchange, prompting yet more speculation about the inevitable consolidation of the I-poker space. Early signs indicate that the company is most likely to sell.

PokerStars was founded by computer programmer Isai Scheinberg, an Israeli whose family holds about 75 percent of the company. The remaining 25 percent is owned by the company's employees.

The price tag the Scheinbergs want to put on PokerStars is reportedly above £1.1 billion (US$2 billion). By comparison, the company's biggest rival, PartyGaming (which is thought to have a hold on over 50 percent of the global online poker market), obtained a market valuation of £4.64 billion ($8.2 billion) when it floated on the London Stock Exchange in June 2005. Although both networks serve players all over the world, a majority of the players on both PokerStars and PartyGaming reside in the United States.

If PokerStars floats on the LSE, the IPO would likely occur in the second half of 2006. Greg Feehely, head of research at banking group Altium Capital, told eGaming Review, that while going public is a possibility "a sale rather than an IPO is far more likely" because of the lack of equities distribution at NM Rothchild.

Further, PokerStars' good standing coupled with the dynamic landscape of the I-gaming industry makes the company an attractive candidate for acquisition. Several companies in the sector, including Sportingbet, 888 Holdings, BetonSports, PartyGaming and Leisure & Gaming, have made it clear that they are on the M&A path, but it will of course take a very large purse to pay for PokerStars.

Traditional British gaming firms are potential buyers as well. Any of them could use such an acquisition to bolster their presence not just at home but in the United States as well. The British government has already indicated that it will not forbid its licensed operators under the new Gambling Act from accepting wagers from U.S. gamblers. Prime candidates include Rank Group, William Hill and Gala, which is still in the process of integrating its October purchase Coral Eurobet.

The most interesting prospective buyer must surely be Ladbrokes, which only last week unloaded its Hilton hotels assets for £3.3 billion ($5.8 billion). Even before the sale of the hotels was settled, press reports were rife with speculation that Ladbrokes could soon be involved in a merger or acquisition. It has been widely reported that private equity bidders, including BC Partners, Blackstone and CVC Capital Partners, have attempted to woo Ladbrokes for a sale price of about £4 billion (US$7 billion). The company is also thought to now be free to accept U.S. wagers, whereas it remained unable to do so when Americans from Hilton Hotels Corporation sat on its board of directors. The acquisition of PokerStars would supplement Ladbrokes' bookmaking and strong Internet operations in Europe with an already developed presence in the United States. Nevertheless, Ladbrokes CEO Chris Bell says his company has no plans for mergers or acquisitions at the moment.

Recently relocated to the Isle of Man from Costa Rica, PokerStars is a dominant player in the United States, partly due to effective marketing and key sponsorships. The company generated a lot of media attention in 2003 for its role in the Cinderella story of 2003 World Series of Poker champion Chris Moneymaker, who earned his $10,000 seat in the tournament by winning a satellite tournament on PokerStars.com that he paid only $40 to enter. The following year's WSOP champion, Greg "Fossilman" Raymer, also earned his seat by winning a satellite tournament on PokerStars.com.

PokerStars sent 1,116 players to the 2005 WSOP and two of them made the final table. Although champion Joe Hachem did not qualify for the tournament through PokerStars, he later signed a sponsorship agreement with the company. Both Moneymaker and Raymer have remained on board with PokerStars through sponsorship deals.