Sportingbet Acquires Paradise Poker

Citing a long-term desire to enter the online poker space, Sportingbet Plc yesterday announced the acquisition of the world's third largest poker site, Paradise Poker.com, in a deal reportedly worth US$297.5 million.

"This deal will have a major impact on our business and will be a landmark one for the entire industry."

- Alex Czajkowski
Sportingbet

Sportingbet will raise the cash for the acquisition through $164 million of new debt and by issuing 54.5 million new shares at 110p each.

The purchase boosts Sportingbet's customer base to more than 2 million players and creates what the company bills as the first global online poker, sports betting and casino operator.

Launched in 1999, Paradise is the world's third largest online poker room, with an approximate 10 percent share of the industry, according to company figures.

Alex Czajkowski, marketing director of Sportingbet Plc Americas Region, said Paradise was an ideal candidate for acquisition.

"This is a poker site that was built by poker players for poker players," Czajkowski said. "Their technology is impressive. We will be working hard to increase the market share of the site."

Czajkowski likened the Paradise acquisition to Sportingbet's purchase of Sportsbook.com in 2001.

"[Sportsbook.com] was a site that was very popular among sports bettors, and Paradise has carved out a nice niche for itself in the poker-playing community," he said. "Paradise is a strong brand with a large and loyal customer base "

Sportingbet reported turnover of $2.62 billion for the 16 months ending July 31, 2004, with an operating profit before goodwill and exceptional costs of $39.57 million. The company owns more than 30 gambling brands in 200 countries across the world, including its flagship site, Sportsbook.com.

Sportingbet had been looking at the poker sector for a long time, Czajkowski said, and at Paradise for "months and months."

"This deal will have a major impact on our business and will be a landmark one for the entire industry," Czajkowski said.

ParadisePoker.com has over 721,000 registered customers and 97,000 active players. Despite missing out on the online poker boom that the industry experienced over the last two years, Czajkowski is confident Sportingbet will be able to take a leading role in the space.

"Our strategy is to become the world's leading online sports betting and gaming-based entertainment business. The acquisition of Paradise Poker is a significant step forward in achieving this goal."

- Nigel Payne
Sportingbet

"We knew we were late to the market," he said, "but just like a lot of things in this industry, it is all about liquidity. There isn't that much differentiation in the products that are out there, but Paradise has done some great things with their technology, and they are a perfect match for us."

Czajkowski said that Paradise operates a business model that benefits from high operational gearing, due to its small, predominately fixed cost base. Operating costs relate largely to processing fees, while personnel and IT costs are low relative to rake and tournament fee income. The financial model, he said, has historically resulted in Paradise generating both high operating margins (57 percent) and strong cash flow.

Discretionary marketing spend is the single largest cost incurred by Paradise, a cost that will be absorbed somewhat by combining the marketing efforts of Paradise and Sportingbet.

Paradise's aggregate monthly rake and tournament fee income in August and September 2004 was $6.6 million and $7.0 million respectively.

Shares of Sportingbet on the AIM stock exchange jumped 12 percent on the news of the acquisition.

Bettors can play poker through the existing Sportingbet Web site using their usual login details and accounts. A link between the two sites was implemented Thursday. Further integration between the two sites, tying both of their backends together, will be a more arduous task.

"Hopefully sometime in 2005 we can have a smooth transition for users of both sites in place," Czajkowski said.

Czajkowski added that 40 to 50 percent of Sportingbet users have accounts at online poker rooms, but it's too early to determine how many of them are active users on Paradise.

"The marketing person in me wants to see all of them using our new system," he said.

Sportingbet chief executive Nigel Payne said the acquisition increases his optimism about Sportingbet's future.

"With strong organic growth in betting volumes at the start of the busy season, we look forward to the future with confidence," Payne said. "Our strategy is to become the world's leading online sports betting and gaming-based entertainment business. The acquisition of Paradise Poker is a significant step forward in achieving this goal."