Now What?

As the sky over the London Stock Exchange continued to fall in the wake of Partygaming's ominous interim report, members of the U.S. investment community came together at the Harvard Club in New York City last week to learn about the true dynamics of the I-gaming market. If ever there was a need for an education, it is now, and a lineup of I-gaming analysts and executives were up to the task Sept. 27 at the I-Gaming Public Offerings seminar, a joint effort from River City Group and NYSSA.

"There are very big deals around the corner this year and within one to two years."

The combination of the Internet poker boom and the liberalization of England's gaming laws had I-gaming businesses queuing up over the summer to float in London in a frenzy that was jump started by Party's float, which valued the company at over US$9 billion. But the sweet smell of IPO success was abruptly replaced in early September by the stench of screeching tires when Party reported that its revenue growth was slowing, and potential floaters are suddenly reassessing whether the time is right.

The first company to experience post-Party investor apprehension was online casino group 32Red, which abandoned aspirations of a £10 million float for a postponement of fundraising and a Sept. 23 IPO that raised £300,000 through the sale of 0.5 percent of the company's shares. A few days later, I-gaming technology provider Zone4Play postponed plans for an AIM offering that was projected to come as early as Friday and to raise about £5.5 million.

One company that did float last week was longtime I-gaming heavyweight 888 Holdings Plc, and despite its stature as one of the few companies considered capable of giving Party a run for its money, the company, like 32Red, fell way short of its original expectations. 888 raised £147.7 million through the sale of 84.4 million shares at 175 pence each, but just a month ago, they were hoping to raise £285 million. The company also anticipated a valuation of between £720 million and £830 million, but lowered its expectations to between £550 million and £650 million by the time it published its prospectus in early September and came in Thursday at £590 million.

I-gaming companies are profitable, and most of them have solid business models. This alone makes them more worthy of backing then the quintessential ad-driven dot-com darling of the late '90s, but the Party gold rush nevertheless appears to have been a bit excessive. So somewhere between the PartyGaming rainbow and the doldrums of the ruptured dot-com bubble lies the legitimate I-gaming market, and Friday's conference attendees were there to find out where this suggested happy medium exists.

Consolidation - The Time Is Now

The consensus among industry observers is that the long inevitable stage of consolidation is finally coming into being. Observe the prospectus of virtually any I-gaming-related business and you'll see that the primary growth avenue is acquisitions.

PartyGaming is the natural leader in the rumor department (by virtue of its size) and has been identified as a prime candidate to purchase Empire Online, a marketing and player acquisition company that claims to draw nearly 20 percent PartyPoker.com's customers. Last week the British media reported on speculation that Party could be interested in buying Betfair, the world's largest Internet betting exchange. Party is poised to make purchases of this nature, but has remained silent on just whom it might be coveting.

"As long as the ducks are quacking, we'll feed them."

Sportingbet, one of five I-gaming companies presenting last week at the Harvard Club, has for years centered its growth strategy on a string of acquisitions, including Sportsbook.com, Paradise Poker and others. While several I-gaming groups are eying floats as a means of raising money to fund acquisitions (Netb2b2 Plc, Leisure & Gaming Plc and Fairground Gaming Holdings, to name a few), Sportingbet CEO Nigel Payne is of the mind that consolidation will put an end to the London IPO frenzy. Citing 32Red as a prime example of why things will change, Payne predicts that fewer than 10 of the many planned London I-gaming IPOs will occur.

"I don't believe there will be many more floats in London," Payne told attendees at the IPO seminar. Instead, he contends, the companies that are already public will be making their moves.

"There are very big deals around the corner this year and within one to two years," he added.

One "big deal" that's apparently not around the corner for Sportingbet is the acquisition of Empire Online. A reported £790 offer made on Sept. 5 was pulled off the table on the 20th following a flood of articles in the London press suggesting that Empire could be overvalued. Some observers believe the offer was nothing more than an effort to drive Empire's asking price up for the speculated Partygaming purchase.

Despite the halting of the Empire merger talks, one can expect Sportingbet to be active on the acquisition front--especially when considering the company's history--and there certainly is no shortage of companies up for grabs. Payne and BetonSports.com CEO David Carruthers, who also presented last week at the investment seminar, said their voice mails and e-mail boxes are filling up every day with proposals from businesses seeking buyers.

So what will determine who the buyers will be as the industry consolidates?

Payne says companies with strong balance sheets are in strong positions, which places Sportingbet toward the top of the list. The company has also established itself as a leader in terms of product distribution. Payne said Paradise Poker, for example, handles more than all of Las Vegas' poker rooms combined. Likewise, he said, Sportsbook.com takes more bets than all of Vegas' sports books combined.

Recently floated 888 also looks to be on the buying side. Despite the company's disappointing IPO, at a value of $1 billion, it is still among the world's largest I-gaming businesses.

"We have money ready for acquisitions going forward," CEO John Anderson said following the float. "The industry is ready for consolidation. There are a lot of operators at the moment, but in a couple of years there will only be a handful, of which we will be one."

In terms of diversification, Party seems to be alone in maintaining a heavy emphasis on one core product. Unlike Party, 888 and Sportingbet draw significant portions of revenues through multiple gambling products (888 through poker and casinos and Sportingbet through poker, sports betting and casinos).

BetonSports, which floated on the AIM in July 2004, has diversification in its sights as well. The company just launched an online casino through a deal with Realtime Gaming, and Curruthers said that they will concentrate much more of its marketing efforts on casino products. He also said that BetonSports has experienced a 60 percent increase in play since at its poker room since switching to Tribeca Tables' poker network--a move made specifically to boost the company's presence in the poker space.

Investors' Perspective

During the final panel at the IPO seminar--an institutional perspective--Aram Fuchs of FertileMind Capital, Robert Winslow of Wellington Capital and David Shore of Desjardins Securities analyzed I-gaming businesses' reluctance to go public since the Party report and where the industry stands in terms of restoring investors' confidence.

"Volatility doesn't go away. It can be tempered somewhat, but it doesn't go away."

Roberts summed up the industry's situation as a pendulum scenario in which companies go from being overvalued to undervalued. The bigger companies, he said, are undervalued at the moment because of market volatility.

"Today," he said, "there's some hesitation in going public. That's not the sort of environment to go public in."

Like Payne, Shore believes that many of the smaller companies with ambitions of floating in London won't reach their goals.

"A lot of the smaller companies will be taken out by the bigger companies before they can reach the IPO stage," Shore explained.

Fuchs, however, isn't convinced the IPO trend is coming to an end.

Said Fuchs, "There's a famous phrase: 'As long as the ducks are quacking, we'll feed them.'"

He also pointed out that multiples in the I-gaming space are still high compared to other industries. I-gaming companies, he said, are seeing multiples in the mid 20s, compared to the S&P average, which is in the range of 20 to 21.

Nevertheless, all three panelists recognize that the I-gaming market remains volatile--a natural condition for a young industry.

"You're going to have significant volatility," Shore explained, "until you have maturity."

Roberts cautioned, however, that it can't be entirely eliminated.

"Volatility doesn't go away," he said. "It can be tempered somewhat, but it doesn't go away."

Fuchs said a major step in stabilizing the market is for shareholders to start seeing dividends.

But he also recognizes that volatile markets present wonderful opportunities to educated investors.

"This volatility is your friend," Fuchs said. "You can earn so much money"

Party scare aside, the notion that there's money to be made in the I-gaming markets has been lost on no one, and seminars like the one at the Harvard Club are going a long way toward enlightening those who believe the I-gaming market is bound for a "Dot-com Bubble - Part 2" scenario.

It should be interesting, then, to see on which side of (and how close to) reality the pendulum falls when the next IPO event is held.