Online Poker: IPOs in the Cards?


Beth Carney To investors hoping to cash in on the online poker craze, a public offering of the world's biggest online poker room looks like a solid bet. That explains the excitement surrounding the suggestion that PartyGaming, the Gibraltar-based Internet gambling operator, is considering a listing this year on the London Stock Exchange. The company's Partypoker.com Web site claims about half of the worldwide market, according to Pokerpulse.com, a Web site that tracks the industry. Pokerpulse estimates that the game will generate $2 billion in profits this year.

Speculation about a PartyGaming initial public offering took off in January, when the 8-year-old company, formerly known as iGlobalMedia, announced that it was undertaking a strategic review, including the possibility of offering shares for sale to investors.

ANTE FROM TV. The timing could be right, analysts say, as British investors have shown a recent appetite for stocks associated with online poker. In October, Sportingbet, a British sports-betting and casino-gaming Web site, spent $300 million to buy the ParadisePoker Web site, now ranked third among poker sites and accounting for about 10% of the market. Since then, Sportingbet's share price has more than doubled, ascending from the equivalent of $2.18 to $5.86.

In another sign of interest in the industry, NETeller, an online money-transfer service that derives 80% of its business from facilitating payments for gaming and betting sites, has seen its share price triple since it listed in London in April.

"What ParadisePoker did was make all the institutional investors' eyes widen and go, 'This is actually a very profitable business, with very, very strong growth,'" says Greg Feehely, a leisure analyst at Altium Securities in London.

Popularized by the success of such televised tournaments as the World Poker Tour and the World Series of Poker, online poker has become the fastest-growing segment of the Internet gaming industry. According to the Vancouver-based Pokerpulse's estimates, more than $190 million is bet in online poker games every day, up from $11 million two years ago. During that time, the number of active players has grown from about 83,000 to nearly 1.9 million.

PROFIT MARGIN JACKPOT. Most gambling sites are privately held, and figures on the financials of poker operations are scarce. But those in the industry say the game generates a lot of cash without the overhead of casinos or the risk associated with bookmaking. In online poker rooms, players bet against one another. Operators earn money by taking a small percentage -- known as the "rake" -- of the bets as well as a cut of online tournament fees.

It's a high-margin business. On Feb. 22, Sportingbet reported that in the six months through the end of January, the ParadisePoker site contributed $15.3 million in operating profit on $23.9 million in sales. Overall, the company made $49.6 million in operating profit before exceptional items on poker, casino games, and $1.5 billion of sports wagers. Notably, in the six-month period, the daily poker rake grew 114%, to $261,668. "This really is an enormous industry," says Nigel Payne, chief executive of Sportingbet.

Yet the online gaming industry isn't without risk. Although Americans make up the majority of online gamblers -- estimates of the exact proportion vary from between 60% to 80% -- U.S. prosecutors have deemed online gambling illegal. The U.S. Justice Dept. has written warning letters to many American Web sites that accept advertising for gambling sites. Because of these prohibitions, these sites operate offshore, and some refuse sports bets from Americans.

AMERICANS WON'T FOLD. In contrast, Britain has proven more open to the industry. In 2001, London abolished a tax on bets in order to encourage local bookmakers, including those with Web sites, to stay ashore. Britons can legally gamble online but cannot operate Internet casino games, thanks to old laws that require the game to take place in the same room as the player.

British companies that run poker sites now locate the operations offshore but are not otherwise penalized by the government. Proposed legislation under debate in Parliament would legalize online gaming and establish a new commission to regulate it. "We want them here," says Anthony Wright, spokesman for the Media, Culture & Sport Dept.

Those in the industry largely dismiss the idea that the U.S. government's hostile stance poses a threat to the industry's future. Payne, whose Sportingbet Web site derives more than half its income from Americans, believes that considering the global reach of the Internet, it would be practically impossible for the U.S. to crack down on offshore operators. "We're a U.K. public company licensed in the U.K., and the U.K. says you can take bets from American citizens," he says.

GOING MAINSTREAM? Even so, the question remains as to whether the fast-growing poker trend is a passing fad. According to Pokerpulse's figures, the monthly increase in players has slowed from an average growth of 20% a month in 2003, to about 10% a month now, albeit from a much larger base. Dale Johnson, executive vice-president in corporate development at NETeller, says his company thinks current growth rates can't sustain themselves.

Still, the industry has tremendous potential, particularly internationally, since the bulk of players now come from the U.S. "To this point what we've seen are the early adopters. There's still a mainstream market to come," he says.

If PartyGaming does go public, it will offer an unparalleled look into the industry's workings. The company, which has customer-service operations in India, has released little information about its operations. Analysts say it earned $350 million before interest, tax, and amortization in 2004, which means a possible valuation of $4 billion. It's owned by five shareholders, including Indian software specialist Anurag Dikshit and American Ruth Parasol, a former adult-entertainment industry executive who no longer participates in PartyGaming's day-to-day operations. Last year the company appointed Richard Segal, former head of Odeon Cinemas, as its chief executive.

"HOSPITABLE FEEL." Even if PartyGaming doesn't list, those in the industry expect the future to bring more public offerings and, likely, consolidation of the 250 sites and 55 networks vying for the poker-playing public. "There's enough of a hospitable feel in the financial community at this point," says Sue Schneider, president of the River City Group, a Missouri firm that conducts research and runs trade shows on the Internet gambling industry.

As for the risks, she says, "This is an industry that tends to draw gamblers, even in terms of investors." Carney is a correspondent for BusinessWeek Online in London


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