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Looks Like A Sure Thing, But...


Take a look at the financials for online gambling giant PartyGaming Ltd., and you'll see why many think its initial public offering will be a monster. Last year, the Gibraltar company earned $350 million in profits on $602 million in revenues by taking a small commission from online poker, bingo, and other games. The banks bringing the company public on the London Stock Exchange, including lead underwriter Dresdner Kleinwort Wasserstein, say PartyGaming should rake in profits of $500 million this year and $660 million next. "It's a printing press for money," says David Menlow of IPOFinancial.com, a Millburn (N.J.) researcher.

But scratch the surface, and the company faces big risks, like an amateur playing Texas Hold'Em. The 200-page prospectus cites unusual legal threats. Chief among them is a warning that 87% of the revenues come from U.S. customers, yet Uncle Sam sees Net gambling as illegal. The document warns that the Justice Dept. considers "companies offering online gaming to U.S. residents are in violation of federal laws" and that actions taken by U. S. officials could "result in investors losing all or a very substantial part of their investment."

This isn't just boilerplate legalese. An official from Justice told BusinessWeek it's actively pursuing more aggressive techniques to counter the booming industry. Those include squeezing the middlemen who facilitate Net gambling and arresting execs from gambling sites if they set foot on U.S. soil. "We have to keep looking for new and innovative ways to investigate and prosecute," says the official.

Still, such risks have done little to deter investors. On June 22, Dresdner Kleinwort Wasserstein said the PartyGaming IPO was fully subscribed, according to British press reports. PartyGaming plans to sell shares for $2 to $2.30 and raise $1.8 billion to $2 billion in exchange for 20.6% of the company's equity. That would give the company a market capitalization of $8 billion to $9.3 billion, making it the largest IPO on the London exchange since 2001. The stock is expected to begin trading the week of June 27.

GOLDEN PARASOL

The jackpot will go to PartyGaming's big shareholders. While the company won't receive any of the proceeds from the offering, the top four owners will get most of the cash. The largest shareholder, with 31.6%, is Anurag Dikshit, a 33-year old graduate of the Indian Institute of Technology (IIT) who helped the company develop its software. Others include Ruth Parasol, a U.S. citizen and former Web-porn purveyor who founded the business in 1997, and her husband, Russ DeLeon. The CEO is Richard Segal, who formerly ran British movie chain Odeon Ltd. PartyGaming declined to comment.

One reason for investors' confidence may be the track record of PartyGaming's management. When U. S. banks began refusing Net gambling transactions in 2002 under pressure from New York Attorney General Eliot Spitzer, revenues for many gaming sites went into decline. Yet PartyGaming bypassed the crackdown by developing its own online payment system. Similar to PayPal Inc., the system provides customers with an online wallet into which they can transfer funds from their bank accounts. Then they can use the wallet to gamble whenever they want.

PartyGaming's management has been innovative in other ways. In 2002 it established a subsidiary in Hyderabad, India, to handle customer service and tech systems. The unit accounts for 85% of the company's 1,100 workers. That contributed to the 62% gross margins last year.

Numbers like that make the PartyGaming offering difficult to ignore. Still, for investors there's no question that the company is a high-risk bet.

By Spencer E. Ante in New York


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