A 'Troublesome Child' For Party Gaming
Published: Friday, July 22, 2005 Online-Casinos.com
A 'TROUBLESOME CHILD' FOR PARTY GAMING
A different perspective on an old relationship
One of the more interesting views on online gambling relationships surfaced this week in an opinion expressed by a respected analyst in a review of online gaming.
Discussing the relationship between Noam Lanir's growing Empire Online marketing group and the (online poker) market leading Party Poker with which it does business, along with other major companies, Citigroup Smith Barney opined:
"We see Empire as like a troublesome child to PartyGaming, small but growing faster and taking more than its fair share of the budget.
"We think PartyGaming's best option is to tie Empire in by buying it.
"Empire (ep.com) finds online poker players who then play on PartyGaming's systems in return for which Empire pays PartyGaming a royalty. Empire's players account for around 4 percent of PartyGaming's EBIT.
"This EBIT share appears unimportant. However, PartyGaming makes less profit on Empire players than players that come to PartyGaming direct. We estimate that PartyGaming's 2005 EBIT would be some 11 percent higher if it achieved a "normal"profit on Empire's players.
"One assumes PartyGaming would want to renegotiate the deal with Empire. PartyGaming has the biggest online poker business and Empire benefits from the liquidity it can offer its players. However, Empire has the option of taking its +/- 9 percent share of the online poker market elsewhere, beefing up a new partner's poker room, reducing PartyGaming's dominance a little and perhaps getting an even more favourable revenue share from the new partner.
"If PartyGaming bought Empire the inefficiency of competing with each other could be eliminated, Empire's market share could be secured for PartyGaming and Empire's successful non-US player recruitment could be expanded, reducing PartyGaming's dependence on the US.
"We calculate that PartyGaming could pay a 30 percent premium for Empire without EPS dilution.
"Empire would get the best deal from a new poker partner if it agreed to bring all of its poker business with it. We estimate that the pro forma effect of Empire leaving the PartyGaming network would mathematically be only a 5 percent reduction in 2005 estimated earnings. However, the damage to PartyGaming from the implied re-jigging of market shares in the online poker market is uncertain.
"We would like to see PartyGaming acquire Empire; consolidation is one reason why it floated and a deal could make financial and strategic sense. However, our valuation is based on the status quo being maintained and Empire leaving would not be a major problem for PartyGaming.
"With the World Series of Poker due to be on TV in August and September driving even more online poker participation, we believe that the newsflow will be excellent in the short term.
"We reiterate our 1S (Buy/Speculative) rating and 185p target."
