Empire to sue PartyGaming, after rejecting a new lower bid

[Sniper]

LONDON (AFX) - Online gaming group Empire Online Ltd said talks over a takeover by PartyGaming PLC had broken down and it is to launch legal action after PartyGaming (LSE: PRTY.L - news) last month moved its players on to a dedicated poker platform.

Empire shares fell as much as 17 pct to a record low before recovering.

'PartyGaming has made a revised proposal that is significantly different both in terms of the price and structure and at a level that cannot be recommended,' Empire said in a statement.

PartyGaming said the rejected bid had valued Empire shares at around 60 pence. It is believed to have first approached Empire at the end of last month with an informal all-share proposal worth between 130-140 pence.

Empire shares fell to a low of 52.5 pence before recovering to stand 3 pence, or 4.7 pct, higher at 66.5 pence by 11.15 am, valuing the company at around 195 mln stg.

'The fact they've rejected 60 pence, is seen to set something of a floor, for now at least,' one trader said.

However, Seymour Pierce analyst Paul Leyland advised clients to 'steer clear' of the stock until all of the upheaval surrounding the company had died down.

It is the second time in less than three months that an attempt to buy Empire Online (LSE: EOL.L - news) has failed. Sportingbet PLC (LSE: SBT.L - news) , a leading rival to PartyGaming, in September scrapped a 270 pence per share bid approach.

Empire stock, which was floated at 170 pence in June, has lost 79 pct of its value since Sept 6 when shares in the sector were slammed by a PartyGaming warning about slowing customer growth rates.

Empire Online shares were dealt a second blow on Oct 10 when PartyGaming, its biggest customer, said it was to move its own gamblers to a newly integrated operating platform.
The move was designed to cut reliance on so-called 'skins', companies such as Empire which drive gamblers to its gaming platforms in return for a fee.

That decision sparked fears Empire would struggle to hold on to its players as they sought sites with a larger pool of gamblers and thus higher prizes.

PartyGaming ratcheted up the pressure on Empire still further on Nov 11 when it bought two of its other four skins and said it was scrapping arrangements with a third.

Empire admitted in its statement that while it expects to deliver net profit broadly in line with prior expectations this year, its business is likely to be materially impacted in 2006.

Seymour Pierce's Leyland says while it would be incorrect to say there were doubts over Empire's survival, it is near-impossible to predict future profit levels with any degree of certainty against the current backdrop.

Empire said it intends 'to vigorously pursue legal proceedings as soon as possible' because of damage caused to it 'by the conduct of companies within the PartyGaming group'.

A spokeswoman refused to provide more detail as to the basis on which the action was being pursued.

PartyGaming says it will defend any action.

'They're clutching at straws,' spokesman John Shepherd said.

PartyGaming shares slipped 0.5 pence to 97.5.