Shorting party poker

[BradleyT]

http://news.independent.co.uk/busine...p?story=647148

PartyGaming: a case of too good to be true

There are 27 pages of risk factors to read in the PartyGaming prospectus, which must be something of a record. Can even online poker be this risky, or have the founders truly hit upon the proverbial licence to print money? For Michael Jackson (no, not that Michael Jackson), the chairman, and Brian Larcombe, senior non-executive director - both brought in to add a veneer of respectability to this somewhat dodgy enterprise - it's very much the latter. They collect £1.5m and £1m apiece for simply lending their good names to the flotation.

PartyGaming generates oodles of cash from it's online poker tables and if this were any normal company, its current earnings would more than justify the £4.4bn to £5.1bn valuation the sponsors are hoping to achieve. Only, of course, this is not a normal company. PartyGaming has come from nowhere in just eight years, with most of its growth taking place in the last two.

What's more, the company doesn't need to float at all. There's no new money being raised. All possible business expansion can be easily funded from cash flow. All the proceeds of the float go instead straight into the pockets of the founding shareholders. The question that must always be asked in such circumstances is: "if this is such a great business, why are the founders selling?"

The obvious risk for investors is that a bit like the Spice Girls, PartyGaming will disappear as quickly as it arrived. The chances of this happening are quite high even if you think online poker is a here to stay phenomenon with continuing explosive growth potential. Great tracts of the prospectus are devoted to the possibility of a regulatory crackdown in the United States, where online betting is arguably illegal.

With nearly 90 per cent of PartyGaming's revenues coming from the US, the company is plainly highly exposed. Directors draw comfort from a relatively recent court ruling which seemed to draw a distinction between online sports betting, which is definitely illegal, and other forms of online gambling. Be that as it may, the prospectus bluntly admits that "the group's activities are considered illegal by relevant authorities". This may be the first time a company of such magnitude has been floated on the back of an overtly illegal activity.

Yet the bigger threat to PartyGaming is actually the other way around.

The fact that online gaming is legally dubious in the US is what has given PartyGaming and other fly-by-night, Gibraltar-based upstarts their opportunity. Paradoxically, it has created a formidable barrier to entry in an industry where such barriers would otherwise be non existent.

If online gaming were indisputably legal, then a whole host of American internet content providers would by now have steamrollered PartyGaming and its coterie of imitators out of existence. The company's sky high return on sales of more than 50 per cent would already have been competed away. The longer the legal status of online gaming remains uncertain, the better it is for Britain's newest stock market sector. Yet to gamble on your company's core activity remaining illegal doesn't look a sensible investment strategy to me. PartyGaming is just too good to be true. Best stick to poker.