PartyGaming shares plunge as firm says growth rates to slow

Paul Jarvis

Tuesday, Sept. 6, 2005 | 9:34 a.m.

Shares of PartyGaming Plc, the online poker operator that sold $1.9 billion of stock in a June initial public offering, fell as much as 37 percent to below the IPO price after the company said revenue growth is slowing.

The stock dropped as much as 58.75 pence to 98 pence in London, wiping about 2.4 billion pounds ($4.4 billion) from the company's market value. The shares, which were sold to the public at 116 pence each, were at 105 pence at 12:50 p.m. local time. Stock of competitors including Sportingbet Plc also fell.

PartyGaming's share sale was more than three times subscribed by investors on expectations that the increased popularity of online poker will spur growth in an industry that's expanded 10-fold in three years. The company's revenue gains are slowing as more operators seek to enter the market, adding to competition.

"There were some clear dangers in relation to the valuation of this company and our concerns have been realized," said Henk Potts, a London-based fund manager at Barclays Private Clients, which manages the equivalent of $45 billion. "PartyGaming is all about its growth potential, and some investors decided to bet on the growth rather than consider the potential slowdown."

Profit rose 25 percent in the first half, PartyGaming said today in a statement, as revenue gained 81 percent. The company incurred costs of $62.3 million related to its stock sale.

The drop in PartyGaming's share price has redressed the "hype" that caused the stock to gain after the IPO, said Paul Leyland, an analyst at Seymour Pierce in London.

"The market has misinterpreted what's actually just happened in the same way that it misinterpreted that poker was going to the moon ad infinitum initially," said Leyland, who doesn't have a formal recommendation on the stock.

Gibraltar-based PartyGaming, formed in 1997, said revenue growth in July and August was slower and weaker than expected. This may have been caused by the later screening of the World Series of Poker, which this year started on Aug. 23, Chief Executive Richard Segal said on a conference call. The event, aired by Walt Disney Co.'s ESPN, began last year on July 6.

"We may have revenues which are slightly lower than what we had initially anticipated based on a softer pick-up in the third quarter," Finance Director Martin Weigold said on the call. "That may just be a blip, it may be a trend."

The poker industry has swelled as events such as the World Series of Poker have encouraged more people play games such as Texas Hold'em on line. About 29,000 players competed for more than $103 million of prize money at this year's tournament in Las Vegas.

The number of days on which regular users played poker rose 59 percent in July and August from the same period last year, slowing from a 102 percent gain in the first half, Segal said.

PartyGaming said customer retention rates are falling as more casual players come on line. Competition is increasing in the market, which is 51 percent-controlled by Gibraltar-based PartyGaming. Empire Online Ltd., which helps poker and casino Web sites win customers, also had an initial public offering in June, and 888 Holdings Plc, the world's largest Web casino operator by number of visitors, is planning a $500 million share sale.

"The market has been highly competitive for some time and remains highly competitive," Segal said.

A spokesman for 888 said the company's IPO plan remains on track and amid "very positive feedback" from investors.

According to research company Christensen Capital Advisors, growth in online poker will slow to 60 percent in 2006 from 130 percent in 2005, and to 30 percent in 2007. The industry grew to $1 billion in 2004 from $90 million in 2002, Christensen says.

Gaming companies have raised $4.5 billion selling shares over the last 12 months. Sportingbet sold stock twice in the period, raising a total of $220 million, Bloomberg data show.

Shares of Sportingbet, the owner of Paradise Poker, fell as much as 18 percent in London today. Stock of Ukbetting Plc, which operates Ukbettingpoker.co.uk, dropped as much as 9 percent.

PartyGaming said first-half net income rose to $171 million, or 4.5 cents a share, from $136.5 million, or 3.6 cents, a year earlier. Earnings before interest, tax, depreciation and goodwill amortization rose 70 percent to $257.7 million.

Revenue, 92 percent of which comes from fees for poker games played on the company's Web site, increased to $437.4 million, PartyGaming said. Sales in the U.S. gained 77 percent, while growth outside the U.S. more than doubled.

The company makes 87 percent of its revenue in the U.S., where the Justice Department considers online gambling illegal.

Dresdner Kleinwort Wasserstein cut its 2006 estimate for earnings before interest, tax and amortization by 12 percent to $622 million, according to a research note.

Segal said the company is "monitoring developments" at Empire Online after Sportingbet said Sunday that it may make a takeover offer.