PartyGaming and Bwin spent so much time fretting over their marriage that those analysts who had long called on these online gambling companies to get hitched had forgotten about the courtship.
The marriage, “a merger of equals”, according to Jim Ryan, PartyGaming’s chief executive, was announced on Thursday. It is the biggest the gambling sector has seen and will be consummated in the first quarter of 2011. As ever, the question is will it last?
Nick Batram, analyst with KBC Peel Hunt, says: “On the face of it, it is a compelling proposition, but quite often the best-looking couples don’t make the best-looking marriages.”
Though both companies are licensed in Gibraltar, Bwin is listed in Vienna and PartyGaming in London. They have known each other a long time, and according to Mr Ryan, the courtship revolved around personality issues.
“It was about making sure culturally we were on the right track here, and frankly that took time,” Mr Ryan says. “We now realise that from a strategic perspective we were aligned and the two organisations and management teams complement each other very well.”
The deal certainly creates a formidable beast in the competitive world of online gambling. It will be three times bigger than anything else in the sector in terms of net gaming revenues, with €682m ($887.5m). It will be twice as big as the next player in terms of earnings before interest, tax, depreciation and amortisation, with €196m.
This raises questions for the companies’ rivals. Mr Batram says: “Where does it leave the likes of 888? In online gaming, big is beautiful. It’s all about scale.” He believes the estimated €55m a year of synergies created by the merger is on the conservative side.
Smaller rivals will also take fright at the firepower at the disposal of the new entity. Martin Weigold, PartyGaming’s finance director, says a strong cash position and the opportunity to seek debt facilities in the capital markets “as and when required” would enable the enlarged group to expand further through acquisitions.
Nothing is ever straightforward in online gambling. Both parties are scarred by battles past with regulators.
In 2006, Norbert Teufelberger and Manfred Bodner, co-chief executives of Bwin, were arrested and detained in a French prison over the country’s anti-gambling laws for signing a shirt sponsorship deal with Monaco football club.
Anurag Dikshit, a PartyGaming co-founder, agreed to pay the US authorities $300m in 2008 after pleading guilty to an online gambling charge. The company itself, forced to abandon the lucrative US online poker market after anti-online gambling laws were voted through, signed a non-prosecution agreement with US authorities and agreed a $105m settlement.
But things are different now. France has a regulated market – not a particularly liberal one, say some operators – and less than a day before the merger announcement, the US took a step closer to new regulations. A vote in the House financial services committee agreed on measures that would legalise online poker and other forms of gambling.
Mr Teufelberger says France could be “a catalyst for more governments to regulate the market. The commercial reality is many governments are looking to increase their revenue base”.
This outlook may tempt back some of the institutional investors that have had their fingers burned by past flirtations with the sector, or attract those that stayed away completely.
The creation of a new dominant player will at least generate some interest. “Given the size of it and that it will be quoted in London, it makes it a more investible proposition,” says Mr Batram.
“It will attract a few more people into the sector. Do I see a flood coming in? Not necessarily so. But it is happening at the same time as some progress in the US and when the deal is finalised, we will have had six months of trading in the French market.”
Some observers expect tension in the arrangement. Mr Ryan and Mr Teufelberger will be co-chief executives of the merged company. There are significant differences in how each company carries out operational control. Others remain concerned that Bwin’s business is dominated by the German market, where the regulatory outlook is hazy.
Mr Weigold acknowledges there may be trouble ahead. “It is a very complicated transaction. There aren’t too many cases of a Gibraltarian merging with an Austrian,” he says.
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