Poker giant asks investors to bet against US law

LONDON - PartyGaming, the world's largest online poker operator, is testing the willingness of European investors to bet against the US Department of Justice.

The operator of the PartyPoker website, which plans to raise 1.1 billion ($2.8 billion) in an initial public offering in London this week, makes 87 per cent of its revenue in the US, where the Justice Department considers the business illegal, PartyGaming says in its IPO prospectus. At least seven states have outlawed online gaming, according to the Gibraltar-based company.

PartyGaming has "a fantastic business model, the problem is there's a legal concern," said London fund manager Jonathan Arthur. "For the slightly more racy funds" willing to take bigger risks, "it's probably a good stock to have".

The company's revenue almost quadrupled last year, and the PartyPoker site has gained active players every quarter since it opened in 2001, reaching 411,000 in March. Online gambling stocks are soaring, with Sportingbet, a London-based competitor that makes about 60 per cent of revenue in the US, gaining 62 per cent this year. Sportingbet went public six years ago.

PartyGaming's market value may be more than 10 times the size of Sportingbet's 424 million ($1.1 billion). The company would be worth 4.4 billion even at the lowest IPO price sought. surpassing London-based British Airways Plc, Europe's third-biggest airline.

Revenue, of which 92 per cent comes from fees for poker games on its site, rose to US$601.6 million in 2004 from US$153.1 million in 2003. Net income more than tripled to US$348.5 million from US$77 million. The net profit margin was 57.9 per cent in 2004.

Investors have already placed orders for more shares than the 781.8 million that PartyGaming is offering, according to a source.

PartyGaming is offering the shares, equal to 21 per cent of the company, for 111 pence to 127 pence apiece. All of the orders have been within the price range, according to the person.

At the middle of the price range, PartyGaming would trade at about 25 times 2004 earnings, the firm said. Sportingbet trades at 26 times 2004 profit, according to data compiled by Bloomberg.

The average stock in the FTSE-100 benchmark index, for which PartyGaming would be eligible, trades at 19.2 times earnings, Bloomberg data shows.

Investors shouldn't be concerned about regulation because PartyGaming is outside the US, said Frank Catania, a former New Jersey assistant attorney-general and director of the state's gaming enforcement division and an industry consultant.

While most of PartyGaming's clients are in the US, the 8-year-old company has no offices, employees, or assets in the US.

The company's computer servers are located in Gibraltar and Canada and its employees are in the UK, Gibraltar and India.

"How does the Department of Justice have any right to say what goes on in other parts of the world?" Catania said.

"There may be some states where it's illegal for the player, but no one has the resources to enforce that."

Sportingbet, whose business of taking online bets on sporting events is illegal in the US, has not had any subpoenas or other contact with regulatory authorities in the US, said a spokesman.

US legislation is expected later this year to prevent credit card companies, banks and other payments systems from funding online gaming.

In 2002, Citigroup and PayPal started blocking online gambling payments.

Advertising is another concern. Discovery Communications told PartyGaming in April 2004 that US marshals seized more than US$2 million of PartyGaming's payments to Discovery for TV ads.

In June 2003 the Department of Justice told broadcasters that running ads for online gaming may aid illegal activity.

At least two research reports by banks that aren't involved in the share sale have concluded that the potential rewards in the IPO outweigh the risks.

Morgan Stanley analysts led by Jamie Rollo wrote on July 16 that the shares are worth 110 pence to 194 pence apiece. Investec Securities analysts led by James Wheatcroft recommend buying the shares for 117 pence apiece.

- BLOOMBERG