Against All Odds
1 March 2007 Andrew McIver
Online betting firms had their values slashed in half when the US outlawed online gaming last year. How does a company recover from such devastating loses? Adrienne Baker speaks to two CEOs about their gameplans for the future.
Following the sudden announcement that the US was outlawing online gambling late last year, £4bn was instantly wiped off the market. One day, online betting companies were the darlings of the London and AIM exchanges, trading at high multiples and promising strong growth rates, the next, they found themselves in freefall.
On 2 October, the first day of trading following Washington's crackdown criminalising the transfer of proceeds from internet gambling, PartyGaming's shares dropped around 65%, sportingbet's fell 67% and 888 Holdings lost 28%. By far the worst hit was World Gaming, which was forced into administration two weeks later after its shares plummeted by 92%.
For CEOs of online gambling companies, it has been an extremely fraught and challenging few months, during which they have had to absorb their losses and set out new growth strategies. And they will have to do this without their key US market. They are, however, confident that they can turn things around.
TACTIC 1. BE PREPARED
The news was not completely unanticipated: online gambling companies have always lived in the shadow of impending US legal action. However, what did take the industry by surprise was the suddenness of the decision.
Top management, shareholders, analysts and industry experts were all convinced that the US would hold off on shutting out internet gambling sites.
Richard Hunter, a gaming sector analyst with Hargreaves Landsdown, says: "It was a shock to the market because it was introduced under a bill that was unrelated."
Simon Holliday, a partner with UK-based Global Betting and Gaming Consultants (GBGC), adds: "There was some discounting of stocks because of the US legal situation, but everyone thought it probably wouldn't happen this year. The market is so short-term and these companies were generating so much cash."
However, he does feel it was an eventuality the market should have been prepared for. "I was surprised that many CEOs did not have clearer 'plan Bs' in place because there was always a possibility that the US would act."
Both PartyGaming and sportingbet did warn of the threat of US legislation in their prospectuses. And while sportingbet was definitely one of the worst hit, it was also the best prepared for getting rid of its US arm because its various operations are structured as standalone businesses.
Andrew McIver, sportingbet CEO, explains: "Europe, Australia and the US were all in silos. You double up on some costs this way, but if you want to float or sell off one business, it's easier."
This structure made sense for sportingbet because US players tend to bet on different things from UK and Australian customers.
Holliday adds: "A key part of its business was sports betting, so it was natural for it to segment. It took more risks than others by getting into sports betting, but organisationally it could easily chop off part of its business."
Betting on sports by phone has always been illegal in most states under the US Wire Act, but it was unclear how legislators would handle online betting until the passage of this recent bill.
Despite suffering a severe blow to their revenue streams, senior managers have not had to do a lot of apologising to their shareholders.
Hunter explains: "To a large extent, CEOs haven't had to explain the situation because the market has seen how much this has impacted their business. No one saw this coming and the question now is: what will they do to regain their revenues?"
TACTIC 2. RETRENCHMENT
For those taken completely by surprise, the first reaction has been to consolidate their losses.
With no obvious loophole, online gambling firms rushed to divest their US businesses and ceased taking money from US residents. Taking a one-time charge of £252.4m, sportingbet sold its US operations for $1 to Jazette Enterprises. PartyGaming also exited the US, taking a hit of £133m, while Leisure & Gaming sold its US business to its CEO. 888 Holdings, which had roughly half of its revenue coming from the US, simply halted its stateside operations.
Top executives also reined in their businesses to focus on Europe and Asia, scaling back marketing budgets and staff where necessary.
Norbert Teufelberger, co-CEO of Austrian online betting firm bwin, explains: "A year earlier than planned we are changing our aggressive growth strategy in favour of profit and cash-flow generation."
With the shutdown of its US operations, bwin lost 20% of its gross gaming revenues. Teufelberger, who shares the CEO post with Manfred Bodner, is now focused on his company's core sports betting and poker products, and has shelved plans to develop an in-house casino software product.
He is also adding language and currency options to bwin's PokerRoom.com website, previously aimed at the US market.
He adds: "We also reduced our marketing budget, particularly in the areas of sponsoring and brand building measures."
TACTIC 3. DEVELOP NEW MARKETS
Most CEOs have put in place aggressive European expansion plans and some are looking to further consolidate. 888 Holdings, for example, is already in talks to be acquired by Ladbrokes.
Meanwhile, PartyGaming is restructuring to get its cost base down and build a new revenue stream. It has plans to launch multilingual poker sites and is exploring ways of attracting former US customers, possibly through horse racing which is excluded from the new legislation. The company is also reportedly eyeing bwin as a possible takeover target.
In addition, sportingbet is focusing on its Australian and European markets. The latter now accounts for about 60% of its operations.
McIver says: "We restructured and realigned our cost base; we have a net cash position so we don't have to borrow money and people have a better understanding of what the business will look like going forward."
TACTIC 4. LEARN FROM YOUR MISTAKES
CEOs should be mindful of the legal position of some European countries as they bet their futures on the region's potential.
France has taken a hostile stance to internet gambling operators in an effort to protect state lotteries and domestic casinos, while Denmark is also taking a protectionist position. At the same time, some German states are challenging bwin's gaming licence.
Other EU nations are taking a more liberal approach, with the UK leading the pack by legalising all types of gambling. Italy is also expected to open its market to international online gambling companies, with Spain and Belgium likely to follow suit.
Teufelberger is probably more acutely aware of regulatory issues than most after being arrested on a Monaco football field in September 2006 by French authorities and charged with suspicion of violating French gambling laws.
In the days preceding the US decision both Peter Dicks, then sportingbet's non-executive chairman, and David Carruthers, BetOnSports' former CEO, were arrested in the US on charges related to online gambling. Dicks has since been released from a New York prison, where he was awaiting extradition to Louisiana. Carruthers is under house arrest in St Louis awaiting trial on fraud and racketeering charges.
Holliday warns: "It would be dangerous for CEOs to treat Europe as a single entity because each market is at a different stage. CEOs have to be as clear as possible in terms of regulation and create as much certainty as possible."
For its part, bwin is pushing for gambling to be regulated at the European level and has launched a campaign against the German states' efforts to protect their monopoly.
TACTIC 5. KEEP YOUR EYE ON THE COMPETITION
European online gambling firms are also facing increased competition after Las Vegas Sands, the world's largest casino company, announced plans to build an online site.
The arrival of this heavyweight into the online gambling sector will give these beleaguered companies a further run for their money. But after experiencing last year's surprise clampdown and shaving off half of their businesses, CEOs are not batting an eye.
McIver says: "We are still a growth stock that doesn't have one country. We have a good European and Australian business and our goal is to keep growing."
After all, these are all gambling companies comfortable with playing the odds, and ultimately they are all in the game to win.