Mainstream and industry media and the message boards remained dominated
today (Tuesday) by debate, speculation and not a little panic regarding
the weekend passing of US legislation designed to disrupt financial
channels used by American online players. By the end of the day, losses
in terms of company value through share price declines were said to
have topped GBP 3.5 billion as online gambling companies tried to
figure out the business consequences, official company positions and
probably any loopholes in the new legislation.
Among the losers in an investment sense will be pension fund managers
who bought into the online gaming sector because they run tracker
funds that must invest in FTSE 100 constituents, such as PartyGaming.
Party Gaming was the biggest casualty yesterday on the London market,
losing almost GBP 2 billion of its market capitalization after its
shares crashed 58 percent to 45p. Sportingbet saw two-thirds, or GBP
500 million, wiped off its valuation, while 888 Holdings lost 26 percent
of its value, or GBP 128 million.
Mitch Garber, the chief executive of PartyGaming, which makes three-quarters
of its revenues from the US, said the new law, if signed, would make
it "practically impossible" to provide US customers with
access to its sites. Exiting the US meant its financial performance
would fall "significantly" short of City expectations. 888,
which makes half of its profits in the US, and Sportingbet issued
similar warnings.
Some of the biggest names in global internet gaming seemed poised
to abandon the lucrative business in the US when President Bush signs
off the shock legislation that has the potential to disconnect a substantial
market from the $13 billion industry. Party Gaming and 888 Holdings
advised an intention to stop accepting bets from US-based customers
as soon as the bill is signed.
Party Gaming spokesmen said that as the first piece of Federal legislation
dealing explicitly with internet gaming: "...it [the new
law] does make clear that the US government intends to stop the flow
of funds from Americans to online gaming operators through criminal
sanction."
Lobby groups and City analysts expressed skepticism that the law would
be enforceable. Frank Fahrenkopf, president of the American Gaming
Association (AGA), which represents land gambling businesses in the
US, said he did not believe the legislation would be enough to enforce
a ban on online gaming. "Money always has a habit of finding
its way to where it wants to go," he said.
The American Gaming Association, which represents land casino operators
based in Las Vegas and elsewhere, had previously asked Congress to
fund a commission that would study whether online gambling can be
regulated and taxed in the U.S. The lobby group's hope is a study
may eventually let major casino operators such as MGM Mirage and Harrah's
Entertainment Inc. enter the lucrative online business.
John Anderson, 888 Holding's chief executive, said: "It's
a shame for the American consumer. This will just drive it underground.
Look what happened with Prohibition. We will step up a gear in terms
of looking at the rest of the world. It's a devastating loss. Most
of the rest of the world is quite sensible in terms of regulation.
If you look at the prohibition of booze in the U.S., gangsters made
a lot of money from that.''
Sportingbet said it intends to lobby the World Trade Organization
to find out whether the legislation would "violate" US commitments
under the general agreement of trade and services struck recently.
The UK group said it was "unclear" how the US Treasury and
Federal Reserve, which will have 270 days to decide how to crack down
on internet gamblers, might enforce the bill against non-US corporates.
The Guardian reported that an unidentified senior executive said it
was possible that groups representing US banking interests could lobby
to get non-credit card payments, such as money transfers via Western
Union, exempted on the grounds that it would not be practical to identify
the use of the proceeds. Only credit card companies use a coding system
that identifies internet gambling transactions. Another executive
said it was possible cash bets could be exempted from the legislation.
UK companies linked to the internet gambling sector also suffered.
NETeller, which processes payments, lost 61 percent of its value,
or around GBP 260 million, while Playtech, a software provider, was
worth GBP 220 million less at the market close, valuing it at GBP
310 million.
"This bill was having trouble getting through Congress
so a lot of investors thought this was not going to happen,'' said
Brian Tora, investment director at Gerrard Ltd. in London. "Suddenly
no one really knows how much these companies are going to make in
terms of profit.''
Another broker, Jamie Coleman at EFG Wealth Management said: "I
can't believe they actually managed to get it through, I'm pretty
damn shocked, and I'm pretty damn shocked at the way they went about
doing it as well.''
Meanwhile, Republican politicians mainly responsible for the bill
were crowing. "Internet gambling has been illegal since
the inception of the Internet, but there has been no way to enforce
it,'' Representative James Leach, an Iowa Republican, said.
"By making it illegal to use a financial instrument to
settle an Internet wager, Congress is putting responsibility on the
financial community."
The legislation directs the Federal Reserve and Department of Justice
to issue regulations within nine months to banks establishing policies
and procedures for blocking transactions.
"There was an assumption tied into the price of these stocks
that the legislation was not going to make it through,'' said
Paul Leyland, an analyst at Arbuthnot Securities in London. "Unless
Congress can ensure the act will be policed, this could very quickly
transpire to be a toothless piece of legislation,'' he added.
"The devil of all this will be in the detail.''
Sportingbet tumbled 64 percent to 66 pence. The company said the new
U.S. rules prompted it to abandon talks to buy World Gaming Plc, whose
shares slid 76 percent Monday.
There were 23 online gaming-related stocks on London's Alternative
Investment Market at the end of August.
Empire Online Ltd., whose online gambling brands include Club Dice,
fell 16.5 pence, or 25 percent, to 50.5 pence. Leisure & Gaming
Plc, whose brands include VIPsports, lost 75 percent to 9.75 pence
in London. NETeller Plc, a U.K. provider of money transfers for Internet
gaming, fell 215 pence, or 61 percent, to 140 pence.
Excapsa Software Inc., a Toronto-based maker of software for gambling
Web sites, slid 71 percent to 13 pence in London. CryptoLogic Inc.,
another Canadian maker of online gambling software, was 15 percent
lower in Toronto as European stock markets closed.
Playtech Ltd. a British Virgin Islands-based gaming-software developer,
tumbled 41 percent to 145.75 pence. Bwin Interactive Entertainment
AG slid 35 percent in Vienna.
FireOne shares dropped 66 percent in London.
In Canada, companies involved in the industry found their stock similarly
stricken by the news.
Vancouver-based Chartwell Technology Inc. was down 25 cents or 11.6
percent to $1.90; shares in software firm Las Vegas From Home.com
tumbled four cents or 25.8 percent to 11.5 cents and Internet Bingo
firm Parlay Entertainment Inc. lost 25 cents or 16.7 percent to $1.25.
Most industry observers were hoping that the fear and speculation
so evident on Monday would give place to more rational and considered
assessments and a calmer market today.