City gambles on online betting mergers - The Guardian - 23rd March 2009

There is a growing school of thought which believes that the online gaming sector is ripe for consolidation.

Mergers between existing operators could lead to substantial savings, given the widespread duplication of operating and software costs. And it is also possible that gaming companies without a major online presence could be tempted into jumping into the market through acquisition. However it is unclear whether any moves will be made before any settlements with the US Department of Justice over the longstanding disputes relating to the various companies previous US activities.

In a 12 page note on possible deals - concentrating on online operators targeting rivals - Evolution Securities analyst Ivor Jones said:

"Long talked about, we believe the sector will start to consolidate soon.

"Current trading news across the sector is, by and large, not great. The recession and increasing secular maturity are combining to deflate near-term growth expectations. The longer-term benefits of deregulation are still some way off. When merger and acquisition [activity] starts there is likely to be rush of deals by companies which don't want to be left behind and we expect share prices to rally rapidly. Investors who want to play the consolidation theme should take positions now."

Evo's suggestion for the most interesting link-up is 888 taking on rival Sportingbet:

"Strategically this would bring together high quality casino and sports betting businesses. We would expect revenue benefits from cross-selling each product across the combined customer base. In addition Sportingbet pays third party royalties on its casino which could be eliminated as could the, relatively minor, amounts 888 is paying for its sports book. Geographically 888 is over-dependent on the over-competitive UK and the combination would give an improved channel for 888's UK cashflow to be invested in developing markets."

Next comes the possibility of PartyGaming adding Germany's Bwin :

"The biggest casino and poker operator combined with the biggest sport book (and substantial poker and casino business) would create a clear leader among the listed companies. Germany is the largest single market for both companies but Party's geographic footprint is westward, UK, Canada and France where Bwin points more east and south, Greece, Spain, Italy."

Another permutation could be Bwin buying 888:

"Similar to our comments on 888/Sportingbet, the casino/poker business gets bigger and gets a great sports book as a driver of traffic. The combined group would be much less dependent on the struggling UK and able to apply its increased cashflow to developing markets."

And then there is the suggestion of PartyGaming buying, not Bwin this time, but 888:

"The cost savings and combined casino, poker revenues would be material but we would see it as a priority to add a competitive sports betting product, something both companies have so far failed to do."

PartyGaming is currently 4.5p higher at 257.25p, valuing the business at just over £950m. 888 is worth around £360m at its present price of 104.75p, down 0.25p. Sportingbet has added 0.75p to 45p, giving it a market capitalisation of around £220m.

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