U.S. talks key to Internet gambling takeovers

LONDON, UK: Online gambling firms Sportingbet and 888 must strike deals to protect themselves from prosecution in the United States if they are to emerge as credible takeover candidates as the industry consolidates.

The two companies had been seen as likely targets in the wake of the industry-transforming merger between PartyGaming and Austria's bwin, which piled pressure on rivals and traditional bookmakers to keep pace.

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But predators won't make a move for either until they know what liabilities the companies could face as a result of their past activities in the United States before the industry was effectively outlawed in 2006. Talks between PartyGaming and bwin only began after Party had agreed a $105 million settlement.

"The DoJ/U.S. issue needs to be resolved prior to anything happening," a source close to one of the companies told Reuters.

A resolution would clear the way for the companies to re-enter the lucrative U.S. market should moves to overturn the 2006 legislation succeed, making them more attractive to buyers.

If the U.S. obstacle is removed, analysts say Sportingbet would hold the most appeal to potential bidders.

KBC Peel Hunt's Nick Batram said its position in Australia, where it is the country's biggest bookmaker, would be of interest to traditional operators Ladbrokes and William Hill, as well as to the combined Party/bwin entity.

"There are a lot of people out there who would like to buy Sportingbet. The value in that business is in its very strong market position in Australia. Bwin isn't in Australia to any degree, while Ladbrokes and William Hill are not sizeable in Australia," he said.

Liberum Capital analyst Richard Taylor agreed that Sportingbet was the "most attractive M&A play" in the sector.

Taylor put an 85 pence price target on the stock, 35 per cent higher than the current share price, reflecting a typical bid premium. An offer at 85 pence a share would value Sportingbet at around 420 million pounds.

Sportingbet shares have dropped by 10 per cent since the start of the year, reflecting frustration it has yet to agree a U.S. settlement. 888's shares have lost nearly two-thirds of their value, with sentiment damaged by a profit warning in May.

That left 888 trading at 9.7 times forecast earnings for 2010, with Sportingbet at 10.3, compared with a price-earnings ratio for the FTSE All Share Leisure & Travel Index of 11.2, according to Thomson Reuters I/B/E/S data.

Liberum's Taylor highlighted the strength of Sportingbet's sports-betting business, which he said had one of the best gross margins in the sector at around 10 percent. In addition, he said Sportingbet's management was open to a bid, having previously stated up to 55 percent of their cost base could be removed.

Taylor added that Sportingbet's shareholder register was not dominated by founders, who can complicate bid negotiations, and he advised investors to buy the shares before Sportingbet agreed a U.S. deal, as the company's price would immediately reflect the likelihood of a takeover after any settlement.

"Assuming a deal can be negotiated, the shares will immediately be priced as in play," he said.

KBC'S Batram said he expected Sportingbet would have to pay between 30 and 50 million pounds to settle with U.S. authorities and noted the company had net cash of 30 million.

Daniel Stewart analyst Michael Campbell said debt could discourage Ladbrokes and William Hill moving for Sportingbet, given they have "reasonably stretched balance sheets".

"This would make the acquisition of Sportingbet tricky to achieve. Funding the purchase of a 300 million pound-plus market cap company like Sportingbet would push debt/EBITDA ratios much higher," he said.

KBC's Batram said 888's attraction would be the potential for cost savings in a tie-up with a rival online gaming operator and identified the combined Party/bwin as a possible buyer.

"If 888 is still on the market by the time that bwin and Party do their stuff, it's an obvious one for them because they both use 888 as a supplier," he said.

Any takeover of 888 would be complicated, however, by the presence on the share register of the founding Shaked family, who hold a controlling stake of over 50 percent and might prove unwilling to negotiate at the current price.