Experts confirm consolidation inevitable regarding online gambling

If the Party-Bwin deal comes off it will set off a wave of M&A activity

Last week's confirmation that Party Gaming and Bwin Interactive are talking about partnering (see previous InfoPowa reports) has set off a round of media reportage on the old topic of industry consolidation.

Reuters reports that consolidation among online gaming firms is set to spark into life in 2010 if the Party-Bwin deal goes through; with such a possibility seen as the potential catalyst for a wave of takeover activity. Several experts told the news agency that a major partnership would have a domino effect in the industry; "The first deal gets everybody else to run," said one observer. "You don't want to be the last one left without a partner."

That could trigger a series of deals involving companies like 888, Sportingbet and Playtech, he added.

Traditional betting firms like Ladbrokes, William Hill and Paddy Power may also look to make acquisitions to boost their online presence.

Numis analyst Wyn Ellis told Reuters that M&A activity across the sector is "inevitable."

"We believe that consolidation talks are widespread across the online gaming sector and that most companies could be considered to be both potential industry consolidators and takeover targets," he said.

Party and bwin have held early stage talks about a combination which would pair Party's strength in online gaming with bwin's expertise in sports betting.

Analysts say the logic behind the deal is compelling.

"Such a deal would bring Party the critical mass in sports book that it lacks, while for bwin, Party's casino and poker products would provide a significant boost to its presence in these markets," said KBC Peel Hunt analyst Nick Batram.

Daniel Stewart analyst James Hollins described the combination as "pretty epic" in discussing it with Reuters reporters.

"The combination would be very strategically strong. It's a pretty neat fit. Party Gaming is a very good poker brand. To combine that liquidity with bwin's network would be pretty impressive," he said.

Bwin shares have risen by over 300 percent since the beginning of 2009, boosted by ongoing merger peculation, a more favorable regulatory environment and the wider rally in Austrian shares,
giving it a market value of $2.2 billion.

That compares with PartyGaming's $1.8 billion valuation, suggesting bwin would be the senior partner in a merger.

"The fact that bwin has edged ahead in terms of market cap may mean that the deal could happen earlier rather than later," said Cheuvreux analyst Alfred Reisenberger. Hopes of industry consolidation and optimism over growth prospects are reflected in the companies' valuations.

Bwin is trading at around 24.5 times forecast 2009 earnings, compared with a price-earnings ratio for the Wiener Bourse Index of 21.7. Party Gaming is trading at 19.9 times forecast 2009 earnings, compared with a price-earnings ratio of 18.5 for the FTSE All Share Index.

Analysts say a number of factors have combined to make sector consolidation more likely over the next twelve months.

Most significant has been PartyGaming's agreement with U.S. authorities which will protect it from being prosecuted over its past activities there.

Deutsche Bank analyst Richard Carter told Reuters the settlement had given the online gaming sector "significantly more certainty and confidence and has enabled the capital markets to better understand
the potential exposure of other online gaming companies that operated in the U.S."

Other online gaming companies which previously had U.S.-facing activities such as 888 and Sportingbet are also in talks with U.S. authorities with a view to reaching settlements.

The easing of those fears and greater clarity over the way the industry is regulated have led to banks being more comfortable with the sector and, therefore, more willing to provide credit for deals.

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