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Party time is back for online gaming 08/04/2009
Chris Tryhorn and Julia Kollewe

Online gambling operators were limbering up for a wave of potential consolidation yesterday after PartyGaming agreed a $105m (£71.3m) settlement with prosecutors over its activities in the US, paving the way for deals in the troubled sector.

Shares in the UK's listed online gaming companies rose sharply as analysts predicted that PartyGaming's better-than-expected deal with the US authorities would allow mergers or takeovers by larger gambling groups.

PartyGaming, the owner of the PartyPoker website, yesterday escaped prosecution after a two-year investigation by the US attorney's office for the southern district of New York.

In return, it agreed to pay $105m in eight half-yearly instalments between now and September 2012, to reflect the proceeds of the internet gambling services it provided in the US before a clampdown in 2006.

The settlement covers the period from 1997 to October 2006, when PartyGaming offered internet gaming to US players, including real-money poker and casino gaming. The company admitted that even before the 2006 crackdown - which forced it to abandon the US market - some of its activities had broken US law.

"Prior to 13 October 2006, certain of the US customer transactions intended for PartyGaming that were processed by third parties, and other gaming and payment-related activity, were contrary to certain US laws," the company said in a statement.

The US attorney's office said that, from 2001, PartyGaming "employed a variety of methods to misrepresent the nature of its customers' transactions to US credit card issuers who did not permit their credit cards to be used for internet gambling". The company also "took steps to disguise payments of winnings to US customers", the attorney's statement said.

It drew attention to the fact that PartyGaming's prospectus for its flotation on the London stock exchange in 2005 warned investors of "uncertainty as to the legality of online gaming in most countries and in many countries, including the US, the group's [PartyGaming's] activities are considered to be illegal by relevant authorities".

PartyGaming had acknowledged that this conduct had violated certain US criminal laws, including those parts of the US code covering illegal gambling, fraud by wire communications and bank fraud, the statement said.

In December, PartyGaming's co-founder Anurag Dikshit became the first high-profile internet gambling tycoon to willingly face justice in a US court.

He could face up to two years in jail - however, he is expected to receive a lighter sentence to encourage others to strike similar deals related to past internet gaming activities in the US. Dikshit has also admitted forfeiture allegations requiring him to pay $300m.

Yesterday's deal is expected to be followed by other similar settlements: Pacific Poker owner and Sportingbet have also been in discussions with the US attorney's office in New York over the past couple of years.

As a result of these ongoing talks, the future of online gaming companies has been mired in uncertainty, with investors and potential buyers unable to quantify the potential cost of their activities in the US.

The leading players of the sector were dealt a body blow in October 2006 when a ban on internet gambling was passed by the US senate and signed into law by President Bush.

The companies were forced to withdraw immediately from the US, the world's biggest marketplace for online poker, and had to write off millions of pounds and lay off hundreds of staff in the process.

Although they have tried to rebuild their businesses since then - with PartyGaming focusing mainly on European and Asian markets - the legacy of their disastrous foray into the US has clouded their prospects. They have lost ground to competitors able to offer bigger tournament prize money because they attract larger player numbers and ceded market share to rogue operators such as the privately held outfits Poker Stars and Full Tilt, which are prepared to take the risk of continuing to take bets from US customers despite being in apparent breach of the anti-online gaming laws.

Jim Ryan, PartyGaming's chief executive, hailed yesterday's settlement as marking an "important day" for PartyGaming. "We are now well placed to seize organic as well as strategic opportunities that previously were beyond our reach," he added.

Analysts welcomed the deal as a harbinger of long-mooted consolidation in the industry. "The non-prosecution deal looks a good one for Party, with the fee of $105m spread over four years being below our expectations [$150m]," said Nick Batram at KBC Peel Hunt. "Party can now put the US issues behind them and start the fight-back against the US-facing poker rooms via consolidation."

Mergers between operators could lead to substantial savings on operating and software costs. Last month Evolution Securities analyst Ivor Jones speculated about potential deals such as 888 taking on Sportingbet and PartyGaming buying Germany's Bwin. He also suggested that either PartyGaming or Bwin could buy 888.

Another possibility is that long-established gambling firms could look to beef up their online offering now that the air is clearing. Ladbrokes, which came close to buying in 2007, but walked away because of the uncertainty surrounding the company, could now renew its interest.