Analysts are struggling to find sufficiently pejorative words to describe the plight of bwin.party (Pwin) and other public companies following the release of Germany’s regulated online gaming market plans. These plans aim to (a) tax sports betting turnover at 16.7%, (b) prohibit in-play betting altogether, and (c) restrict online casino licenses to land-based operators. Pwin draws about a quarter of its revenues from Germany, and these regulations, if implemented as currently proposed, would be expected to cost Pwin dearly. On Thursday, Pwin’s shares tumbled off another cliff — now down by more than a fifth since the newly merged companies listed as a single entity. That reflects an estimated market cap loss of close to £500m in just two days.
Betfair, which derives 5% of its income from Germany, has seen its own stock drop 7% on the news. Add to this the prospect of Greece (4% of Betfair’s revenue) banning betting exchanges, which led broker Seymour Pierce to suggest to the Evening Standard that Betfair’s shares were really worth only 445p, less than half its Thursday closing price. The kerfuffle even rattled digital sports media firm Perform, which was forced to delay its planned IPO by a day, ultimately choosing to price its shares at the bottom end of their previously set range.
If the proposed German laws went through as written, Deutsche Bank estimates that Pwin’s 2012 profits would drop 36%. Peel Hunt’s Nick Batram estimates a 25% earnings hit in 2013. Irish financial advisors Davy warned that the law could quite easily pass if legislators removed language likely to offend EU watchdogs, such as the favoritism shown to land-based casino operators. And then would come Pwin’s moment of truth: “it was one thing to continue operating in Germany when national law clearly contravened aspects of EU law, it is quite another to do it simply because the new law/tax regime does not make sense. Soldiering on therefore is probably not an option, not least because it would likely make the stock un-investable for a large proportion of institutional investors.”
Doubling down, Davy points to Pwin’s optimistic projections that its costly withdrawal from the US market post-UIGEA will ultimately pay off when the US regulates and PokerStars and Full Tilt get pulled down off their thrones. “This would result in an operator vacuum which could be filled by PartyGaming (amongst others) and whatever strategic land-based operator it decided to partner with. With the PartyPoker brand and the backing of a well recognized land-based gaming brand, the assumption was that a considerable share of the market could be up for grabs.”
But now, with PokerStars and Full Tilt entering contingency agreements with major land-based players, the likelihood of a big Pwin payday is even more dubious. Shareholders are slowly realizing that the big chocolate Easter bunny they were promised is a lot smaller than advertised – and hollow. We imagine that the Pwin people can’t wait until the markets close for the weekend.