Company Spotlight: One business makes the internet a really safe bet

Purveyors of porn apart, few businesses have made real money from the internet.

Purveyors of porn apart, few businesses have made real money from the internet. Yes, it has transformed the economics of dating agencies, newsletters and specialist information services, and parts of the banking and securities industries have benefited, too, though often at the expense of cannibalising their bricks-and- mortar operations. But for most firms, being online has done little for the bottom line.

However, one big beneficiary stands out: betting and gaming. The internet has paved the way for new forms of interactive games, made pricing more transparent, and brought in many thousands of new customers. Betting exchanges such as Betfair have even allowed the customers to act like bookies, taking bets rather than just placing them. Online casinos have proliferated. In its last statement, bookmaker William Hill said estimates put the number of online gaming sites at between 1,400 and 3,000.

Now you may not actually approve of all this but it is interesting to note that Britain has a world champion in this business, in the form of Aim-listed Sportingbet. It claims to be the world's largest online betting group, taking more than £1bn of bets each year or eight bets per second. It has more than a million registered customers worldwide, 70 per cent of them in the United States.

There lies one of its problems. A mix of state and federal statutes (topped by the Wire Act) makes internet gambling illegal in much of the US. In practice, making that ban stick if the gambling operator is based offshore is difficult, though a couple of years ago a number of US banks stopped processing credit card transactions related to online bets. Sportingbet got around that with new payment channels, and two US states - California and Washington - have since passed bills to allow horse racing bets to be taken over the internet. More are expected to follow suit.

But Sportingbet's share price has recently been buoyed by hopes that the impasse will be broken. The impetus for change is coming not from the US Senate but from the General Agreement on Trade in Services (GATS) to which America is a signatory. As such, it is committed to opening its borders to non-domestic suppliers of gambling. A dispute brought initially by Antigua, which licenses many of the offshore betting firms, has gone against the US which has yet to respond. This could be the beginning of the end for American prohibition.

Sportingbet will hope so. Americans are flocking to cyberspace to place bets. The company has just launched an internet poker room that is expected to be especially successful in the States. Word is that the launch has gone very well.

Sportingbet has had its share of ups and downs. Just over a year ago, punters would have been forgiven for betting it was headed for the knacker's yard. In 2001, it had bought an online bookmaker with a big US presence called Sportsbook. It had paid £33m up-front but agreed to pay an extra £92m from September 2003 onwards depending on performance.

In the event, Sportsbook did so well in the following two years that the follow-up payments threatened to bring Sportingbet down. The company even considered selling out at less than a third of today's share price. But it finally agreed new terms with the Sportsbook vendors, issued them a pile of shares and loan notes, and secured new banking facilities from Barclays. Since then, Sportingbet has not looked back.

In the year to end-March, the company lifted its operating profits (before goodwill and exceptional costs) by a third to £19.6m. Importantly, it generated a lot of cash - and continues to do so. Over the past 12 months, Sportingbet has repaid £16.5m of debt. There is still more than £30m of borrowings on the balance sheet, but the business carries big amounts of cash, too - £23.5m at the last count. Its bankers can now rest easy.

The business is growing at a tremendous pace. In the four months to the end of July, normally the quietest period of the year, Sportingbet put on 76,000 new customers. The number of sports bets placed during the period rose by more than a half on the same period a year ago. The European business moved into profit for the first time last year and Australia is proving a boom territory with nearly half of all bets now placed over the internet.

With profits likely to top the £25m mark this year, a stock market value of just over £200m still has half an eye on last year's problems. If the US market truly opens up to Sportingbet one of these days the odds on a bid for the business from one of the big US betting and gaming operators will shorten dramatically. The price will be a lot more than £200m.

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