Business Essentials: Ready to place a bet on the stock market

An online gaming firm is looking to float, but can it roll with the City's punches? Kate Hilpern reports

Trident Gaming, the provider of online gambling services, is on a roll and it wants to keep it that way. In July, the Isle of Man-based company made the headlines as a result of its acquisition of Gamebookers, one of the top 30 internet gambling firms in the world, serving clients from 123 countries.

So successful has the acquisition been that Trident now feels ready to look at a possible stock market listing. With next spring as its target, the company is after advice on how best to prepare for a flotation.

"We started out in 2001, building sports betting solutions," says chief executive John O'Malia. "Since then, we have been growing more or less organically and establishing our product, BetBug, which due to its unique design and regulatory profile is the only way to offer sports betting legally in the US market."

Indeed, so steady was the progress that Trident's workforce remained at 12 for nearly four years. But the acquisition of Gamebookers, which employs 65 people, has led to rapid growth. "Gamebookers will have turnover of about €180m (£122m) this year and earn about €11m in revenue and €5.5m to €6m in profit. So we have had a very big leap on the learning curve," explains Mr O'Malia, who began his career as a City trader.

Trident financed the move using a £20m convertible loan from a hedge fund. "It was very important for us to fund the deal in a way that allowed us to control all the variables and make sure it got done," he says. " Subsequent deals in the market have shown that similar assets are valued much higher than our acquisition price, which lends support to our reasoning on why the purchase was attractive.

"Now we are in a position where we would like to take the convertible debt and roll it into equity. After all, the cost of capital with equity funding in the current market is lower than the cost of the debt financing that we put in place."

He cites a further reason for looking at a flotation, or initial public offering (IPO), as an option: "A key challenge for Trident is keeping up with the consolidation in the market and remaining a player as companies jump from being worth $50m (£28m) to $100m to $250m via acquisitions of their own. We have to make sure we are structured in a way that we can take advantage of this and be part of that trend. In this climate, that in effect necessitates a public equity structure."

Mr O'Malia has two main dilemmas. "First of all, how do I manage the risk in the IPO process in order to roll with the punches of the market? Right now, gaming stocks are all the rage, but it will not necessarily always be so. How, then, do we manage that uncertainty?"

His second question is closely related. "Given that the industry is experiencing very rapid consolidation, how quickly should one feel compelled to make follow-on transitions and acquisitions?" he asks.

"Obviously, in this market, there are several potential targets. But should we run our business steadily and follow an - albeit rapid - organic growth path, or should we go out and leverage our listing very quickly into additional transactions?"

www.tridentgaming.com

WHAT THE EXPERTS SAY

David Kent, corporate finance director, Deloitte

"E-gaming stocks are hot now, but with every new issue, institutions increase their exposure to the sector - eventually reaching saturation. Market conditions can worsen between the beginning and end of the IPO process. In sectors like e-gaming, confidence can be fragile.

"These risks can be mitigated. Keep the process short from the time you commit to the non-contingent fees. This means preparing the company for the process in advance of the hard work.

"Set realistic expectations for the amount of new money. The less you are exposed to value considerations and the dilution it brings, the greater the chance of success, even in a difficult market. Assess investor appetite at the outset, and watch out for changes in sentiment as you progress.

"Organic growth or acquisitions? This has to be driven by shareholder value. Making acquisitions for their own sake can be dangerous, leading to integration issues, stretched management and, at worst, overpayment. Deals need to be done selectively and must make strategic sense."

Robin Chhabra, equity research, Evolution Securities

"The collapse of PartyGaming's shares has cast a shadow over gambling IPOs. But few would argue that online gambling is still set for rapid growth.

"Trident Gaming needs to emphasise its strengths. Investors will value Gamebookers' prime position in Europe, given the relative lack of online competition in the region, versus the hotly contested US market. That BetBug is legal in the US is also a plus but management will need to prove the innovation can be a winner with punters.

"There is no pressure to consolidate but investors do value scale. Private operators can generally be acquired for ratings far below those at which quoted companies trade.

"However, competition will no doubt increase given the large number of operators that have listed recently, and investors will not reward those that overpay."

Noémie de Andia, associate director, Hudson Sandler (financial and communications consultancy)

"Trident Gaming operates in a sector that is red hot with the investment community but has a high risk profile due to the regulatory uncertainties in the US. In addition, the recent share-price decline of PartyGaming only a few weeks after its flotation has caused concerns, and some investors are drawing parallels with the 2000 dot-com frenzy.

"In communication terms, this means that Trident Gaming will need to go the extra mile to convince leisure investors that its business is financially secure, carries limited regulatory risk and will enjoy sustainable growth prospects.

"In a crowded online gaming sector, Trident Gaming must demonstrate to the market that its business model provides superior growth opportunities, with a significantly lower risk profile, by focusing on its unique positioning as a safe provider of sports betting in the US and its successful acquisition track record to date."