Jeremy Warner's Outlook: A detention that may presage the start of a wider crackdown in the US on online gaming

Markets to remain wobbly a while yet; GUS right to reject private equity bids
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The Independent Online

Coming so soon after the furore over the NatWest Three, the detention in the US of a senior UK executive from the online gaming industry will send another frisson of fear through the British boardroom over the supposed dangers to pocket and liberty of doing business in the US.

Details were thin on the ground for much of yesterday, but the presumption in the stock market - that the detention presages a wider crackdown on online gaming - last night looked to be the most likely explanation. The industry's worst fears appeared to be confirmed when he was charged with running an illegal offshore gambling operation.

The US Justice Department has long regarded internet gambling as a morally disreputable and illegal activity. The fact that senior executives from this largely UK quoted sector have to date been toing and froing from the US without obvious difficulty may have lulled investors into a false sense of security.

Readers of this column at least can count themselves fully forewarned. Throughout large tracts of the US, gambling of any variety is still regarded as a dangerous vice which should be vigorously controlled or even banished. The exact legal position of online gaming, whether it be betting on sports events, poker or roulette, is at best ambiguous and open to interpretation, but the fact that no US-domiciled company has cared to try it, lucrative though it quite plainly is, probably tells us as much as we need to know.

In any case, their non participation in this market has created a sizeable entrepreneurial opportunity for those of less scrupulous leaning able to carry on the activity from an offshore haven. Personally, I've always thought the biggest risk to these companies is the possibility that their industry is made overtly legal, for this would cause barriers to entry to collapse and profits to be competed away to zero.

For the time being, however, the greater threat seems to come from the US's powerful and extraordinarily vocal anti-gambling lobby. They've already achieved one notably success in persuading the House of Representatives to pass an act which would remove any ambiguity in the position of offshore gambling sites. Under the bill, they would be banned outright. Few think this law likely to survive the Senate. Even so, it is a powerful warning shot.

David Carruthers, the chief executive of BetonSports, has been particularly outspoken in the US debate, having put his head above the parapet probably more times than any other top executive in the industry. BetonSports has also been unusually active in directly marketing its services in the US.

Both of these things may have made Mr Carruthers a target. In the absence of full legalisation of this industry, there was almost bound to be a crackdown at some stage. To think the US is going to tolerate an activity which its own companies are banned from participating in is naive. If this is the start of a new get tough approach to online gambling by prosecutors, which after the vote in the House of Representatives seems all too possible, then many of these companies are toast.

No wonder the founder shareholders in PartyGaming were so keen to offload their stock. And no wonder too that the prospectuses for this new, fly-by-night, stock market sector were so full of health warnings. Nobody can claim they didn't know the risks.

Markets to remain wobbly a while yet

Oil had a brief respite in the markets yesterday, but the trend is relentlessly up. The immediate cause of this latest spike is a second war in the Middle East, the pre-existing one being Iraq. Yet the paradox of an ever rising oil price is that war-induced supply concerns don't matter a fig if markets are also right to fear a pronounced slowdown in the world economy. The effect on demand of an economic downturn is likely far to outweigh any disruption to supply caused by instability in the Middle East.

If you believe the recessionary story, you would therefore also think the spike in the oil price very much a temporary phenomenon which will go into rapid reverse later this year. The interesting thing about the state of financial markets right now is that they are not really sure which way the world economy is heading. We therefore have a high oil price, which points to continued strong growth, coexisting with unsettled equity and bond markets, both of which reflect concern that the need for higher interest rates might cause a hard landing.

Which view is correct? Nobody believes the world economy is going to keep expanding at last year's breakneck speed. Moreover, growing inflationary pressures, in part caused by sky-high oil and other commodity prices, may force central bankers to tighten policy further than they would have wished.

The present uncertainty is hardly helped by the new man at the US Federal Reserve, Ben Bernanke, whose mixed messages seem to reflect a similar confusion at the heart of the world's most powerful economic policy maker. Far from delivering the robust, anti-inflationary message that many commentators expected, the Fed's latest statement was decidedly dovish in its tone. The unmistakable implication was that rates were either very close to the top or possibly even there already.

Mr Bernanke's policy confusion will have been further enhanced by the ever rising oil price, a phenomenon which invariably presents huge problems for central bankers. This is because the rising cost of oil is both inflationary and deflationary at the same time, the inflationary effect being on input costs and the deflationary effect being that it takes money out of people's pockets. The more money spent filling the tank, the less there is for spending on other things.

Should central bankers simply stop tightening and allow the oil price to do the monetary squeezing for them? Or is the correct response to raise interest rates further so as to deal with its inflationary consequences. Thus far, the world economy has proved remarkably resilient to the rising oil price, which has been going on for some years now.

A phenomenon which in past cycles has pole axed activity has this time around had only a very limited effect on inflation and an even less marked effect on growth. The big question: how much more of it can we take? What central bankers do next is likely to prove more than usually important to our economic wellbeing. Rarely has the dilemma in monetary policy looked so acute.

GUS right to reject private equity bids

The board of GUS is coming under renewed pressure to agree the sale of its various interests to private equity ahead of a planned demerger later this year. Blackstone and KKR are said to have made a fresh approach to buy the Argos and Homebase chains, while the Experian credit rating business could be sold within five minutes if only directors would agreed. The board is right to resist.

The only thing that could possibly justify such a sale is if Blackstone and KKR were to offer a silly price unlikely ever to be matched by any value the stock market puts on these assets after they are spun off in October. Even then the maths might not add up, as there may be adverse tax consequences in selling the businesses for cash and then trying to pass the cash directly back to shareholders.

Private equity is perfectly entitled to bid for either of the demerged arms of GUS after they begin trading on the stock market, or indeed the whole shebang right now if the cash could be mustered. The fact that private equity is so desperate to engage the board before GUS does the splits suggests powerfully that it thinks the markets will attribute a higher value to these assets than is being offered. Who would disagree?

j.warner@independent.co.uk

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