Jeremy Warner's Outlook: Return to the days of Prohibition spells death knell for the stock market's newest sector

British Airways: no chance of a bid; Lomax forced to walk the plank at Misys
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The Independent Online

Investors cannot claim they were not warned. The prospectuses for PartyGaming, 888 and all the other online betting sites which have sprung up like woodland mushrooms in the past couple of years contained page after page of health warnings - online betting may be illegal in the US, the main market for these businesses, they said in terms. The fact that it was possible to float operations which were carrying on a possibly illegal activity and needed for tax and regulatory purposes to be based offshore in Gibraltar always struck me as faintly odd, but each to his own; investors knew the risks.

These risks have been further underlined in recent months by a self-evident determination among US prosecutors to enforce the law as they saw it; there have been a number of arrests of British online executives while travelling in the US, while a bill which sought to give teeth to the patchwork of case law by banning payments to internet gaming sites found widespread support in the House of Representatives.

As if all this were not warning enough, there has also been the unseemly spectacle of PartyGaming founders resigning from the board so that they could further cash in their chips before lock-in periods ended. They plainly foresaw how transitory their American spoils were likely to prove, even if outside investors failed to take the hint.

All that said, the coup de grâce could hardly have been delivered in a more unexpected way. Not in her wildest imaginings could Hillary Clinton have thought that the ports security bill she had championed as a way of giving the Democrats a voice in national security would also be used to outlaw online gaming.

By tacking the gaming legislation on to the ports bill, the Republicans ensured that the Democrats wouldn't vote against it. The measures now only require ratification by the President. Might he use his power of veto? Given that he has used it only once before - to block stem cell research - this seems rather unlikely. The Christian right would very definitely not approve. The President is not about to risk their wrath in mid-term elections year.

Yet though the two bills are quite different in their purpose, they do have one common theme. Both are thinly disguised forms of protectionism. The ports bill, masquerading as homeland security, bans port ownership by foreigners deemed undesirable. The prohibition on online gambling likewise attempts to outlaw an industry largely controlled and run by foreigners, not primarily in the interests of morality - though this is the claimed justification - but to protect a still thriving physical industry of Las Vegas super casinos and Mississippi river boats.

Was it just coincidence that private equity chose yesterday to launch a $15bn bid for Harrah's, America's largest casinos operator? What is certainly true is that its prospects are considerably enhanced by the removal of online competition. The hypocrisy of these actions from the self-proclaimed "land of the free" is quite breathtaking, if entirely predictable for anyone with an understanding of America's history of prohibitions. To misquote the late President Reagan, one man's protectionism is another man's pursuit of honest regulation and legitimate tax collection.

The decision on whether to allow gambling in the US is taken at a state or local level. Online gaming exists only in the ether, and therefore cannot be easily controlled or taxed. The mentality that bans it is the same provincial town rule that once prevented the formation of interstate banks, for fear that this would mean money disappearing from the local economy into the speculations of Wall Street.

Narrow-minded though such thinking might seem, there is something to be said for it. In any case, its triumph on Capitol Hill has all but destroyed the London stock market's newest sector.

Shares in the sector leader, PartyGaming, more than halved yesterday. Given that more than three-quarters of the company's revenues come from the US, this might seem something of an under-reaction. Costs will have to be cut rapidly to adjust, and it remains to be seen how durable the balance of revenues prove once deprived of the liquidity of American punters. As I say, investors cannot claim they were not warned.

British Airways: no chance of a bid

That old canard about a foreign or even Middle Eastern takeover bid for British Airways resurfaced over the weekend. The reason this is not about to happen has nothing to do with the burgeoning size of the BA pensions deficit, which is actually a comparatively easy matter for any bidder to deal with. The value of the bid is simply reduced by the appropriate amount. In that sense, the deficit is neither here nor there. It affects only the valuation of the company, not its openness to approaches.

The more formidable barrier is the fact that BA is Britain's premier national flag carrier. Reciprocal landing rights between nations are negotiated on a bilateral basis. BA gets rights to land at Kennedy in return for American rights to land at Heathrow.

In theory, there would be nothing to stop the British Government giving away all BA's British landing rights to Emirates, Saudi Airlines, Qatar Airways or any other foreign carrier, though it would undoubtedly cause a political stink.

On the other hand, it is extraordinarily unlikely that the US and many other countries would continue to regard BA as the British flag carrier in these circumstances. The bidder would soon discover that he'd bought an airline which wasn't allowed to land anywhere. The US have already barred Dubai Ports from owning American docks. Imagine what would happen if Emirates took over BA.

Again in theory, there may be ways around these issues. Air France and KLM have managed to merge without damaging bilateral arrangements by ensuring the continuance of the two companies as two separate legal entities. But even if such an arrangement was acceptable to the US - highly unlikely - there are separate rules which require carriers flying between European destinations to be at least 51 per cent European-owned.

The upshot is that the regulatory barriers to cross-border merger within the airline industry remain formidable, which is why so few of them ever happen. Until these rules change, Willie Walsh, the BA chief executive, must continue to fly solo whether he likes it or not.

As it happens, he thus far seems to have made a reasonably good fist of it, notwithstanding the extreme competitive disadvantage his pension deficit puts him at against fast-growing Middle Eastern airlines, with no such legacy costs, and American airlines, most of which have managed to offload their pension liabilities on to the state.

Yet the only reason BA is still flying at all is because national landing rights are so fiercely guarded by governments. Britain's importance as an international hub makes these rights particularly valuable. The airline industry is not yet a free-for-all of globalised, international competition, nor likely to become one any time soon. For Mr Walsh that's more of a blessing than a curse, for it protects his business, both commercially and from takeover.

Lomax forced to walk the plank at Misys

One man who will be toasting Kevin Lomax's demise at Misys is Paul Myners, former chairman of Marks & Spencer. It is Mr Lomax whom Mr Myners primarily blames for his own ousting at Marks & Spencer, a peculiar kind of reward, dished out in the interests of corporate governance by the book, for Mr Myners' unarguable role in helping to bring about the present renaissance at M & S. Still, he who lives by the sword ...

Misys has been a corporate governance disaster for many years now, culminating in Mr Lomax's botched attempt to take the company private. In the end, Mr Lomax has been unable to deliver either performance or bid. It was a great deal more obvious why he had to go than Mr Myners.