PartyGaming cuts IPO price to £4.8bn after investor apathy

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The Independent Online

PartyGaming, the online poker company hoping to enter the FTSE 100 later this month, is heading for a stock market capitalisation of far lower than the £5.5bn previously touted after potential investors baulked at the price being suggested for its shares.

PartyGaming, the online poker company hoping to enter the FTSE 100 later this month, is heading for a stock market capitalisation of far lower than the £5.5bn previously touted after potential investors baulked at the price being suggested for its shares.

The price range for the float, due to be published today, is expected to give the company a valuation of about £4bn, according to City sources. Its shares are set to be priced at about 13-14 times earnings, much reduced from the estimates that have been hawked round the market, which had suggested PartyGaming shares would be worth about 24 times earnings. Even at these levels, the directors and founders of the company will still net millions of pounds.

One City source said: "The company has tried to set out its stall at around £5.5bn, which is around 24 times earnings. This is extraordinarily high for a company that has only one product to offer and where there are so many questions over the legality of its business. The fund managers in the City have had the upper hand here and have demanded the company pull back its pricing."

The shares are expected to float at a discount to Sportingbet, the AIM-listed company which owns the Paradise Poker brand and trades at about 15 times earnings.

PartyGaming is being forced to price its shares at a discount to take account of the uncertain legal status of online gambling in the US, where PartyGaming gets the majority of its customers. The US Justice Department considers online gambling illegal and has made several attempts to shut down the industry by blocking online financial transactions with betting companies and banning advertising. US senators are also trying to introduce laws to stamp out internet gambling.

PartyGaming believes only online sports betting is illegal and says the fact that it is based in Gibraltar will also shield it from legal action. But PartyGaming's prospectus, also published today, will have to spell out to potential investors all the regulatory risks facing the group.

David Buik, of the spread betting company Cantor Index, said the success of the float, which will be one of the biggest on the London Stock Exchange in recent years, will depend entirely on price. "PartyGaming's financial advisers will have had to lower their sights from the indicative price tag of £5.5bn that was suggested. Investors have been rattled by the fears of a clampdown on internet gambling in the US, so PartyGaming will have to price itself a little lower and aim to raise a little less capital."

Greg Feehely, an analyst at Altium Securities, said: "The reality is that this business has a high degree of regulatory risk and the level of growth in the online poker market is unsustainable. These factors will have to be accounted for in the pricing, and investors will drive the price down. In order to get the float away, PartyGaming will have to bow to their demands."

Increasing competition in the sector is also leading investors to demand a lower price, as is the fact that all proceeds of the float are to go into the hands of the company's founding shareholders rather than towards developing the business.

Potential investors in PartyGaming will also be closely assessing how shares in Empire Online fare over the next week. Empire directs traffic to casino and poker websites and offers marketing services to internet gambling groups. Its shares will begin trading on AIM today, with a listing price of 175p, which represents about 10-12 times earnings. It has raised £123.5m through a share placing, and will be worth about £512m on flotation. Empire is chaired by Lord Steinberg, the chairman of the gaming group Stanley Leisure, who is being given share options in Empire worth £200,000.

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