DEALTALK-U.S. talks key to Internet gambling takeovers

(For more Reuters dealtalks, click on DEALTALK/)

* Sportingbet, 888 must resolve outstanding U.S. issues

* Sportingbet seen as strongest takeover candidate

* Ownership issues may scupper 888 takeover chances

By Matt Scuffham

LONDON, Aug 19 (BestGrowthStock) – Online gambling firms Sportingbet
(SBT.L: ) and 888 (888.L: ) must strike deals to protect themselves
from prosecution in the United States if they are to emerge as
credible takeover candidates as the industry consolidates.

The two companies had been seen as likely targets in the
wake of the industry-transforming merger between PartyGaming
(PRTY.L: ) and Austria’s bwin (BWIN.VI: ), which piled pressure on
rivals and traditional bookmakers to keep pace. [ID:nLDE66S12N]

But predators won’t make a move for either until they know
what liabilities the companies could face as a result of their
past activities in the United States before the industry was
effectively outlawed in 2006. Talks between PartyGaming and bwin
only began after Party had agreed a $105 million settlement.

“The DoJ/U.S. issue needs to be resolved prior to anything
happening,” a source close to one of the companies told Reuters.

A resolution would clear the way for the companies to
re-enter the lucrative U.S. market should moves to overturn the
2006 legislation succeed, making them more attractive to buyers.
If the U.S. obstacle is removed, analysts say Sportingbet
would hold the most appeal to potential bidders.

KBC Peel Hunt’s Nick Batram said its position in Australia,
where it is the country’s biggest bookmaker, would be of
interest to traditional operators Ladbrokes (LAD.L: ) and William
Hill (WMH.L: ), as well as to the combined Party/bwin entity.

“There are a lot of people out there who would like to buy
Sportingbet. The value in that business is in its very strong
market position in Australia. Bwin isn’t in Australia to any
degree, while Ladbrokes and William Hill are not sizeable in
Australia,” he said.

Liberum Capital analyst Richard Taylor agreed that
Sportingbet was the “most attractive M&A play” in the sector.

Taylor put an 85 pence price target on the stock, 35 percent
higher than the current share price, reflecting a typical bid
premium. An offer at 85 pence a share would value Sportingbet at
around 420 million pounds.

Sportingbet shares have dropped by 10 percent since the
start of the year, reflecting frustration it has yet to agree a
U.S. settlement. 888’s shares have lost nearly two-thirds of
their value, with sentiment damaged by a profit warning in May.

That left 888 trading at 9.7 times forecast earnings for
2010, with Sportingbet at 10.3, compared with a price-earnings
ratio for the FTSE All Share Leisure & Travel Index (.FTASX5750: )
of 11.2, according to Thomson Reuters I/B/E/S data.

Liberum’s Taylor highlighted the strength of Sportingbet’s
sports-betting business, which he said had one of the best gross
margins in the sector at around 10 percent. In addition, he said
Sportingbet’s management was open to a bid, having previously
stated up to 55 percent of their cost base could be removed.

Taylor added that Sportingbet’s shareholder register was not
dominated by founders, who can complicate bid negotiations, and
he advised investors to buy the shares before Sportingbet agreed
a U.S. deal, as the company’s price would immediately reflect
the likelihood of a takeover after any settlement.

“Assuming a deal can be negotiated, the shares will
immediately be priced as in play,” he said.

KBC’S Batram said he expected Sportingbet would have to pay
between 30 and 50 million pounds to settle with U.S. authorities
and noted the company had net cash of 30 million.

Daniel Stewart analyst Michael Campbell said debt could
discourage Ladbrokes and William Hill moving for Sportingbet,
given they have “reasonably stretched balance sheets”.

“This would make the acquisition of Sportingbet tricky to
achieve. Funding the purchase of a 300 million pound-plus market
cap company like Sportingbet would push debt/EBITDA ratios much
higher,” he said.
KBC’s Batram said 888’s attraction would be the potential
for cost savings in a tie-up with a rival online gaming operator
and identified the combined Party/bwin as a possible buyer.

“If 888 is still on the market by the time that bwin and
Party do their stuff, it’s an obvious one for them because they
both use 888 as a supplier,” he said.

Any takeover of 888 would be complicated, however, by the
presence on the share register of the founding Shaked family,
who hold a controlling stake of over 50 percent and might prove
unwilling to negotiate at the current price.
(Editing by Will Waterman)

DEALTALK-U.S. talks key to Internet gambling takeovers