Investing Dopers, Let's Discuss the PartyGaming IPO

So PartyGaming Plc, the owner of poker websites including PartyPoker, has said it plans to list its shares in London. The sale will value the company at £4.8 billion (about $8.6 billion) at the midpoint of the pricing range, and the stock is scheduled to start trading on June 30. I don’t know about the rest of you, but I wouldn’t touch it.

The good points, according to my thumbnail assessment, are that the company is operating in a market that’s growing very quickly and it has an established brand - PartyPoker is the world’s biggest poker website. As nice as those factors are, though, they’re massively outweighed by the negatives, IMHO, namely the lack of barriers to entry and a regulatory risk the size of a house.

Barriers to entry, for those Dopers who aren’t fluent in investment-speak, refers to the degree of difficulty competitors will have breaking into a particular industry. The restaurant business, for example, is one where barriers to entry are very low - would-be competitors can easily open their own restaurants. Well, that applies to PartyGaming as well; they’re doing fine for now, but anyone who fancies taking away some of their business can easily start a rival website.

As for the regulatory risk, here is some more information, but to put it in a nutshell, the online gaming industry’s legal status in the U.S. is uncertain because the government views the business as illegal under a 1961 law, though at least one federal court has disagreed. In any case, this means PartyGaming gets almost 90% of its sales from a market where its activities are viewed by the government as illegal.

The company will be paying a dividend, and I calculate the yield at 3.7% at the midpoint of the price range.* That’s not bad, but one can do substantially better among U.K. common stocks, and with companies that have less regulatory baggage. Anyway, this isn’t to say that buyers won’t make money or that the sale will be a disaster, just that it’s not for me. Gaming companies historically have made good investments, but there are much better options than PartyGaming, in my view.

*The company plans to pay about $200 million as a second-half dividend for the current fiscal year ending in May, which equates to a total payment for the full year of around £167 million using the split of 1/3 at the first-half stage and 2/3 at the second-half stage cited by PartyGaming. The company is selling 781.8 million shares, or a 20.6% stake, so the total number of shares outstanding is 3.79 billion. That works out to 4.4 pence a share for the year, which gives a dividend yield of 3.7% at 119 pence, the midpoint of the pricing range.

I am not at all attracted to this offering. The barriers to entry are the biggest problem, and Party Poker doesn’t offer anything that would give me confidence that they can maintain their market share over the long haul. Their interface and customer service is fair at best and their bonuses are modest.

Online gaming isn’t like online auction sites, which have an enormous barrier to entry. Having the largest number of players is only one consideration when choosing where to play, but it is not paramount. The dividend is nice, but I would have to see evidence of some improvements on their end before considering this stock.

The regulatory issue doesn’t concern me as much. The government is more likely to go after the players who are not reporting their winnings. Even if they decided to enforce Federal wire laws I am not sure they would be successful. By using proxy banking services the money can be hard to track. I would imagine their investigations would have to be quite intrusive to be successful.