January 29th, 2005

By Matthew Garrahan

The appointment ofbanking advisers to explore"strategic options" at PartyGaming,a little-known Gibraltar-based company formerly known as iGlobalMedia, has important repercussions for the global online gaming industry.

Analysts say a float of PartyGaming could spark consolidation in what is one of the internet's few success stories.

It could also lead to other online gaming sites listing in London. Cassava, the owner of gambling sites such as 888.com, which sponsors the shirts of Middlesbrough football club, is also believed to be contemplating a London flotation.

Unlike web retailers such as Amazon and eBay that prospered in spite of the dotcom crash five years ago, there are few listed web gaming groups. This is because of the way online betting is viewed in the US. Unlike the UK, which is trying to establish itself as international hub for online betting operators following the implementation of the controversial gambling bill, the US continues to be hostile to the industry.

The decision by PartyGaming and Cassava to explore listings in London should be seen in a political context.

The US is the world's largest internet gaming market, but in spite of the popularity of a flutter on the web, the legality of online gaming there is unclear.

Online sports betting is illegal, although Sportingbet.com, the UK-listed group, takes bets from the UK. And while there is no explicit law against them, the US authorities take a dim view of casino-style betting and online poker.

Several US banks and banks with exposure to the US are known to have had talks with PartyGaming about its future plans. But there is a degree of political risk attached to any such bank working in the online gaming sector.

Some US publishers and media groups have been targeted by the authorities for running advertisements paid for by web gaming groups. Officials from the US attorney general's office have said internet gaming can encourage fraud, money laundering and underage wagering.

But while successive senators have tried to introduce legislation prohibiting online gaming, none has succeeded.

Sportingbet, the UK-listed sports betting operator, takes bets from the US. Since buying Paradise Poker last year its shares have soared, leading analysts to predict institutional investors may be prepared to forgo any wariness they had about investing in the sector.

Andrew Burnett, analyst with Numis Securities, says a significant change is under way, sparked by the flotation last spring of a company called Neteller, which operates online payment mechanisms used by gambling groups.

"[The Neteller float] was oversubscribed and came on a healthy multiple," says Mr Burnett. "But the vast majority of its business came from the North American market. That really indicated a sea-change in the way institutions were prepared to look at online gaming. When you take away the risk of prohibition what you are left with is an industry which is a truly wonderful investment story with stunning growth."

Mr Burnett adds that investors are excited about a new asset class.

He said: "It took Las Vegas 30 years to get from where it started to where it is today. This is the start of a virtual Las Vegas and I think ultimately online gaming will be a vast industry."