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EQUITY RESEARCH

9 October 2009

EUROPEAN LEISURE: ONLINE GAMBLING
REGULATORY CHANGE DRIVES GROWTH

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 186.

Barclays Capital | European Leisure: Online Gambling

Summary of our Rating, Price Target and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Old European Leisure 888 Holdings plc (888 LN / 888.L) Accor SA (AC FP / ACCP.PA) Bwin Interactive Entertainment (BWIN AV / BWIN.VI) Compass Group PLC (CPG LN / CPG.L) Enterprise Inns PLC (ETI LN / ETI.L) InterContinental Hotels Group Plc (IHG LN / IHG.L) Ladbrokes Plc (LAD LN / LAD.L) Mitchells & Butlers Plc (MAB LN / MAB.L) PartyGaming plc (PRTY LN / PRTY.L) Punch Taverns PLC (PUB LN / PUB.L) Sodexo SA (SW FP / EXHO.PA) Sportingbet plc (SBT LN / SBT.L) TUI Travel Plc (TT/ LN / TT.L) Thomas Cook Group Plc (TCG LN / TCG.L) Whitbread PLC (WTB LN / WTB.L) William Hill PLC (WMH LN / WMH.L) Price Price Target Old EPS FY1 (E) EPS FY2 (E)

New 07-Oct-09

New %Chg Old New %Chg Old New %Chg

3-Neg 3-Neg N/A 2-EW 0.94 37.67 33.07 3.87 1.26 8.26 1.81 2.52 2.71 1.21 40.93 0.73 2.60 2.34 12.10 1.76 N/A 1.00 N/A 0.09 1.27 1.27 N/A 1.74 0.30 0.30 0.29 0.29 0.81 0.81 0.26 0.26 0.23 0.23 N/A 0.20 0.36 0.36 2.40 2.40 N/A 0.06 0.24 0.24 0.26 0.26 0.84 0.84 0.18 0.18 N/A 0.11 1.17 1.17 N/A 2.35 0.32 0.32 0.27 0.27 0.62 0.62 0.21 0.21 0.26 0.26 N/A 0.24 0.21 0.21 2.47 2.47 N/A 0.07 0.25 0.25 0.29 0.29 0.89 0.89 0.17 0.17 -

1-OW 1-OW N/A 1-OW 1-OW 1-OW 2-EW 2-EW 2-EW 2-EW 2-EW 2-EW 3-UW 3-UW N/A 2-EW

40.00 40.00 N/A 45.00 4.15 1.25 7.30 2.10 2.50 N/A 1.25 N/A 3.35 3.00 2.10 4.15 1.25 7.30 2.10 2.50 2.90 1.25

3-UW 3-UW 1-OW 1-OW N/A 1-OW 1-OW 1-OW 1-OW 1-OW 1-OW 1-OW 1-OW 1-OW

45.00 45.00 0.90 3.35 3.00 2.10

14.30 14.30

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital. Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative

Valuation Methodology and Risks
European Leisure PartyGaming plc (PRTY LN / PRTY.L) Valuation Methodology: Our DCF model using a 10.5% WACC and 2% terminal growth rate. Risks which May Impede the Achievement of the Price Target: Downside: regulatory risk and market share gains from US-facing sites. Upside: opening of the US market and signing of a material B2B deal. Sportingbet plc (SBT LN / SBT.L) Valuation Methodology: Our DCF model using a 12.6% WACC and 2% terminal growth rate. Risks which May Impede the Achievement of the Price Target: Downside: regulatory risk and currency movements. Bwin Interactive Entertainment (BWIN AV / BWIN.VI) Valuation Methodology: Our DCF model using a 10.5% WACC and 2% terminal growth rate. Risks which May Impede the Achievement of the Price Target: Downside: Regulatory risk and underperformance of the Gioco Digitale acquisition. 888 Holdings plc (888 LN / 888.L) Valuation Methodology: Our DCF model using a 11.1% WACC and 2% terminal growth rate. Risks which May Impede the Achievement of the Price Target: Upside: Improvement in the B2C business, opening of the US market, outperformance of an existing B2B partner and signing of a material new B2B deal. Downside: Regulatory risk and market share gains from USfacing sites.
Source: Barclays Capital

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Barclays Capital | European Leisure: Online Gambling

INVESTMENT CASE – IMPROVED OUTLOOK IN REGULATION-DRIVEN INDUSTRY
Ed Birkin +44 (0)20 3134 7028 Ed.Birkin@barcap.com Julian Easthope +44 (0)20 3134 6640 Julian.Easthope@barcap.com Vicki Lee +44 (0)20 3134 6733 vicki.lee@barcap.com

The online gambling market is projected 1 to grow at a four-year CAGR of 10%, from US$20bn in 2008 to US$29bn in 2012. Europe is the fastest growing online market, driven by greater social acceptance of gambling, increased broadband penetration and more widespread regulation. Online gambling is a regulation-driven industry; the closure of the US market in 2006 led to operators losing up to 90% of profitability; by contrast, regulation of the Italian market has led to 186% year-on-year revenue growth in H1 09. The extent of further regulation will dictate the level of growth, but with online gambling only 0.03% of GDP in Europe in 2008, and France, Denmark and Spain expected to regulate, we see significant scope for further market expansion. 888, bwin, PartyGaming and Sportingbet generate the majority of revenue from Europe. bwin is our top pick in the online industry due to its strong positioning in key European markets; we initiate with a 1-Overweight recommendation. Our DCF-derived price target of €45 implies 37% potential upside from the current share price, giving us a 2010E P/E of 19.1x. We forecast the acquisition of Gioco Digitale to grow poker revenue by 100% in 2010, something that has not been included in consensus numbers thus far. We do not forecast this to be earnings accretive in 2010, but this has led us to be 8% ahead of consensus at the EPS level in 2011. We initiate with a 1-Overweight recommendation on Sportingbet, as we believe that the current level of regulatory risk does not justify the extent of its discount to peers. Our DCF-derived price target of 90p implies 23% potential upside from the current share price, giving us a 2010E P/E of 10.3x. In current trading, Sportingbet has outperformed its peers with net revenue growth of +7% on a constant currency basis, and we see strong growth potential from Eastern Europe. We initiate with a 2-Equal Weight recommendation on both PartyGaming and 888. For PartyGaming, our DCF-derived price target of 290p implies 7% potential upside from the current share price, giving us a 2010E P/E of 19.5x. For 888, our DCF-derived target price of 100p implies 5% potential upside, giving us a 2010E P/E 13.8x. The main catalyst for the online gambling industry is regulatory change. Italy is set to regulate cash poker and casino games in Q2 2010, and we expect France to regulate in spring of the same year; both of these should lead to significant revenue growth. We expect an opening of the US market to act as catalyst for poker operators (PartyGaming, 888 and bwin), and forecast this will likely occur on a state-by-state basis in 2011.

Figure 1: Online Gambling industry: Summary of Barclays Capital valuation and recommendations
Share price bwin Sportingbet PartyGaming 888 €33 73p 271p 95p Price Target €45 90p 290p 100p Market Capitalisation (mn) €1,089 £351 £1,116 £329 Free Float (%) 82 77 42 38 Rec 1-OW 1-OW 2-EW 2-EW FY1 19.0 10.3 21.6 16.6 P/E FY2 14.0 9.2 18.2 13.2 FY3 11.0 8.4 15.3 12.0 EV/EBITDA FY1 9.4 7.9 12.1 9.7 FY2 7.3 6.9 10.3 8.5 FY3 6.3 6.5 9.5 8.0

Note: Online Gambling stocks are rated relative to the Leisure sector; priced as of close 07/10/09; unless otherwise specified, all tables are priced as of close 07/10/09. SBT year end 31/07. For calendarised data, please see Figure 2. Source: Barclays Capital

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Projections by H2 Gambling Capital, the leading data provider for the online betting and gaming industry

9 October 2009

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............................................................................ 128 Casino – Italy fastest growth ............................................................................................... 133 EUROPEAN REGULATION – OUTLOOK IMPROVING FOR OPERATORS 135 Case law .......15 GROWTH OF THE ONLINE GAMBLING MARKET – 10% FOUR-YEAR CAGR (2008-12E) EUROPE AS A REVENUE GENERATOR GOING FORWARDS – FASTEST GROWTH 18 20 Italy – regulation has driven186% growth in H1 09...30 COMPANY SECTION – BWIN TOP PICK IN ONLINE GAMBLING INDUSTRY 888 – BEST IN CLASS B2C BUSINESS............................................................................................ 137 Pending cases .........................................13 Online gambling market – US$20bn in 2008 to US$29bn in 2012........................................................................................................................................................28 Market size potential – online gambling only 0........06% of GDP .27 United Kingdom – mature market still growing at 10% pa ...................................... 120 Sports – strong growth from Eastern Europe ................. 175 9 October 2009 3 .................................................................. 139 EUROPEAN ONLINE GAMING REGULATIONS BY COUNTRY 141 Beneficiaries of European regulation .......................................................................................................................................................................................................................................... 148 US REGULATION – WE FORECAST OPENING ON STATE BY STATE BASIS APPENDIX – REGULATION IN DETAIL 149 165 Online gaming regulations by country..................................................................Barclays Capital | European Leisure: Online Gambling CONTENTS INVESTMENT CASE – IMPROVED OUTLOOK IN REGULATION-DRIVEN INDUSTRY EXECUTIVE SUMMARY – EUROPEAN REGULATION DRIVING GROWTH GLOBAL BETTING AND GAMING MARKET – DOMINATED BY EUROPE 2 5 13 Global gambling market – online to outperform offline growth ..................................................................................................27 Spain – regional regulation under way................................................................................................................................... 131 Bingo – PartyGaming market leader after Cashcade acquisition .............................................................................24 France – anticipated to regulate in 2010 .................. BUT BETTER VALUE ELSEWHERE BWIN – STRONG POSITION IN REGULATING MARKETS – TOP PICK PARTYGAMING – ITALIAN MARKET SHOULD RETURN GROWTH TO POKER SPORTINGBET – STRATEGICALLY PLACED IN EASTERN EUROPE ONLINE GAMBLING INDUSTRY BY PRODUCT – POKER FASTEST GROWTH 33 41 59 79 103 120 Poker – ring-fenced liquidity offers relief in ‘unlevel’ playing field.............

0 21.8 Priced as of close 07/10/09.2 -1.4 P/E (x) EV/ EBITDA (x) FCF yield (%) Div yield (%) EPS growth (%) EBITDA margin (%) PAT margin (%) 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 16.5 6.5 5.4 24.9 9.6 10.6 17.5 7.2 9.2 8.8 11.1 4.9 13.6 7.3 4.1 6.3 6.1 24.3 14.4 2.4 5.7 1.3 7.5 9.0 6.2 14.4 -32 1182 -12 52 406 -24 -43 -34 200 18 26 36 23 9 24 -30 -4 -16 5 1 10 28 21 11 21 0 6 3 13 17 18.9 19.116 351 2.3 6.1 0.8 10.7 2.5 8.1 13.8 12.127 1.0 11.8 N/A 4.4 1.7 2.8 2.9 15.3 10.0 4.6 13.7 16.5 16.4 5.6 10.8 7.9 6.3 4.362 5.3 26.8 26.8 N/A 3.7 3.6 6.Barclays Capital | European Leisure: Online Gambling Figure 2: Leisure & Travel – Valuation summary (Calendarised) Market cap Net debt / £m EBITDA Annualised 888 bwin PartyGaming Sportingbet Online Gamblers Ladbrokes William Hill Landbased Gamblers Total Gamblers Sector Total 329 990 1.3 4.6 28.3 12.9 15.4 18.2 29.6 31.5 16.6 19.8 13.5 7.7 16.1 -1.3 15.9 26.6 6.9 30.676 1.8 15.5 1.6 3.9 13.7 7.7 8.3 9.1 2.1 8.4 12.6 13.9 12.7 6.3 10.4 7.3 7.3 27.4 16.5 29.4 10.0 15.4 10.8 9.5 11.5 -1.4 9.9 27.0 5.0 9.7 6.038 38.6 15.1 24.4 18.3 15.0 15.2 12.3 11.8 4.6 9.7 11.4 6.9 24.7 9.3 9.1 -1. Barclays Capital 9 October 2009 4 .1 2.7 11.6 10.0 18.7 7.9 6.7 2.7 15.4 13.5 23.5 7.4 19.4 0.137 2009 -2.8 11.6 9.9 18.0 3.0 1.1 9.3 28.7 12.7 6.8 8.235 2.0 6.3 7.1 29.9 12.5 20.3 8.0 27.7 6.5 8.2 13.2 6.1 6.0 6.4 23.9 3.1 27.0 26.7 8.6 26.4 2.9 16.6 2.5 24.2 4.2 18.9 5.0 12.0 7.4 27. Source: Company data.3 7.3 16.2 19.5 17.5 9.6 17.0 21.6 N/A N/A 2.8 4.8 9.3 8.4 17.3 -0.

8 -2.74 2009E Consensus Difference (%) 442 104 1. should also give the company a good platform on which to build operations.78 -2. bwin (1-Overweight.6 2.1 2011E BarCap Consensus Difference (%) 629 155 3.01 547 140.Barclays Capital | European Leisure: Online Gambling EXECUTIVE SUMMARY – EUROPEAN REGULATION DRIVING GROWTH 2 Our approach in this report is to focus on the main growth drivers of online gambling. something that has not been included in consensus numbers thus far.36 Difference (%) 14. Figure 3: Barclays Capital’s bwin estimates versus consensus bwin BarCap (€ mn) Gross gaming revenues Clean EBITDA Adjusted EPS (€) 430 105 1. which we forecast will drive 35% EPS growth in 2010. a stake in betbull. Having reached what it believes is optimal brand strength in key markets.5 9.35 2010E Consensus 504 123 2.6 Note: Adjusted EPS figures are pre-exceptionals and share-based payments. giving the company 25% market share of the fastest growing poker market globally. We view this as a shrewd acquisition. Below we summarise these and other growth drivers for each company.5 BarCap 577 134 2. a JV with the Amaury group gives bwin a solid base from which to launch its own branded operations. and a further 28% in 2011. 3-NEGATIVE Price Target €45 Price (06 Oct 2009) €33 Potential Upside + 37% Move from growth to profitability Historically the company has concentrated on growth. along with the increased number of shares resulting from the acquisition. while increased social acceptance and broadband penetration are less companyspecific and are more relevant for the long-term growth of the industry as a whole. which has not yet been reflected in consensus estimates. we are c15% ahead of consensus at the top line in 2010 and 2011. we forecast the acquisition of Gioco Digitale to grow poker revenue by 100% in 2010. In Italy. Source: Barclay Capital. the interpretation of the aforementioned regulatory changes represent the views of the research department and should not be relied upon as a formal legal interpretation. the content of this document has been written by an investment research analyst. and leaves us 8% ahead of consensus at the EPS level in 2011. we believe. c10% ahead at the EBITDA line and 7. price target €45) (see page 59) bwin has good exposure to regulating markets BWIN AV / BWIN. re-investing profits through increased marketing spend to drive brand recognition. and review how much exposure each company has to these. While this does not produce a materially different EPS to current consensus in 2010. In France and Spain.3 -0. the company has now shifted focus towards profitability. Bloomberg consensus 2 The proposed regulatory changes represent an important part of our investment thesis regarding the on-line gambling companies covered in this report. a land-based betting operator in the Madrid region.VI Initiating Coverage Stock Rating 1-OVERWEIGHT Sector View bwin is our top pick due to its positioning in key European markets.80 15. In France. given the increased marketing spend and bonuses necessary to integrate the two businesses and retain market share. In Spain.1 10. bwin is also well positioned to take advantage of regulation. However.2 7. bwin’s sponsorship of Real Madrid enhances the company’s brand strength in this market. 9 October 2009 5 .6% ahead on 2011 EPS. Regulation in Europe is likely to be the main driver of growth for these companies over the next 12 months. Barclays Capital estimates above consensus We include in our forecasts the acquisition of Gioco Digitale. as such. on top of this.7 0. this has led to higher brand awareness than any of its listed peers.

L Initiating Coverage Stock Rating 1-OVERWEIGHT Sector View 3-NEGATIVE Price Target The lack of a meaningful poker offering has restricted Sportingbet’s ability to take advantage of recent growth in Italy. price target 90p) (see page 103) Limited exposure to regulating markets SBT LN / SBT.0 P/E 2010E 14.3 2011E 6.2 2011E Consensus 196 46 35 6.4 13. Sportingbet is also well positioned in Greece. Figure 5: Barclays Capital Sportingbet estimates versus consensus Sportingbet BarCap (£ mn) Net gaming revenues Clean EBITDA Clean EBITA Adjusted EPS (p) 188 44 35 6. 73p Potential Upside + 23% Barclays Capital estimates versus consensus We are above consensus in all of our estimates. 90p Price (07 Oct 2009) Strategic positioning in Eastern Europe Sportingbet is building market share in Eastern Europe. Source: Barclay Capital. but any operator that can build meaningful market share should generate significant revenue due to the high growth rates these countries are currently experiencing. an underperformance of this newly acquired business would make our forecasts difficult to achieve. most notably the 2010 and 2011 clean EBITA and EPS numbers. and believe we have been conservative thereafter.Barclays Capital | European Leisure: Online Gambling Risks to price target Regulatory risk – our recommendation is based on bwin’s positioning in key regulating markets. which places it in a strong position should sports betting regulate in the country. however were the regulatory environment to deteriorate. increased broadband penetration should accelerate this.2 11. we feel other operators are better placed to take advantage of these regulating markets. and led the company to dispose of its Italian operations for an exceptional loss of £7. In current trading Sportingbet has outperformed its peers with net revenue growth of +7% on a constant currency basis.2 13. Valuation Figure 4: bwin valuation Price Target Price Rec 2009E €33 €45 1-OW 19.5 BarCap 206 51 40 7.7 4.1mn.0 2009E 9.3 4. we believe projected growth rates would be difficult to achieve.4 EV/EBITDA 2010E 7.4 15. Thomson One consensus 9 October 2009 6 .2 6.7 Note: Adjusted EPS figures are pre-exceptionals and share-based payments.0 2012E BarCap Consensus Difference (%) 221 54 43 8. which now represents 19% of revenues. These markets are still relatively nascent.4 9. We have included the clean EBITA line in these forecasts as this is what the company has guided on. however.6 8.3 Difference (%) 5. where marketing spend is more efficient due to lower competition. we are in line with guidance for 2010.7 13.3 Source: Barclays Capital Sportingbet (1-Overweight. Performance of Gioco Digitale – we forecast that the acquisition of Gioco Digitale will grow poker revenues 100% in 2010.2 3.0 204 52 40 7.5 2010E Consensus Difference (%) 180 42 31 5. The company generates 17% of group revenues from Spain.0 2011E 11.

Figure 7: SBT discount to peers 2009E Calendarised PE SBT 10. 9 October 2009 7 . we feel the extent of this discount is unwarranted.4 2011E 11. on both a P/E and EV/EBITDA basis.9 888 16.6 BWIN 19.1 BarCap est (43) Discount (%) Cons 1yr (28) Cons 4yr (35) Source: Barclays Capital. there remains an element of regulatory risk for the company. which accounts for 13% of revenues. which is a 43% discount to the average 2009E PE of 888.9 P/E 2010E 12.7 EV/EBITDA 2010E 7.Barclays Capital | European Leisure: Online Gambling Risks to price target Downside risk Regulatory risk – with a large proportion of revenue coming from Turkey. on our estimates. While we understand this. Historical consensus data suggest a one-year average discount of 28%. FactSet We estimate Sportingbet’s calendarised 2009E P/E to be 10. Sportingbet valuation Figure 6: Sportingbet valuation Price Target Price Rec 2009E 73p 90p 1-OW 13.6 Average 19. bwin and PartyGaming. and any reversal of this would adversely affect the company’s reported results. and we believe the current level of regulatory risk does not justify such a discount to peers.9x. The company is reducing its dependence on Turkey.2 Source: Barclays Capital Sportingbet trades at a discount to its peers. given its regulatory risk and lack of a material poker offering. and a four-year average of 35%.0 PRTY 21. Currency movements – the company is currently benefiting from FX movements.7 2011E 7. versus 17% in 2008.3 2009E 8. and the company yet to settle with the US Department of Justice (DoJ).

Barclays Capital | European Leisure: Online Gambling

888 Holdings (2-Equal Weight, price target 100p) (see page 41)
Some exposure to regulating markets
888 LN / 888.L Initiating Coverage Stock Rating

2-EQUAL WEIGHT
Sector View

3-NEGATIVE
Price Target

888 generates the lowest proportion of revenues from Europe ex-UK of the four companies on which we are initiating, at 45% of group net revenue. We estimate that c15-20% of revenue is generated from Spain, France and Italy, giving the company a respectable positioning in regulating markets. 888 has an Italian licence but is waiting for cash poker and casino to be regulated before entering the market, putting the company at a disadvantage to operators currently gaining market share.

Dragonfish B2B business best in class – strong growth
We view 888’s B2B business, Dragonfish, as the main growth driver going forward, accounting for 20% of revenue in H1 09, on our estimates. The company arguably has the best-in-class B2B offering; it is the only operator that offers the entire suite of products as well as numerous services such as CRM and payment processing etc. The company has signed a number of potentially lucrative B2B deals in recent months, but there is a lack of visibility over which deal could potentially generate significant earnings for the company, and to what extent, given the time lag between signing a contract and generating material earnings.

100p
Price (07 Oct 2009)

95p
Potential Upside

+ 5%

B2C business in decline
Recent trading in the company’s B2C business has been poor; net revenue declined 21% yearon-year in H1 09, an estimated -8% on a constant currency basis. While a decline in poker revenue was consistent with industry trends, given pressure from US-facing sites, we view the decline in casino revenue (60% of B2C income) as a cause for concern going forward. For this reason, we believe there are better value options in the online gambling industry.

Barclays Capital estimates below consensus
We are at the bottom end of consensus for 2009 EPS, due to a lower interest income than that currently being assumed by the market. In 2010 and 2011 we are in line with consensus, although we acknowledge there is upside risk to these numbers if recently signed deals in the B2B business start to generate meaningful incremental earnings for the company. Figure 8: Barclays Capital’s 888 estimates versus consensus
888 Holdings BarCap (US$ mn) Total operating Income Clean EBITDA Adjusted EPS (¢) 242 44 9.1 2009E Consensus Difference (%) 242 45 10.0 0.2 -0.5 -8.6 BarCap 262 50 11.5 2010E Consensus 258 50 11.8 Difference (%) 1.8 -0.4 -2.4 2011E BarCap Consensus Difference (%) 273 54 12.6 275 54 12.5 -0.6 -0.5 1.2

Note: Adjusted EPS figures are pre-exceptionals and share-based payments; Source: Barclay Capital, Bloomberg consensus

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Barclays Capital | European Leisure: Online Gambling

Risks to price target
Downside risk
Regulatory risk – a settlement with the DoJ should be viewed positively by the market, however there is a risk that discussions do not end with the desired outcome for the company. Market share gains from US-facing sites – an acceleration in market share gains by US-facing sites would pose a further downside risk to projected poker growth for the company.

Upside risk
Improvement in the B2C business – success in regulating markets could give a boost to the B2C business, especially with the cross-selling potential between casino and poker, 888’s two material revenue generators. Outperformance of an existing B2B partner – while the signing of B2B deals is positive for the company, until the partnership has started to mature it is difficult to foresee the revenue generating potential of these. There is a risk that one of the recently signed deals will experience an unexpected level of success, boosting the overall performance of the B2B business. As the B2B business has a higher margin than the B2C business, this will have a greater effect on the bottom line.

888 Valuation
Figure 9: 888 Valuation
Price Target Price Rec 2009E 95p 100p 2-EW 16.6 P/E 2010E 13.2 2011E 12.0 2009E 9.7 EV/EBITDA 2010E 8.5 2011E 8.0

Source: Barclays Capital

888 trades in line with its peers. While we view upside risk to our valuation, we believe there is better value elsewhere in the online gambling industry.

PartyGaming (2-Equal Weight, price target 290p) (see page 79)
Entry into regulating markets should return growth to poker
PRTY LN / PRTY.L Initiating Coverage Stock Rating

2-EQUAL WEIGHT
Sector View

3-NEGATIVE
Price Target

PartyGaming was late in entering the Italian market, taken by surprise at the extent of its growth. However, the company has now launched with a PartyPoker.it site and a partnership with Intralot (intralot.it), which has joined the group’s network. Given the scope of growth that bwin has experienced, we believe that PartyGaming can generate material income from Italy; having stated its intention to be first in line for licensing in other regulating markets, we see substantial growth from poker in this area. Poker has suffered in recent trading due to pressure from US-facing sites, however we feel that going forward this should be compensated by growth in regulated markets with ringfenced liquidity, leading to an increase in poker revenue in 2010.

290p
Price (07 Oct 2009)

271p
Potential Upside

Strong underlying casino growth
PartyGaming has outperformed its peers in recent trading in its casino offering, despite an adverse currency effect. H1 09 casino revenue was flat year-on-year, and now represents 45% of group net income; we forecast 8% revenue growth in 2009 and 13% in 2010.
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+ 7%

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Barclays Capital | European Leisure: Online Gambling

Barclays Capital estimates versus consensus
Our estimates are broadly in-line with consensus in 2009 and 2010, but ahead in 2011. We are comfortable being 9% ahead in 2011 EPS, as we believe the market is under-estimating the opportunities in regulating markets. Figure 10: Barclays Capital’s PartyGaming estimates versus consensus
PartyGaming BarCap (US$ mn) Net revenue Clean EBITDA Adjusted EPS (¢) 444 132 20.0 2009E Consensus Difference (%) 444 133 20.7 0.1 -0.7 -3.2 BarCap 528 154 23.8 2010E Consensus 517 158 23.6 Difference (%) 2.1 -2.1 1.0 2011E BarCap Consensus Difference (%) 565 168 28.3 541 165 26.0 4.4 2.0 8.7

Note: Adjusted EPS figures are pre-exceptionals and share-based payments; Source: Barclay Capital, company data for consensus

Risks to price target Downside risk
Regulatory risk – PartyGaming has a strong poker brand that should give the company a competitive advantage in markets that are on the verge of regulation. However, were the regulatory environment to deteriorate, there would be downside risk as projected growth rates would be difficult to achieve. Market share gains from US-facing sites – an acceleration in market share gains by USfacing sites would pose a downside risk to our projected poker growth for the company.

Upside risk
Opening of the US market – any regulation of the US market could result in material potential upside from the share price of all European poker operators (notably PartyGaming, bwin and 888); however, we feel that PartyGaming’s US legacy and brand strength position the company particularly well. Signing of a material new B2B deal – the company has confirmed that a number of potential B2B deals are in the pipeline, and there is a risk that the company could sign a B2B deal with a partner that is capable of generating material revenues for the company. As the B2B business has a higher margin than the B2C business, this would have a greater effect on the bottom line.

Valuation
Figure 11: PartyGaming valuation
Price Target Price Rec 2009E 271p 290p 2-EW 21.6 P/E 2010E 18.2 2011E 15.3 2009E 12.1 EV/EBITDA 2010E 10.3 2011E 9.5

Source: Barclays Capital

PartyGaming trades at a premium to its peers, on both a P/E and EV/EBITDA basis, on our estimates. We feel this is warranted, given its market leading position in poker, underlying casino performance and product diversity. Despite being affected adversely by pressure from US-facing sites in recent trading, we believe ring-fenced poker liquidity in Italy, and potentially in other regulating countries, should negate the advantage of US-facing sites in

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and potentially other regulating markets. with a movement towards licensing and taxation as demonstrated by Italy. negates this unfair advantage. Not all operators report bingo as a separate product. East European countries are showing particularly strong growth in sports betting. as well as further regulation of European markets. allowing bwin to post year-on-year poker growth in H1 09. Spain and France are projected by H2GC to show the fastest growth going forward should the markets regulate. however. and going forward we expect casino growth to be driven by nondownload games and live-dealing. returning unrivalled gross win margins. exposure to Italy could therefore be a key growth driver over the next couple of years. PartyGaming’s liquidity outside of these markets should also benefit the company compared to other European-listed operators. We project that bingo will account for c20% of group revenues in 2010. notably the UK. on our analysis. a leading online bingo operator.Barclays Capital | European Leisure: Online Gambling these markets. Online gambling industry by product Poker – ring-fenced liquidity offers relief in ‘unlevel playing field’ US-facing websites are creating an ‘unlevel playing field’ due to the increased liquidity of the US market. Casino – Italy fastest growth The UK is the largest European casino market although further regulation in Italy. and should remain the market leader in 2012. too early for US Europe – regulation to capture tax revenues A combination of the threat of infringement proceedings by the European Court of Justice (ECJ) and the need for incremental tax revenue caused by the global downturn has driven regulatory change in Europe. PartyGaming has outperformed both 888 and bwin on a constant-currency basis in recent trading. Regulation – continued liberalisation in Europe. expected by bwin to occur in Q2 2010. we believe. Spain and Sweden. The UK is the largest European sports betting market. Italy. we estimate that PartyGaming has outperformed its peers due to its superior liquidity. Sports betting – strong growth from Eastern Europe Sportingbet and bwin both generated over 50% of group gross revenues from sports betting. Sportingbet’s sports offering is best in class. compared to less than 1% in H1 09. 9 October 2009 11 . Bingo – PartyGaming is market leader following Cashcade acquisition Online bingo is dominated by handful of countries. and we view this as a major growth driver for Sportingbet going forward. could make it the fastest growing territory between 2009 and 2012. has given PartyGaming the most diverse online offering of the listed European operators. The strength of PartyGaming’s casino offering will be beneficial to the company ahead of the expected legalisation of casino products in Italy in Q2 2010. despite generating less revenue than bwin. but have experienced declines in both revenues and market share. however the clear market leader is PartyGaming following the acquisition of Cashcade in July 2009. European operators have been forced to increase bonuses in an effort to compete. Growth in the company’s casino product and the acquisition of Cashcade. on a constant currency basis. Ring-fenced liquidity in Italy. Ex-Italy.

leading us to believe an 18-24 month timeframe is more realistic. as the current prohibition has been unsuccessful. in our view. there remains staunch opposition that will likely delay implementation of this. The timeframe of regulation is difficult to predict.Barclays Capital | European Leisure: Online Gambling US – opening on state level likely. 9 October 2009 12 . This would allow more liberal states to regulate and capture much needed taxation from the industry without facing such intense Conservative opposition at a Federal level. however we believe that while the continued operation of US-facing sites makes regulation inevitable. but not before 2011 We believe the US will open up. although this is more likely to be on a state level before any Federal legislation is passed.

Barclays Capital | European Leisure: Online Gambling GLOBAL BETTING AND GAMING MARKET – DOMINATED BY EUROPE The global betting and gaming market is projected by H2 Gambling Capital (H2GC) to grow at 3. after a weak 2009E affected by the economic downturn. with 36% of global gross win in 2008. Figure 12: Total global gross gambling yield (US$ bn) 450 400 350 300 250 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 13 204 214 224 239 251 272 286 310 333 336 335 353 370 385 Total Global Gross Gambling Yield ($bn) Source: H2GC Europe is the largest territory with 36% market share Europe is the largest territory in terms of gross gambling yield (stakes less prizes). with 46% market share. By product. Global gambling market – online to outperform offline growth The global gaming and betting market was worthUS$336bn in 2008. Europe and North America have roughly one-third of the market each.4% four-year CAGR to US$385bn in 2012. The online industry is forecast to grow faster than the offline industry. projected by H2GC to grow to US$385bn in 2012. online. The global gaming and betting market (online and offline) was worth US$336bn in 2008. the final third is made up by the rest of the world. 9 October 2009 .4% per annum to US$385bn in the four years to 2012. casinos and lotteries account for over 60% of total gross win. and will account for 7. and H2GC projects it will grow at a 3. with Asia / Middle East the main contributors. sports betting is the largest area.5% of total gross gambling yield (stakes minus prizes) in 2012 versus 6 % in 2008. By geography.

and lotteries. gaming machines have grown from 16% of GGY in 1999 to 22% in 2008.Barclays Capital | European Leisure: Online Gambling Figure 13: Global GGY by geography 2008 Africa 1% Oceania 5% Asia/ME 22% N America 32% C/S America 4% Europe 36% Source: H2GC Geographical split in terms of GGY is one-third Europe. Figure 14: Global GGY by product 2008 PM HR Betting 6% Lottery 29% FO HR Betting 1% Sports Betting 5% Bingo/Other 5% Gaming Machines 22% Source: H2GC Casinos 32% Lottery and Casino have 60% of the market Again. This has remained stable for the past 10 years. one-third RoW The geographical split in terms of gross gambling yield (GGY) is roughly one-third Europe. 9 October 2009 14 . In contrast. which have fallen from 32% of revenue to 29% in 2008. and casinos from 27% to 32%. which has fallen from 13% in 1999 to only 6% in 2008. In terms of product split. onethird North America. the product mix has remained relatively stable over the past few years. one-third North America and one-third RoW. and H2GC forecasts it to remain relatively constant. with the notable exception being parimutuel horse race betting. casinos and lotteries represent the lion’s share of gambling spend.

7. with online gambling in Africa representing only 3% of total GGY. dominated by the monopoly Japanese Racing Association.5% in 2012E Asia / Middle East (ME) has the highest proportion of online gambling.9% Figure 16: Online gambling market 2012E Online 7. respectively.5% Offline 94. Figure 15: Online gambling market 2008 Online 5. The vast majority of Asian online gambling is sports betting in Japan.5% (US$29bn) in 2012. North America has been underrepresented since the passing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in October 2006. the online market represents only 6% (US$20bn) of the total global gambling market and H2GC forecasts it to grow to 7. Europe and North America have 6% and 5%.5% Online market represents 6% of total gambling market in 2008.1% Source: H2GC Source: H2GC Offline 92.Barclays Capital | European Leisure: Online Gambling Online gambling market – US$20bn in 2008 to US$29bn in 2012 Despite rapid growth in recent years. followed by Asia/ME and N America. Figure 17: Online betting and gaming by geography 2008 Africa Oceania 0% 4% N America 27% Asia/ME 30% C/S America 2% Europe 37% Source: H2GC 9 October 2009 15 . at 8% of total offline and online gross gambling yield. Europe was the largest online gambling market in 2008.

driven by Asia/ME which accounts for over half of global online sports betting. Figure 18: Online gambling by product 2008 Poker 20% Sports 46% Casino 25% Bingo 9% Source: H2GC Sports betting largest component of online GGY Sports betting is the largest component of online GGY. Figure 19: Online product mix by region 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 27% 52% 81% 3% 40% 4% Africa 30% 11% 33% 16% 26% 6% 37% 59% 26% 2% 15% 3% 31% 25% Europe 31% 9% 18% 15% N America Oceania Asia/ Middle C/S America East Poker Casino Bingo Sports Source: H2GC Africa. projected to grow to 47% in 2012E Going forward. respectively. and that N America could potentially rival Europe as the largest online gambling market. The online product mix varies considerably by territory. H2GC forecasts Europe to grow to 47% of the global online gaming market due to continued deregulation. according to local cultures. Asia/ME and Oceania have a high propensity for sports betting. we believe that a partial opening could occur by 2012. 9 October 2009 16 . while Asia/ME and N America fall to 27% and 18% of revenue.Barclays Capital | European Leisure: Online Gambling Europe online market leader with 37% share in 2008. However. while in Europe and the Americas online casino and poker are more prevalent. these forecasts assume no opening of the US market.

4% 3. and that consolidation will likely take place in order for companies to remain competitive. William Hill and Ladbrokes have a c9% European market share with their online operations. with the balance being made up from state monopolies such as Svenska Spel (c2. PartyGaming has the highest proportion of non-European revenue. William Hill’s online acquisition of a number of Playtech assets at the start of the year boosted its non-UK business.0% 2. 9 October 2009 17 .Barclays Capital | European Leisure: Online Gambling Figure 20: European operators’ market share 2008 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% BWIN PRTY SBT 888 UNIB WMH LAD 1. which we estimate at c25-30%.0% 1.3% 6. and 3% of the global market.1% 3. We estimate that PokerStars and Full Tilt will have c40-50% of the European poker market by gross win (c10% European online market share).3% 8.7% market share in 2008) and smaller operators.1% 3.8% 1. this is largely Canadian revenue.7% 1.6% 4. company data. Fragmented industry should lead to further consolidation This low combined market share of the top European operators illustrates how fragmented the industry is. leaving both companies with c33% of revenue generated from Europe. a legacy of the company’s US business.3% 3.0% European Market Share Source: Barclays Capital.4% 1.5% 4. H2GC Global Market Share bwin has the largest market share by revenue of the listed online operators bwin has the largest market share by GGY of the listed online operators. with c8% of the European market.

notably Italy.2 5.4 Oceania 2012E ($bn) C/S America Africa 9 October 2009 2012E 18 . bwin.2 0.1 16. France and Spain H2GC forecasts this growth to be led by Europe.5 7.7 1.8 28.8 5.4 26. should the US regulate.9 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E Online Gross Gambling Yield ($bn) Source: H2GC Growth driven Italy. However. Sportingbet and PartyGaming all generate the majority of their revenue from Europe.Barclays Capital | European Leisure: Online Gambling GROWTH OF THE ONLINE GAMBLING MARKET – 10% FOUR-YEAR CAGR (2008-12E) H2GC projects the online gambling market will grow at a four-year CAGR of 10%. notably Italy.1 0. 888.4 12. from US$20bn in 2008 to US$29bn in 2012E.0 0. France and Spain. which will double in size during 2008–12.0 25. We believe this will be driven by further regulation in Europe. Figure 21: Online global gross gambling yield (2003-12E) 35 30 25 20 15 10 5 0 7.7 22. from US$20bn in 2008 to US$29bn in 2012.0 0.9 7. France and Spain.1 19.2 9. driven by further regulation of the market.4 5.7 16. we would expect it to rival Europe’s online dominance. Online market to grow from US$20bn in 2008 to US$29bn in 2012 The online gambling market is forecast to grow at a four-year CAGR of 10%. Figure 22: Online gambling growth by territory (2008-12E) (US$ bn) 16 14 12 10 8 6 4 2 0 Europe Asia/ME N America 2008 ($bn) Source: H2GC 13.4 1.

Europe’s dominance in the online betting and gaming market is mirrored in the geographical split of revenue for 888. Figure 24: bwin revenue 2008 N. Europe 31% Central Europe 57% Europe (ex. bwin generates the highest proportion of revenue from Europe (96%). bwin. As previously mentioned. USA) 7% 8% UK 41% S. Europe has become the predominant revenue stream. Europe 8% ROW 4% Europe is the predominant revenue stream for 888. based on current regulatory movements at both a State and Federal level. at a CAGR of 17%. Middle East and Africa) Source: Company data 9 October 2009 19 . SBT and PRTY Figure 23: 888 revenue 2008 America ROW (ex.Barclays Capital | European Leisure: Online Gambling Europe’s revenue to double in size between 2008 and 2012 H2GC forecasts Europe to almost double in size in the next four years. a legacy of its US operations. with 77% of net gaming revenue coming from Europe. The majority of the balance of revenues for the company (17% in 2008) are generated from Canada. while PRTY has the most diverse geographic footprint. this assumes no opening of the US market which we do not believe to be the case over the next three years. due to assumed stricter enforcement of the UIGEA. the Middle East and Africa (although we estimate that c70-75% of revenues is generated from Europe). BWIN. UK) 44% Source: Company data Source: Company data Figure 25: PRTY revenue 2008 AsiaPac 4% Americas 19% Figure 26: SBT revenue 2008 Australia 13% Americas 1% EMEA 77% Europe 86% Source: Company data (Note: EMEA includes Europe. PartyGaming (PRTY) and Sportingbet (SBT). North American GGY actually falls over this period. Since these operators stopped accepting bets from the US.

increased broadband penetration and further regulation of the market. Figure 28: Projected growth (US$ bn) USD (bn) 16 14 5. Social acceptance Greater social acceptance of gambling coincides with increase in sport on TV In the UK. there is more in-running / streaming in sports betting. and flash casino games have been introduced. The extent of further regulation will dictate the level of growth.2 Figure 27: Growth of European online gaming industry (US$ bn) USD (bn) 8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 1.Barclays Capital | European Leisure: Online Gambling EUROPE AS A REVENUE GENERATOR GOING FORWARDS – FASTEST GROWTH Europe is the fastest-growing online market.2 8. rising to US$7.1 2.9 7.2 0 2008 2009E 2010E 2011E 2012E Source: H2GC Source: H2GC This growth has been driven by a number of factors.2bn in 2008.1 13. with females now being targeted by gaming operators through online bingo.03% of GDP in Europe in 2008.3 12 10 8 6 4 2 7. 9 October 2009 20 . Increased social acceptance through greater availability has fed through to other forms of gambling. and a five-year CAGR of 46%. while the UK illustrates that more mature markets continue to expand. The online gambling market is projected by H2GC to increase to US$13.5bn by 2012. driven by greater social acceptance of gambling.7 1. and more recently. which H2GC forecasts to grow at a 15% CAGR globally between 2009 and 2012. the explosion of sport on television with the advent of Sky TV has increased the social acceptance of sports betting. such as online poker. broadband penetration has become increasingly important as poker has become more popular.6 4. equating to a four-year 2008-12 CAGR of 17%.7 11. two of the most influential being an increase in social acceptance of gambling (attributable to an increase in sport on TV) and increased Internet penetration. to US$13.5bn by 2012 Online gambling in Europe has grown at a 10-year CAGR of 53%.5 12. but with online gambling only 0. Italy is demonstrating the phenomenal growth associated with regulation. Going forward. we see significant scope for further expansion of the market. Europe to grow at a four-year CAGR of 17%. Internet penetration Broadband penetration key growth driver Internet penetration has been a major growth driver for online gaming. we believe that social acceptance of gambling is set to increase further. which has recently shown the strongest global growth of any gambling product at a five-year CAGR (2003-08) of 65%.

we believe online gaming in Europe is some way from reaching saturation point. 9 October 2009 21 .Barclays Capital | European Leisure: Online Gambling Figure 29: Broadband penetration as a driver of online gambling 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Online gambling (% of total) [RHS] 14% 12% 10% 8% 6% 4% 2% 0% European Home Broadband Penetration [LHS] Source: H2GC Online gambling as a percentage of total gambling in Europe has increased in line with broadband penetration. H2GC expects this to reach 40% in 2012. We split this out further below into different countries. a 34% increase in the number of users. With this growth. and growth should remain strong going forward. Figure 30: European Internet penetration 60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Figure 31: European broadband penetration 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Internet penetration Source: H2GC Source: H2GC Broadband penetration 34% increase in broadband users between 2008 and 2012 Broadband penetration was less than 30% in Europe in 2008. showing adult population and broadband penetration. Both Internet and broadband penetration are set to continue to grow strongly. albeit at a slower rate than that seen in past few years.

and H2GC projects a three-year CAGR (2009-12) of 30%. the greatest driver of online gambling growth is regulation of the industry. Italy is a prime example of this. in 2008 the online gambling market in Italy grew by 48%. it has an adult population of over 50mn and only 30% broadband penetration. Italy has seen significant growth since it opened up last year. 9 October 2009 22 . Figure 34: Online projected growth by country (2009-12E) 60% 40% 20% 0% Poland Lithuania Romania Slovenia Slovakia Denmark Latvia Bulgaria Estonia Czech Rep France Spain Hungary Italy Belgium Portugal Luxembourg Malta Finland Ireland Cyprus Greece Austria UK Netherlands Sweden Germany Norway 3yr CAGR (2009-12) Source: H2GC Figure 33: 2008 online growth by country (%) 200% 150% 100% 50% 0% Romania Lithuania Slovakia Slovenia Latvia Estonia Czech Rep Hungary Poland Bulgaria Portugal Greece Malta Belgium Luxembourg Italy Cyprus Finland Netherlands Spain Austria Germany Ireland France Sweden UK Norway Denmark 2008 growth Source: H2GC Although this is dwarfed by the developing Eastern European countries in terms of percentage growth. Regulation is greatest driver of online gambling growth However. hence we see significant scope for growth as broadband penetration increases. in actual terms H2GC expects Italy will have the largest growth of any European online gambling market. given the lower base of these countries.Barclays Capital | European Leisure: Online Gambling Figure 32: Adult population (mn) and broadband penetration 80 70 60 50 40 30 20 10 0 Germany UK France Italy Spain Poland Romania Netherlands Greece Czech Rep Belgium Portugal Hungary Sweden Austria Bulgaria Slovakia Denmark Finland Norway Ireland Lithuania Latvia Slovenia Estonia Cyprus Luxembourg Malta Popn with Broadband Source: H2GC Potential There are many countries that have significant scope for online expansion through increased broadband usage.

France and Spain will likely be the most material markets over the next couple of years Although operators are seeing strong growth in Eastern Europe in percentage terms.0 -6.1 -9. The European Commission has launched infringement proceedings in recent years against a number of Member States. Barclays Capital estimates 9 October 2009 23 .1 4.0 25 36 64 95 64 103 60 65 35 43 39 68 98 66 106 63 66 33 61 54 80 101 74 113 73 73 40 77 66 85 106 79 116 76 77 44 Source: IMF data.7 -1.5 -6.0 -5. France and Spain will likely be the most material markets over the next couple of years as regulation drives large-scale growth.4 -0.1 -3.6 -2.8 -7.5 -0.2 -11.2 -2.6 -5.4 -5.0 -2.2 5. Figure 37: European deficits by country Fiscal balance (% of GDP) 2007 2008 2009E 2010E 2007 Gross debt (% of GDP) 2008 2009E 2010E Ireland Spain France Greece Portugal Italy Austria Germany Finland 0. Italy. but the economic downturn has been the key driver of change as countries look to capture much-needed tax revenue to cover growing budget deficits.6 -5.8 -8.4 -4.7 -4.8 -3.Barclays Capital | European Leisure: Online Gambling Figure 35: 2008 online growth by country (US$ mn) 400 350 300 250 200 150 100 50 0 UK Germany Italy Sweden Spain France Greece Netherlan Austria Ireland Finland Norway Belgium Portugal Denmark Poland Czech Romania Hungary Cyprus Bulgaria Luxembo Lithuania Slovakia Estonia Latvia Slovenia Malta Figure 36: Online projected growth 2009-12E (US$ mn) 1200 1000 800 600 400 200 0 Italy UK France Spain Sweden Denmark Germany Poland Ireland Greece Austria Finland Netherlands Czech Rep Belgium Romania Norway Portugal Hungary Bulgaria Lithuania Slovakia Cyprus Luxembour Latvia Estonia Slovenia Malta 2008 .5 -0.4 -5. data from H2GC shows UK.3 -12.3 -3. Although it has not proven possible thus far to fully prohibit non-licensed online gaming operators in Europe.2 -7.2012E projected growth (USDm) Source: H2GC 2008 growth (USDm) Source: H2GC Italy. the threat of prosecution recedes and players are more prone to participating in an industry that is no longer regarded as a ‘grey’ area.2 2. Economic downturn has been the key driver of change as countries look to capture much needed tax revenue Pressure from the EC may have forced many Member States to look at modifying their online gaming legislation.6 -2. the regulation of markets has led to accelerated growth as operators gain further scope for marketing.6 -1.7 -3. This has led a number of countries to look at ways of regulating online gaming. with 17 gambling-related cases pending at the ECJ.8 -6.6 -0.8 -13.1 -7.

Figure 38: Italy gross gambling yield (US$ mn) 2500 2000 1500 1000 500 0 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Italy Online Gross Gambling Yield Source: H2GC Data from the AAMS (the Italian Monopolies Authority. sorted by 2009E fiscal deficit as a percentage of GDP. 9 October 2009 24 . We look at the European regulatory situation in more detail. Unsurprisingly France and Spain.Barclays Capital | European Leisure: Online Gambling Above is a table of the fiscal balance and gross debt of the most pertinent EU countries in terms of online gambling. who are the next countries to regulate. but first we analyse the growth that can be expected from a newly regulated market. compared to 35% between 2003 and 2006. Despite attempts to ban online gaming operators. have two of the highest fiscal deficits in Europe. Licensing this has led to a dramatic increase in the size of the market. Italy – regulation has driven186% growth in H1 09 2006: US$250mn market. and has shown the accelerated expansion that regulation generates. which H2GC forecast to reach US$940mn in 2009 – a three-year CAGR of over 50%. H2GC expects post-regulation to reach US$940mn in 2009 We believe Italy is an example of how Europe is likely to regulate in the future. ‘illegal’ online gaming was still estimated by H2GC at over US$250mn in 2006. which oversees gambling regulation) shows a surge in turnover since the introduction of tournament poker in September 2008.

as the soccer season breaks. which expires next year. but instead use those funds to more aggressively market its poker offering. giving the impression that it could be potentially loss making for the company to enter while there is only tournament poker on offer. although it will not be live until near the end of 2009) should lead to a further acceleration in growth of the Italian market. but is waiting for the inclusion of cash poker and casino games before it aggressively enters the market. despite a certain level of cannibalisation of the existing tournament offering. H2GC Ave = 186% Jun-09 Total Remote Gambling Turnover Source: AAMS. the privately-owned Italian online gaming operator. The chart showing year-on-year growth takes into account the seasonality of the industry. The company has acquired Gioco Digitale. bingo and casino expected in the near future (online bingo legislation was passed on 28 April 2009. PartyGaming estimated that only c25% of poker revenues are from tournaments. 888 has an Italian licence.Barclays Capital | European Leisure: Online Gambling Figure 39: Italian online turnover 400 300 200 100 0 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Figure 40: Year-on-year growth in online turnover 300% 250% 200% 150% 100% 50% 0% Jan-09 Feb-09 Mar-09 Apr-09 May-09 yoy growth online turnover growth Source: AAMS. This could give the company a significant position in the fastest-growing online gaming market globally. It does not intend to renew its sponsorship deal with AC Milan. H2GC Introduction of tournament poker in Sept 2008 has driven the average growth rate of online market to186% in the first six months of 2009 The chart of total online turnover shows strong growth since the introduction of tournament poker. bwin is the Italian market leader following the acquisition of Gioco Digitale bwin has significant brand strength in Italy with its sponsorship of AC Milan. with a market share of c7%. This adds further weight to our belief that an introduction of more products will stimulate growth. when the league had a winter break. but unlike its success in sports betting this is not reflected in poker. this was also the case in December 2008. which has made bwin the market leader with over 25% poker market share. showing an average growth rate of 186% in the first six months of 2009. with 75% from ring games. The introduction of ring games. 9 October 2009 25 . with the decline in June 2009 due to the seasonality of online gambling. This also accounts for the drop in turnover in July and August 2008.

Barclays Capital Italy has represented a decreasing proportion of group revenues since 2007. with INTRALOT added later that month. and although in actual terms revenue generated from Italy increased in 2008.0% bwin and Gioco Digitale 25.1% PartyPoker 1.2 7. This decision has effectively exited the company from the fastest-growing market in the world. it has since started to fall as regulation has benefited the licensed operators who are able to advertise freely. Barclays Capital Revenue generated from Italy (£m) Source: Company data.Barclays Capital | European Leisure: Online Gambling Figure 41: Italian poker market share. although it refrains from advertising in the country.8% Source: bwin presentation September 2009 MicroGame 24. the latter through a partnership with lNTRALOT.3 % of group revenues Source: Company data. but has now entered the market both in a B2C and in a B2B capacity. The company continues to offer online gambling services to Italian citizens through its offshore licence. Although it is too early to see any definitive results from this alliance.5 6. we see this as a potentially meaningful market for the company going forward.3 5. Sportingbet has sold its onshore licensed business in Italy. 9 October 2009 26 .5% PartyGaming did not initially obtain an Italian licence. The B2C business through its Italian licence went live in June.1% Pokerstars 17. with the introduction of cash poker and bingo games. Snai and Sisal 24. Figure 42: SBT – Italy as % of total group revenues 7% 6% 5% 4% 3% 2% 1% 0% 2007 2008 9m 2008 9m 2009 Figure 43: SBT – Revenue generated from Italy (£ mn) 8 7 6 5 4 3 2 1 0 2007 2008 9m 2008 9m 2009 7. August 2009 Other 7. as current regulations made the operation unprofitable. given the scale of the business.5% Lottomatica.

the EC has imposed a review after two years to look into the effect of these restrictions. with H2GC projecting a 21% four-year CAGR Spain is in the midst of regional regulation. Horse race betting will be under a tote model.Barclays Capital | European Leisure: Online Gambling As more countries regulate to capture much-needed tax revenues. Sportingbet generate 4% of revenue from France. We believe bwin is the best positioned for regulation with the company confirming that a JV with the Amaury Group. the EC has ratified French proposals to regulate online gambling. respectively. 9 October 2009 27 . despite concerns over the imposition of a maximum payout and the high levels of tax. a media company. Currently no operators hold a regional licence. France – anticipated to regulate in 2010 France is next in line to regulate with 28% forecast four-year CAGR France is next in line to regulate. Figure 44: France gross gambling yield (US$ mn) 1600 1400 1200 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E France Online Gross Gambling Yield Source: H2GC H2GC forecast a four-year CAGR (2008-12E) of 28%. Rioja and Casstilla y Leon have both announced that they will introduce their own gambling legislation. sports betting (23% CAGR) returns the greatest actual growth at an average of US$85mn per year. and whether they are necessary to protect the consumer. which we expect to be dominated by the French monopoly PMU. rather than short-term affair. In percentage terms. Madrid and the Basque Country have regulated. with the only authorised online operator a state-owned monopoly. while we calculate that PartyGaming has a 3% market share. In return for this. while full national regulation looks to be a medium-. which equates to a c2% market share. but neither have done this yet. seeing the market increase from US$535mn in 2008 to US$1. has already been signed in anticipation of the market opening. Currently only two regions.4bn in 2012. we expect an acceleration in growth of the European online gambling market as a whole. Spain – regional regulation under way Spain regulating on a regional basis. however. This legislation is to go in front of the French parliament later this year. this is driven by bingo and poker growth at a four-year CAGR of 56% and 42%.

market share will be eroded by licensed operators who can freely advertise. and is unsurprisingly a very competitive market because of this. 9 October 2009 28 . a retail betting company with a Spanish presence. This led some operators to decrease investment in the UK. United Kingdom – mature market still growing at 10% pa UK very liberal but competitive market The UK has the most liberal online gambling legislation in the world. from US$550mn in 2008 to US$1. However Sportingbet is best positioned.Barclays Capital | European Leisure: Online Gambling Figure 45: Spain gross gambling yield (US$ mn) 1400 1200 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Spain Online Gross Gambling Yield Source: H2GC Growth is forecast by H2GC at a four-year CAGR (2008-12E) of 21%.2bn in 2012. with a market share of over 8%. However. US$34mn per year). Again. the UK remains an important territory for online operators given its regulatory position and the size of the market. We expect Spain to regulate sports betting quicker than Italy. bwin is well positioned with a stake in bet bull. in order to concentrate on more lucrative markets. Whether the company will be able to capitalise on this depends on whether it views licensing as commercially viable. many companies looked at the return on investment of other operations and found that the UK’s ROI was poor in comparison to other European countries. After the closure of the US market in October 2006. The UK represented almost 10% of Sportingbet’s group revenue in 2006. illustrating the lower returns available in more mature markets. in our view. This is driven by poker growth (34% CAGR at average of US$67mn growth per year) and sports betting (22% CAGR. but this had fallen to just over 6% by April 2009. given its minor poker offering. If not. and therefore view this as an important market for Sportingbet going forward.

Figure 47: UK Online gambling market share. 9 October 2009 UK Germany Sweden Italy France Spain Ireland Greece Netherlands Austria Norway Denmark Finland Belgium Portugal Poland Czeck Rep Romania Cyprus Hungary Bulgaria Luxembour Slovakia Lithuania Estonia Latvia Malta Slovenia Gross Gambling Yield ($m) 29 .800 1.000 800 600 400 200 0 Source: H2GC UK online gambling market worth over US$2bn in gross win in 2008. 2. the UK online gambling market was worth over US$2bn in gross win in 2008. the UK has shown strong growth for 888 for the past three years.600 1.200 2.200 1.400 1.Barclays Capital | European Leisure: Online Gambling Figure 46: Size of online gambling market by country. 2. and has increased marketing spend accordingly. 2008 888 6% BWIN 1% PRTY 3% SBT 1% LAD 11% WMH 10% Other 68% Source: Barclays Capital 888 has the largest UK market share of the pure online operators. the second-biggest market in Europe (despite a complete prohibition of online gambling).5x that of Germany According to data from H2 Gambling Capital. Sportingbet has since stated the importance of the UK market. 2008 (US$ mn) 2.5x that of Germany. despite the intense competition.000 1. despite decreasing as a proportion of group revenue.

reaching over US$2. despite a declining growth rate. demonstrating that regulated markets do not become exgrowth after an initial expansion. by comparing online gross gambling yield as a percentage of GDP.06% of GDP Below we look at the potential size of regulated markets.Barclays Capital | European Leisure: Online Gambling Figure 48: 888 Holdings UK net gaming revenue 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 UK as %age of total NGR Source: H2GC 2008 UK NGR yoy growth Although the UK has fallen from 45% of total net gaming revenue in 2006 for 888 to 41% in 2008.8bn in 2012 on H2GC estimates. with a four-year CAGR (2008-12) of almost 10%. it has grown at a three-year CAGR of over 25% during this time. This is encouraging for operators. the size of the market ensures that the UK remains important for online operators. 9 October 2009 30 . Market size potential – online gambling only 0. Figure 49: UK gross gambling yield (US$ mn) 3000 2500 2000 1500 1000 500 0 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E UK Online Gross Gambling Yield Source: H2GC Continued growth of mature markets is encouraging for operators Despite the relative maturity of the market. growth remains firm in the UK.

02% of GDP in 2008 to 0.08% 0. this would represent a 225% increase on 2008 gross gambling yield. providing upside potential in markets such as Spain and France (2008: 0.12% in 2012.03 0.5 43. International Monetary Fund (www.14% 0.10% 0.05% 0. We believe that online gaming gross win in regulated markets should grow to at least 0.00% UK Italy Spain 2003 Source: H2GC.72 14.6 6.07 16.6 9 October 2009 31 . a four-year CAGR of almost 35%.0 48.8 12.02% 0.08% in 2008.8 34.0 30.04 0.org) 0.76 21.10% of GDP.06% 0.imf.3 37.03% 0.02% 0.03 9.10% 0.12% 0.10% of GDP in the medium term.Barclays Capital | European Leisure: Online Gambling Figure 50: Online GGY as % of GDP 0. We expect Italy’s continued regulation to boost gross win from 0.83 35. If further regulation were to increase this to 0.10% in 2012E.4 46.9 18. Figure 51: Market growth rates at assumed share of 2012 GDP % share of GDP (2012E) European online GGY (US$ bn) Growth 2008-12E (%) Four-year CAGR 2008-12E (%) 0.14 30. respectively). Barclays Capital 7.08 0.06 0.45 25.10 23.12 0.12% 0.8 27.13 0.08% 0.02% 0.06% 0.41 18. European gross win of 0.2 22.05 0.02% 0.02%.06% of GDP in 2012E.10% of GDP in 2012 would equate to a 225% increase in market size versus 2008 Total European online gross win is forecast by H2GC to grow to 0.04% 0.17 -3 30 62 95 127 160 192 225 257 290 322 355 387 -0.38 11.79 28. H2GC forecasts this to grow to 0.5 40.10 0.08% in 2008 Online gaming gross win as a percentage of GDP has increased from 0.09 0.07 0.03% 0.02% in 2003 to 0.14 0.11 0.03% and 0.48 32.15 Source: H2GC.02% in 2003 to 0. and illustrates the growth potential of regulated markets.08% 0.03% France 2008 2012 Germany Europe UK gross win as percentage of GDP has grown from 0.

06% share of GDP by 2012. with the extent of the growth dependant on further regulation. both in Europe and globally. but on a long-term view we see 0. and the UK forecast at 0. caused by the economic downturn. Social acceptance. in our view. Greater social acceptance of gambling. We remain comfortable with the H2GC estimate of the market attaining a c0. increased broadband penetration and further regulation will drive online betting and gaming growth.06% share of GDP by 2012 Figure 51 shows the 2008-12E growth profile of the European online gambling market at assumed shares of 2012 total European GDP. it is clear to us that regulation is only going one way in Europe. with Sweden online GGY accounting for 0. however.0.17% of GDP. Despite a lacklustre performance YTD by European operators. despite a prohibition on unlicensed gambling. broadband penetration and regulation key drivers of growth 9 October 2009 32 . The industry has been plagued by perceived regulatory risk since the closure of the US market. we view continued strong growth in Europe as our base case.Barclays Capital | European Leisure: Online Gambling We remain comfortable with the H2GC estimate of the market attaining a c.10% as a conservative estimate.12% by 2012.

400 1. before analysing them individually in more depth.640 542 512 PRTY BWIN SBT 888 Market Capitalisation (US $ m) Source: FactSet (29/09/2009) PartyGaming is the largest company by market cap. 29/09/2009 Despite having a smaller market capitalisation than PartyGaming. with Sportingbet and 888 considerably smaller.600 1. followed by bwin.000 1. FactSet (SBT data Q2 & Q3 2009 due to July yr end). rates used are spot rates.Barclays Capital | European Leisure: Online Gambling COMPANY SECTION – BWIN TOP PICK IN ONLINE GAMBLING INDUSTRY In this section we consider the companies in relation to one another. Ex.800 1.200 1. Figure 53: Gross gaming revenues (H1 09 – US$ mn) 350 300 250 200 150 100 50 0 311 264 157 128 BWIN PRTY SBT 888 H1 09 Gross Gaming Revenues (USD m) Source: Company data.000 800 600 400 200 0 1. 9 October 2009 33 .720 1. Size Figure 52: Market capitalisation (US$ mn) 2. bwin generates more gross revenue.

Bonuses) Source: Company data. at c10% of gross revenue. Profitability Figure 55: Marketing and bonus costs (2008. Barclays Capital PartyGaming and William Hill distribute the most bonuses as a percentage of gross revenue (25%). % gross revenue) 60% 50% 40% 30% 20% 10% 0% PRTY SBT BWIN 888 WMH (H1 09) Bonuses LAD (H1 09) Marketing Costs (ex. Marketing costs (ex-bonuses) are similar across the pure online operators at c30% of gross revenue. this is due to PartyGaming’s higher levels of bonuses. bwin and 888 all have materially lower levels of bonuses. Sportingbet.Barclays Capital | European Leisure: Online Gambling Figure 54: Net gaming revenues (H1 09 – US$ mn) 300 250 201 200 150 100 50 0 BWIN PRTY SBT 888 144 118 264 H1 09 Net Gaming Revenues (USD m) Source: Company data. caused by increased competition from US-facing sites and a higher proportion of revenues coming from the more bonus intensive casino product. FactSet (SBT data Q2 & Q3 2009 due to 31 July yr end) The gap between bwin and PartyGaming is even more pronounced in net revenue terms. 9 October 2009 34 .

3% 3. due to its larger European footprint compared to that of PartyGaming. where the company has kept constant the levels of investment in the business despite a decline in revenues. which we expect to remain fairly constant going forward.3% SBT Global Market Share 888 bwin has the largest European market share out of the listed operators.4% 3.1% 3. 9 October 2009 35 .0% 1.4% 1. On a global basis. Barclays Capital 8. We expect this to normalise to above 20% going forward as the top line recovers.0% 6.1% 3. Market share Figure 57: Market share 2008 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% BWIN PRTY European Market Share Source: H2GC. 888’s lower margin is driven by high levels of R&D spend and increased marketing costs. bwin and PartyGaming both have c3% market share.Barclays Capital | European Leisure: Online Gambling Figure 56: Clean EBITDA margin (% of net revenue) 2009E 35% 30% 25% 20% 15% 10% 5% 0% PRTY BWIN SBT 888 Clean EBITDA margin 2009E Source: Barclays Capital PartyGaming and bwin both have a clean EBITDA margin of c30%. The low levels of market share is evidence of the fragmentation of the market. with Sportingbet close behind.

This has been further diversified with the acquisition of Cashcade.Barclays Capital | European Leisure: Online Gambling Product / geographical mix Figure 58: Product mix 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1% 37% 7% 20% 17% 17% 22% 6% 61% 58% 56% 56% 33% 4% PRTY SBT Sports Poker BWIN Casino Other 888 Source: Company data Sportingbet and bwin have the most diverse product mix. giving the company a material bingo operation. with casino generating substantially higher EBITDA. although both remain highly reliant on sports betting. however. PartyGaming has traditionally relied heavily on poker but declines in poker in H1 09 has led to a more even split between poker and casino in revenue terms. we forecast that bwin’s acquisition of Gioco Digitale could double poker revenue in 2010. something that is not the case with sports betting. The one thing that all the operators have in common is a material proportion of revenue from poker and casino. 888 generates the majority of revenue from its casino offering. This is because both of these products can be successfully cross-sold. Figure 59: Geographical split 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 16% 30% 45% 12% 4% 79% 60% 39% 10% 888 PRTY UK Europe (ex-UK) 9% SBT RoW 93% 3% BWIN Source: Company data 9 October 2009 36 .

adjusted for currency movements.56% 20% 15% 12. this is driven by regulation in Italy.91% Source: H2GC Source: H2GC Poker has the highest growth rate. A larger proportion of PartyGaming’s poker is generated from outside of these countries. Recent trading Below we show recent growth in net revenue for each company. Sportingbet data Q2 only. However. which will likely continue to come under pressure from PokerStars and Full Tilt. France and Spain. These markets will be ring-fenced. thus negating any liquidity advantage held by US-facing sites. UK 12% 10% 8% 6% 10% 4% 2% 0% Sports betting Casino Poker Bingo 5% 0% Sports betting Casino Poker Bingo 6. given its brand strength in these countries. supporting our view that bwin is particularly well placed to capture future growth in the industry.60 0 -11 -6 1. Adjustments to SBT for Australian tax changes and reduction of exposure to Turkey lead to double-digit growth. where we believe bwin is best positioned.90% 17.96% 6.23% 16. however this part of bwin’s revenue will likely come under more pressure than PartyGaming’s given the lower liquidity that it currently has. Europe 25% 21. Europe also has higher growth rates across the board than the UK.97% 9. the company still generated 17% of revenues from Canada in 2008.99% 6.06% Figure 61: Product CAGR 2008-12E. Figure 62: FX-adjusted revenue growth (%) H1 09 net revenue growth FX adjusted 888 bwin PartyGaming Sportingbet1 -13 0 -21 6 2. while 888 generated the most revenue from the UK. PartyGaming’s 30% of revenue generated from outside of Europe (including UK) is a legacy of its US business. Source: Barclays Capital 9 October 2009 37 . Figure 60: Product CAGR 2008-12E.Barclays Capital | European Leisure: Online Gambling bwin generated the most revenue from Europe in 2008. A lower proportion of bwin’s poker revenue is generated from outside the ring-fenced liquidity of Italy. which could lead to the conclusion that PartyGaming is in a dominant position going forward.

has benefitted from FX movements. Department of Justice Settlements A number of online gambling companies are currently involved in talks with the US Department of Justice (DoJ) regarding activities in the US prior to the passing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in October 2006. has been adversely affected. PartyGaming recently launched poker in Italy. while France and Spain are also expected to regulate going forward. Other companies are also positioned to take advantage of growth in regulating markets. and has since added Intralot’s offering to its network. The company also has a stake in bet bull which operates landbased betting shops in Spain. who also reports in US$. reporting a 13% net revenue growth in FY 09 while the FX-adjusted growth was +7%. taking advantage of the lower levels of competition to gain market share. However.Barclays Capital | European Leisure: Online Gambling Currency movements have an immaterial impact on bwin’s revenue. This will be driven by Italy’s continued regulation of poker and casino. while Sportingbet is well positioned in Spain where it already generates 17% of Group revenues. on the other hand. and has confirmed that it is looking to sign another JV in the country before it regulates. we believe that bwin should be able to arrest this decline. allowing the company to benefit from any large-scale growth associated with Eastern Europe in the medium term. and 888 and Sportingbet are in talks. although Gioco’s market share has been decreasing with the entry of operators such as PartyGaming and PokerStars into the market. versus reported clean EBITDA of -6%. AC Milan. Currency movements also affect costs of the company. The company is also well placed in France. PartyGaming has already signed a NonProsecution Agreement with the DoJ. where it has a JV with the Amaury Group. Growth drivers Regulation of European markets We view regulation of European markets as being the main growth driver in the online gambling industry in the near to medium term. Other European growth markets Sportingbet is positioning itself in Eastern Europe. in percentage terms they are showing strong growth. given that the majority of revenues are generated in the reporting currency. with strong brand penetration across Europe. in H109 PartyGaming’s FX-adjusted clean EBITDA increased 11%. We view Sportingbet’s decision to establish a dominant position in these markets as strategically sound. The company has a number of high profile sponsorship deals including Real Madrid. Sportingbet. 9 October 2009 38 . according to a report by H2GC. this is a result of the company’s decision to reinvest all profits back into marketing up until 2007 to build brand strength. Although these markets do not have the same levels of expansion as that of southern Europe. bwin’s acquisition of Gioco Digitale has made it the market leader in Italy with a c25% poker market share. the Portuguese Football League and MotoGP. we believe bwin is best placed to take advantage of this growth. PartyGaming estimates that at least half of its net revenue decline was attributed to currency movements while 888.

Valuation Given the highly cash generative nature of the business. although there has been an increase in the number of small. which generate 37% of group revenue. Sportingbet is more selective. and could provide meaningful earnings should the US open at a Federal level. Barclays Capital 1-OW 1-OW 2-EW 2-EW €33 73p 271p 95p €45 90p 290p 100p 37 23 7 5 9 October 2009 39 . Since settling with the DoJ. benefiting the companies both in terms of increased revenue and higher margins. we use a DCF valuation for the companies. lottery / media companies) are looking to monetise their brand strength by offering various forms of online gambling. Upside/ (Downside) % Rec Share price Price Target Bwin Sportingbet PartyGaming 888 Source: Company data. but also it presents exposure to markets that may otherwise have been closed. M&A Large-scale M&A activity is yet to occur in the industry. PartyGaming has been at the forefront of this. The company is now looking at acquisition opportunities in the live betting arena to improve a poor sportsbook offering. but only 888 and PartyGaming can offer the full spectrum of products. Sportingbet has the largest B2B offering through its revenue share in countries such as Italy and Spain. We view 888 as best placed to take advantage of the growth in B2B going forward. as well as other strategic opportunities that may occur. using specialist marketing partners to drive growth. these are highly successful and lucrative. Sportingbet uses B2B to gain access to markets in which it does not operate. its recent deal with Harrah’s Interactive Entertainment is evidence of the strength of this offering. including a number of services such as payment processing and client relationship management (although PartyGaming does not have any sports betting B2B deals). As markets regulate. While the latter offers a full suite of products and services to companies who will compete directly with 888. though we view this offering as different to that of 888 and other online operators. acquiring Cashcade and WPT. 888. PartyGaming is not the only company looking at M&A opportunities. and we view bwin’s acquisition of Gioco Digitale as strategically the best acquisition to date. a number of traditional land-based gaming operators as well as non-gaming companies (eg./ mid-sized deals. Not only is this a higher margin business (50-60% Clean EBITDA margin).Barclays Capital | European Leisure: Online Gambling B2B We forecast B2B offerings to be a key driver for companies going forward. as seen in Greece and Spain. PartyGaming and bwin all offer a B2B product in poker. where it operates under different brands.

4 12.7 3.5 20.9 16.6 9.6 17.5 -1.4 7.7 2.235 2.6 10.1 4.3 9.9 5.6 10.2 -1.6 15.0 18.9 3.9 26.7 15.0 21.7 16.1 -1.3 10.5 7.1 24.9 19.5 7.4 6.4 2.6 13.7 5.6 9.5 6.3 11.7 2.5 1.3 19.8 9.1 24.4 0.116 351 2.7 16.8 26.2 29.3 15.5 19.4 -32 1182 -12 52 406 26 36 23 9 24 10 28 21 11 21 18.0 7.8 4.3 14.4 5.1 -1.6 19.3 6.4 17.5 2.6 9.4 24.4 27.7 Ladbrokes William Hill Landbased Gamblers Total Gamblers Sector Total 1.0 6.8 7.1 9.1 2.0 15.6 N/A N/A 2.1 6.9 18.3 6.7 12.0 12.5 17.5 24.3 11.5 9.2 12.8 13.3 15.3 7.9 9.7 1.Barclays Capital | European Leisure: Online Gambling Leisure & Travel – Valuation summary (Calendarised) Market cap Net debt / £m EBITDA Annualised 2009 P/E (x) EV/ EBITDA (x) FCF yield (%) Div yield (%) EPS growth (%) EBITDA margin (%) PAT margin (%) 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 888 bwin PartyGaming Sportingbet Online Gamblers 329 990 1.8 Priced as of close 07/10/09.0 15.9 13.6 17.6 2.9 5.3 -0.9 27.2 13.7 11.3 26.4 7.9 30.8 7.3 7.8 10.3 8.6 5.8 N/A 4.9 12.1 29.9 6.7 16.5 9.8 2.9 15.4 18.6 6.3 8.7 6.5 29.7 8.1 13.3 7.3 4.4 10.0 21.9 6.0 3.4 16.7 8.0 26.4 9.0 6.362 5.0 1.2 9.1 27.5 6.6 7.3 4.0 6.038 38.8 11.8 15.6 16.4 13.4 13.2 8.1 6.2 4.1 8.4 23.3 4.7 12.5 8.6 10.0 3. Source: Company data.1 0.5 16.8 12.127 1.2 14.7 9.4 6.5 11.4 10.0 6.0 27.9 15.6 31.6 26.6 28.0 4.3 12.2 18.5 8.2 8.1 2.5 16.2 23.4 18. Barclays Capital 9 October 2009 40 .137 2.7 6.7 6.9 9.4 1.3 7.7 7.3 28.3 10.8 11.8 4.8 9.0 11.9 24.676 -2.4 -24 -43 -34 200 18 -30 -4 -16 5 1 0 6 3 13 17 27.8 N/A 3.3 13.

888’s B2C performance has been weak in recent trading. this caused the company to lose over one-third of its market cap within a month of the UIGEA was passed. In Q4 08. the most notable of which was with Harrah’s Interactive Entertainment. We forecast 888’s nascent B2B business to grow 35% in 2009 and a further 27% in 2010 We forecast 888’s nascent B2B business to grow 35% in 2009 and a further 27% in 2010. allowing the company to offer a full product suite to players. Q4 08 revenue declines from economic downturn and FX movements Figure 63: Total Operating Income (US$ mn) 80 70 60 50 40 30 20 10 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 47 51 55 65 66 69 68 59 57 61 Total Operating Income ($m) Source: Company data 9 October 2009 41 . and are already valued in the share price. with the discontinued operations representing 55% of revenues and 75% of profit that year. revenues started to decline as the economic downturn took effect and with FX movements going against the company. when it launched its first casino website. with a multitude of deals already signed this year. implying 5% potential upside from the current share price.8x with a DCF-derived price target of 100p per share. in the B2C business further declines in poker revenue will likely hinder growth going forward. Revenues Total operating income showed slight decline Q3 2008 which we attribute to seasonality.Barclays Capital | European Leisure: Online Gambling 888 – BEST IN CLASS B2C BUSINESS. and while we appreciate that the B2B business is arguably best in class and growing strongly. We value the company on a 2010E P/E of 13. believing there are better value options in the online gambling industry. BUT BETTER VALUE ELSEWHERE We initiate with a 2-Equal Weight recommendation. History 888 was founded in 1997 as Virtual Holdings Limited. which has given the company potential exposure to the US market should the market reopen. This is the main growth driver for the company. along with a second casino brand. we believe recent deals will take time to mature and generate meaningful revenue. In 2002 the company added a poker offering. The company stopped accepting stakes from the US in 2006. In 2008 the company further enhanced its product with the addition of 888ladies bingo and 888sport. However.

Barclays Capital | European Leisure: Online Gambling However. Italy and Spain. Figure 64: Total Operating Income (US$ mn) with FX adjustments 80 70 60 50 40 30 20 10 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 47 51 55 65 66 69 68 1 9 12 9 59 57 61 Total Operating Income ($m) Source: 888 estimates Est. US) Europe (ex. the company has shown relative resilience to the economic downturn.888 generates the majority of revenue from Europe (ex. France. however. which we believe account for c25% of revenue together. 9 October 2009 42 . the largest territories within this are Germany. UK). UK). We expect Greece to only generate 1-2% of revenues. UK) now accounts for 45% of revenues. revenue loss due to FX rates change at Jan 08 FX rates. with the balance from other European countries. is still the largest individual market for the company. Although the company does not break down the geographical split further than this. but this is translating to a lower amount in US$. Figure 65: Geography NGR 140 120 100 80 60 40 20 0 H1 06 H2 06 UK Source: Company data 8 9 7 5 9 27 37 7 9 30 34 41 50 54 8 48 40 10 59 11 9 12 11 11 58 53 48 43 H1 07 Europe (ex UK) H2 07 H1 08 H2 08 RoW H1 09 Americas (ex. a territory it has pushed since the closure of the US market . a territory that it has pushed since the closure of the US market. What has generally been found is that players are depositing the same amount of money in local currency. when taking into account FX movements. Geographic split 888 generates the majority of revenue from Europe (ex. The UK.

US) Source: Company data This geographical mix leaves the company relatively well positioned to take advantage of further liberalisation of Italy. we do not see material growth in the more mature UK market. US) 9 October 2009 43 . although the split in poker has shifted considerably over the past three years. The company is also looking to expand its RoW coverage by attaining a licence in Asia.Barclays Capital | European Leisure: Online Gambling Figure 66: Geography NGR 6% 12% 9% 11% 7% 8% 8% 9% 6% 8% 7% 9% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9% 9% 35% 38% 42% 41% 45% 46% 45% 47% 43% 43% 43% 41% 38% 36% H1 06 H2 06 UK H1 07 Europe (ex UK) H2 07 H1 08 H2 08 RoW H1 09 Americas (ex. given the high propensity to gamble in this area of the world. however. France and Spain. The geographical split of poker and casino are relatively similar now. where authorities are also looking at the benefits of a taxable regulated framework. This would be a material market to the company. France and Spain This geographical mix leaves the company relatively well positioned to take advantage of further liberalisation of Italy. US) Europe (ex UK) Americas (ex. Figure 67: Poker by geography 45 40 35 30 25 20 15 10 5 0 H1 06 UK Source: Company data Figure 68: Poker by geography 2 3 17 2 3 3 3 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6% 12% 21% 6% 12% 26% 7% 5% 39% 5% 8% 5% 7% 8% 8% 3 2 4 7 2 4 9 2 16 43% 21 19 50% 51% 62% 21 19 20 56% 18 49% 16 45% 12 H2 08 RoW 38% 32% H2 06 H1 07 H2 07 H1 08 H1 06 UK Source: Company data H2 06 H1 07 H2 07 H1 08 H2 08 RoW Europe (ex UK) Americas (ex.

US) Europe (ex UK) Americas (ex. Backgammon Source: 888 Annual Report 2008 B2B Software Payment Solutions Customer Support Marketing CRM Services 9 October 2009 44 . and France and Spain start to liberalise. the company was transformed into separate B2C and B2B businesses In 2008 the company was transformed into separate B2C and B2B businesses. B2B and B2C – strategic split of business In 2008. as it has experienced less liberalisation within Continental Europe. and competition has intensified with new entrants. rather than rake which is a better representation of the frequency of play. Figure 71: Organisational Structure B2C Casino Poker Bingo Sport Live Dealer. as forecast by H2GC. the B2C business offers gaming directly to the consumer. this is a more accurate representation. We note that going forward. US) Source: Company data Casino by geography has remained more stable than poker over the same period. as net deposits depend on the skill level of the player. along with various services. Figure 69: Casino by geography 80 70 60 50 40 30 20 10 0 H1 06 UK H2 06 H1 07 H2 07 H1 08 H2 08 RoW 3 5 20 15 5 5 24 21 15 19 20 20 20 5 6 31 37 36 60% 40% 20% 0% H1 06 UK Source: Company data Figure 70: Casino by geography 120% 5 6 8 7 8 80% 5 100% 7% 12% 11% 11% 46% 9% 11% 44% 9% 11% 7% 11% 7% 12% 47% 48% 53% 52% 35% 33% H2 06 35% 31% H2 07 29% H1 08 29% H2 08 RoW H1 07 Europe (ex UK) Americas (ex.Barclays Capital | European Leisure: Online Gambling As the poker market in the UK has matured. whilst the B2B business supplies the software for these games. the way this data is calculated will change from a net deposit basis to a rake basis. to other operators on a revenue share basis. revenue from this area has almost halved. and we expect to see this trend intensify as Italy offers cash poker. This is also a function of European markets opening.

poker revenue started to decline in 2008. as opposed to structural issues such as poker. splitting out the Casino. This decline has continued.Barclays Capital | European Leisure: Online Gambling B2C product split We look at the B2C and the B2B businesses in turn. at least in a B2C capacity. suffering from the unlevel playing field caused by sites still accepting US players. and we see a stabilisation of poker at current levels as the best case scenario for the business. suffering from the unlevel playing field caused by sites still accepting US players On a B2C basis. Poker and Emerging Offering products of the B2C business below. 9 October 2009 45 . This assumes no change in the players’ behaviour. Figure 72: B2C Total Operating income (US$ mn) 70 60 50 40 30 20 10 0 Q1 07 Q2 07 Q3 07 Q4 07 Casino Source: Company data 1 22 21 20 19 22 4 20 4 17 5 15 5 14 7 13 26 28 30 36 36 36 35 30 27 29 Q1 08 Poker Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Emerging Offering In the B2C business. however we believe that this is due to the FX movements and the economic downturn. Casino is the core product for the company and this has also fallen since Q3 08. had the FX rates been different. the company has been relatively resilient. Figure 73: B2C Total Operating income 2007–H1 09 (US$ mn) with FX adjustments 140 120 100 80 60 40 20 0 H1 07 Actual revenue Source: Company data 7 14 95 107 118 106 94 H2 07 H1 08 H2 08 H1 09 Estimated revenue loss due to FX rates change at Jan 08 FX rates. Taking into account the FX movements. Taking into account the FX movements. poker revenue started to decline in 2008. compared to at January 2008 FX rates. the company has been relatively resilient The chart above shows the company’s estimated revenue loss due to FX rates changes.

Despite the small size of the offering. Dragonfish B2B business The B2B business has been the success story of 2008/09 for the company. Much of this decline has been absorbed by growth in the emerging offering. this is included in casino revenue. where players are able to play for longer at lower stakes. total spend per player (in constant currency) remains approximately the same. which includes sports betting. which has proven particularly popular in Asia where players are more sceptical of computer-generated odds. 9 October 2009 46 . where it now represents only a quarter of total operating income. bingo.Barclays Capital | European Leisure: Online Gambling The economic downturn has led to a shift towards ‘recessionary’ games. Sports betting risk management and odds compilation is outsourced by 888 to Blue Square. along with live casino. Asian live casino (where players see the roulette wheel / cards being played by a live dealer. 888 has launched a new page of ‘888 games’ which are non-download. Figure 74: Total Operating income (%) 100% 80% 60% 40% 55% 20% 0% Q1 07 Q2 07 Q3 07 Q4 07 Casino Source: Company data 2% 45% 42% 39% 38% 37% 6% 33% 8% 31% 10% 30% 11% 30% 14% 26% 58% 61% 62% 61% 61% 61% 61% 59% 60% Q1 08 Poker Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Emerging Offering Poker’s decline since 2007 can be clearly seen above. To cater for this shift. despite this. and more recently. along with the European live casino dealer revenue (Asian live casino dealer revenue is included in the emerging offering product). as opposed to a computer generated image). This has also been a growth driver for emerging products. where players are able to play for longer at lower stakes The economic downturn has led to a shift towards ‘recessionary’ games. and rebranded Dragonfish. versus 45% in Q1 07. The B2B business has now been completely split out from the B2C business. whose growth has arrested much of the decline in the B2C business The B2B business has been the success story of 2008/09 for the company. whose growth has arrested much of the decline in the B2C business. this is important as it provides the company with a full suite of products. low stake products.

in simplistic terms about 60% of revenues flow through to the contribution line. In the B2B business. 9 October 2009 47 . We note the speed of growth of the B2B business depends on the speed of further regulation of the industry. given the higher margin of the business. we give an example of B2C contribution below. To illustrate the benefits of B2B revenue. 100% flow to contribution For the B2C business. almost all the revenue feeds through to the contribution line. respectively.Barclays Capital | European Leisure: Online Gambling Figure 75: TOI B2B / B2C 160 140 120 100 80 60 40 20 0 H1 07 H2 07 H1 08 B2C Source: Company data Figure 76: TOI B2B / B2C 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2% 11% 13% 17% 20% 17 13 2 107 118 22 24 98% 89% 87% 83% 95 106 80% 94 H2 08 H1 09 H1 07 H2 07 H1 08 B2C B2B H2 08 H1 09 B2B Source: Company data The B2B business is growing both in actual terms and as a proportion of total revenue for the company. B2B. all revenue accretive. which are then used to cover fixed costs (in reality the number is slightly lower given the fixed costs are split into variable fixed and fixed fixed costs). including seven to date in 2009. In 2010 we forecast cUS$66mn of B2B operating income. at the ‘contribution level’ the effect is more pronounced. However. and US$196mn of B2C operating income. Figure 77: B2C revenue to contribution B2C Revenue Direct Costs Marketing Costs Contribution Source: Barclays Capital 100 8% 32% 60 About 60% of B2C business’ revenues flow through to the contribution line. and that there is generally a six to nine month delay from the signing of the deal for it to gain critical mass and become earnings enhancing. a split of 64%/36%. and that as markets start to regulate. more land-based companies will enter the online gaming business on a B2B basis. Contribution is revenue minus direct costs minus costs of marketing. B2B deals Dragonfish has signed over 20 B2B deals. Generally a six to nine month delay from the signing of B2B deal for it to gain critical mass and become earnings enhancing We believe B2B will be the major growth driver for the business going forward. under the above contribution assumption this generates cUS$118mn of contribution for the B2C business versus US$66mn for the B2B side of the business.

which could rise to 17-18% if it includes a range of services. has a B2B partnership with 888. both have more liquid poker products than 888. that it has chosen 888 is a major vote of confidence for company’s B2B business in particular. should this partnership prove successful. This gives the company an entry point into a market that it may not otherwise have. That an established land-based gambling operator.Barclays Capital | European Leisure: Online Gambling B2B deal with Harrah’s is vote of confidence for company 888 announced the signing of Harrah’s Interactive Entertainment on 11 September 2009. the Balkans (Loper Gate) and a number of territories in China and South and Central America (Probability). 9 October 2009 48 . The Racing Post is another of the company’s higher profile deals in the UK (although not particularly large in revenue terms) where 888 provides both a casino and poker product. We see this as an example of the evolution of the online gaming market going forward. There is also competition from bwin’s Ongame network for poker B2B deals. from marketing and customer relationship management to payment processing. Given the loss of players when migrating between software providers. PartyGaming has committed to use 888’s software for the next 30 months. providing an entry point into markets it may not otherwise have Recent deals have opened up new geographies for the company. with the size of the partner and the scope of the services supplied dictating the size of the revenue share (we note that some elements are occasionally priced on a costplus basis). company guidance suggests that 888 could earn up to 50% of the revenue from small deals. sports. ring-fencing their poker. bingo. however. intra-country liquidity is key. These are all supplied on a revenue share agreement. in the latest. 888 has arguably the best B2B product available. The current deal is initially for the UK market only. which we view as unlikely in the short term. and bwin’s Ongame network. however neither of these competitors offer a full range of products. with overall liquidity becoming less important. Harrah’s Interactive is headed by exPartyGaming CEO Mitch Garber. which has recently been acquired by PartyGaming. with Europe regulation moving towards that of countries such as Italy. not only offering all products (casino. including South Africa (Phumelela). whose Interactive arm is headed by someone with integral knowledge of the online industry. B2B deal for the company. with Playtech operating the iPoker Network. although this should be diluted over time as more deals are signed. We estimate that Cashcade represents a very material part of 888’s B2B revenue. this could leave 888 well positioned should the US open up. there are 72 websites on iPoker and 27 on Ongame. and therefore there is no guarantee the company would be used by Harrah’s in the US were it to regulate. However. however. B2B competitors Main B2B competitors are PartyGaming and Playtech for both casino and poker. In general. but also a full range of services. games). poker. we believe PRTY may move some of the services in-house to increase cost efficiencies. both have more liquidity than 888. and bwin’s Ongame network for poker 888’s main B2B competitors are PartyGaming and Playtech which both supply casino and poker products. Recent deals have opened up new geographies for the company. whereby established land-based companies will potentially leverage and monetise their brand by offering online gambling. Cashcade. compared to only seven on 888’s Pacific Poker network. Playtech’s iPoker network. 35% for medium-sized deals (including all the services) and up to 10-12% for supplying software for the high-end deals. and potentially largest. has chosen a B2B strategy to enter online gaming is further evidence of the demand for B2B products from market leading operators.

There is a stringent. despite a fall in revenues. where smaller operators offered high levels of rakeback to players.5% in H1 09. increased from 79% in H1 08 to 82. 888’s ‘clean’ poker network. Figure 79: Costs 100% 19% 80% 60% 40% 20% 0% H1 06 H2 06 H1 07 R&D H2 07 H1 08 H2 08 Admin expenses H1 09 37% 36% 43% 40% 41% 36% 37% 16% 9% 11% 10% 11% 9% 12% 32% 16% 14% 13% 13% 14% 12% 32% 34% 35% 36% 39% 43% Operating expenses Source: Company data Sales & Marketing 9 October 2009 49 . thus reducing the profitability of the network. This is a reason why the CryptoLogic poker network failed. and that must be adhered to by any site joining the Pacific Poker network. although as a percentage of total operating income. although increased in percentage terms.Barclays Capital | European Leisure: Online Gambling 888’s network also has strong regulations on loyalty schemes and rakeback. leaving the larger operators to either match this and destroy margins. could make it a more attractive proposition to new entrants. without a tail of smaller sites offering high levels of rakeback. or leave the network. This is to avoid smaller sites offering the same software to players but with high rakeback. Figure 78: Costs Operating expenses Source: Company data Sales & Marketing Non-marketing costs remained virtually constant at US$62mn (H1 08 US$63mn) due to a conscious decision to continue investment in the business. Costs Costs decreased in actual terms in H1 2009. tiered loyalty scheme that 888 use. due to inherent gearing of the business model 120 100 80 14 60 40 20 24 0 H1 06 H2 06 H1 07 R&D H2 07 H1 08 H2 08 Admin expenses H1 09 27 9 10 24 10 21 11 27 10 8 34 37 12 32 13 37 14 40 12 41 42 38 11 12 8 35 Costs decreased in actual terms in H1 2009.

Barclays Capital | European Leisure: Online Gambling Admin expenses remained constant in monetary terms. however this has since reversed. and therefore increased as a percentage of revenue. Figure 81: Marketing costs 50 45 40 35 30 25 20 15 10 5 0 3 2 1 6 12 8 H1 06 2 6 7 9 H2 06 14 16 7 11 4 7 10 20 12 H1 08 On-line Other H2 08 7 14 10 8 5 10 7 7 14 H1 07 Affiliates H2 07 Off-line H1 09 Source: Company data There has been a definite shift in the composition of marketing costs over the past two years. to drive player numbers. Figure 80: Marketing costs 45 40 35 30 25 20 15 10 5 0 42 27 24 30% 20% 10% 0% H1 06 H2 06 H1 07 H2 07 H1 08 H2 08 H1 09 34 37 50% 35 40% 38 Sales and Marketing costs ($m) Source: Company data Sales and Marketing (% of NGR) Marketing costs on the other hand are more variable. In H1 07 there was a shift towards an increase in affiliate spend. with marketing spent on brand strengthening increased as part of ‘other’ marketing costs. dependant on the current strategy. and although they will vary as a percentage of revenue. 9 October 2009 50 . we expect them to remain at around 30-32% of revenue going forward. as we forecast an increase in revenue. We expect this to fall again going forward.

we expect this to reverse as sales increase. However. as the supply of players to European operators dramatically decreased. as competition has intensified. normalising to c20%.5 times more efficient to market on Google than through affiliates. Google allowed online gambling on the search engine. both in actual terms and as a percentage of revenues. has caused clean EBITDA to decrease. 9 October 2009 51 . and this has changed the way that operators are marketing their business. Cost per acquisition (CPA) The CPA (the cost of acquiring a new customer) has increased over the past three years. This has particularly been the case since the closure of the US. The company estimates that it is 2. Figure 84: Clean EBITDA 25% 20% 15% Figure 83: Clean EBITDA 30 25 20 15 10 5 0 H1 08 EBITDA ($m) Source: Company data 28 21 10% 5% 0% 21% 17% H1 09 H1 08 EBITDA margin Source: Company data H1 09 This constant investment in the business.Barclays Capital | European Leisure: Online Gambling Figure 82: Marketing costs 120% 100% 80% 60% 40% 20% 0% H1 06 H2 06 H1 07 Affiliates Source: Company data 5% 22% 7% 25% 31% 6% 21% 32% 10% 20% 28% 7% 16% 32% 27% 14% 27% 22% 19% 19% 43% 31% 37% 41% 43% 45% 32% H2 08 40% H2 07 Off-line H1 08 On-line Other H1 09 Marketing costs shifted away from affiliates towards search engine optimisation to increase the efficiency of marketing spend At the start of 2009. despite lower revenues. 888 has shifted away from affiliates towards search engine optimisation to increase the efficiency of marketing spend. throughout the industry.

claimed in the 2009 Interim results presentation. leaving it stagnant. but the company are looking to expand its scope in the future. we expect upwards pressure on the CPA as advertising costs recover. However. where players can see exactly what they need to do to acquire bonuses. the structure is very formulaic. however.Barclays Capital | European Leisure: Online Gambling Since the recent economic downturn. This tops up the players account. To prevent this. and has only a couple of dollars left in his account. There is also a top of the range CRM system being developed. we would expect a potential fine to be in the region of US$50-60mn payable over three to four years. however seems relatively low-key affair for the company A US settlement has been high on the agenda at PartyGaming analyst presentations for the past 18 months or so. It is multi-tiered. the CPA for H1 09 was US$171 compared to over US$200 in H1 08. Jim Ryan. This system is still relatively new. however. This is a trend that is becoming prevalent across the industry. if there is an offer for settlement and the company rejects it then there is the risk of an indictment. could absolve operators from any liabilities pre-UIGEA without the need for a settlement. The casino loyalty programme also rewards activity and play on certain games. 888’s attempts to buy Cashcade is evidence that the company believes a DoJ settlement is not a prerequisite for industry consolidation. With the lifetime value of players decreasing. the cost of advertising has plummeted. Going forward. this could materially affect the company. if successful. the cost of advertising has plummeted Since the recent economic downturn. rewarding higher yielding players the most. we note that PartyGaming made considerably more profit from its US operations than 888. which will most likely be taken into account in any settlement. Using a similar structure to PartyGaming’s settlement. a US$10 bonus if he reloads US$10 himself now. however this should be partially mitigated by more efficient advertising. this is a welcome boost for the company. most notably search engine optimisation as Google opens its European search engines to online gaming websites. the new system might offer him. should the market reopen. with a very rigid structure. An example of this could be a player that loses US$50 on roulette. The company knows that he may not reload the account for a period of time. On top of this. at 888’s 2009 interim results presentation. 9 October 2009 52 . in real time. Loyalty programme The loyalty programme implemented by 888 is a very rigid. and increases activity for the company. that its Department of Justice settlement gave the company a competitive advantage in M&A. In poker. especially as it harbours aspirations to do business in the US. Sign-up bonuses are in operation. tiered system. which compares favourably to bwin’s H1 09 CPA of €141. where operators look to retain highyielding players at the expense of the ‘fish’. 888 in discussions with DoJ over a settlement. whereas it appears a more low-key affair for 888. CEO Gigi Levy noted a number of courses of action being taken by different parties which. DoJ PartyGaming’s CEO. but certain criteria must be met to receive these. once in talks with the DoJ. whereby the company looks to issue bonuses based on immediate behaviour. with a negligible amount of ad-hoc bonuses.

up over 80% year-onyear on an FX-adjusted basis. This was driven by the B2B business. the underperformance of poker. it is the underperformance of the casino business that we believe is cause for concern. Integration problems while migrating players to a new platform can cause operators to lose 30-40% of players. another US$40-50mn loan from major shareholders. Unlike PRTY. which has suffered from the unlevel playing field created by a number of sites still accepting US bets. however FX adjusted it was actually +2. This would allow 888 to leverage its current offering. Through investigating funding for the Cashcade acquisition. that it outbid 888 leaves us to believe that either the two companies had very different valuations of Cashcade. who wanted to acquire the company after the closure of the US market depressed 888’s share price. Constant investment in the company (marketing to revenue cost ratio) and flat overheads has led to a decrease in the clean EBITDA margin from 21% in H1 08 to 17% in H1 09. but this was eventually bought by PartyGaming 888 was poised to acquire Cashcade. and is actively looking at acquisitions. and provide further software to the large customer without the need for integration to take place. talks ended without agreement in April 2007. management confirmed that the most likely acquisition going forward would be a small B2B company with a large customer. This was driven by the B2B business. 888 was poised to acquire Cashcade. according to reports by Dow Jones Newswire (23/07/2009). 888 does not believe that a settlement with the DoJ is a prerequisite to M&A activity. Barclays Capital -21 41 -13 -8 82 2. This is a relatively solid performance given the adverse economic conditions however 8% declines in the B2C business are worrisome. If 888 were able to acquire a small business that was already integrated with a large customer. and could then provide its casino operation. Recent trading Recent trading has been affected adversely by FX movements Recent trading has been affected adversely by FX movements. Operational gearing is inherent in the online gaming business model. and this is cited as a key barrier to change for customers. as confirmed by a company press release at the time. the UK market leader in online bingo. up over 80% year-on-year on an FX-adjusted basis. However. 53 9 October 2009 . which on top of US$70mn on the balance sheet (US$70mn is net of customer liabilities) leaves the company with a war chest of cUS$150mn.6%. H1 09 net revenue was -13% year-on-year. but was outbid by PartyGaming in July this year. however FX adjusted it was actually +2. or that 888 has more limited access to funding.Barclays Capital | European Leisure: Online Gambling M&A activity 888 was involved in takeover discussions with Ladbrokes. the company believes that it is able to secure US$40mn from the banks. the UK market leader in online bingo. and we expect the clean EBITDA margin to improve as net revenue increases.6%. has contributed to B2C revenue declines. PartyGaming did not pay an expensive multiple for Cashcade. Like other operators. At the Q2 results presentation. which has resulted in headline figures that do not fully reflect the underlying performance of the business. 888 has not confirmed this press report. giving 888 access to this customer. this could be materially earnings accretive to the company. However.6 H1 09 net revenue was -13% year-on-year. Figure 85: Net revenue H1 09 versus H1 08 (%) Headline growth FX adjusted growth B2C B2B Total Source: Company data.

it has tended to trade at a one-year forward P/E multiple of between 10 and 15 times. and growth in Q4. and adjusted EPS of 9.1 cents. This compares to consensus estimates of US$242mn net revenue.3mn. with Q3 broadly flat on Q2.Barclays Capital | European Leisure: Online Gambling Outlook Company guidance indicates that typical seasonal patterns are to return Company guidance indicates that typical seasonal patterns are to return. US$44. clean EBITDA of US$44. Figure 87: PE relative to FTSE All-Share (2005-present) 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Nov-05 Nov-06 Nov-07 Aug-06 Aug-07 Aug-08 Nov-08 Feb-06 Feb-07 Feb-08 Feb-09 May-09 May-09 May-06 May-07 Source: FactSet 9 October 2009 May-08 Aug-09 54 Aug-09 Feb-06 Feb-07 Feb-08 Nov-05 Nov-06 Nov-07 Nov-08 Feb-09 . given the changes that have affected the company over its relatively short history. We forecast FY 2009 total operating income of US$242mn. This suggests a return to year-on-year growth in Q4. however. on a preFX-adjusted basis. Valuation Historical data Figure 86: 888 historical P/E (2005-present) 30 25 20 15 10 5 0 Aug-06 Aug-07 Aug-08 May-06 May-07 May-08 Source: FactSet Tended to trade at a one-year forward P/E multiple of between 10x and 15x It is difficult to ascertain a clean historical EPS for 888.5mn clean EBITDA and 10 cents adjusted EPS.

8 47.4 3. This Beta is above that of peers PartyGaming and bwin due to unknown risk of 888’s discussions with the DoJ and the potential settlement associated with this.2 3.0) (8.3 3.0) 47.2 46.0 (4.2 56. WACC of 11.3 3.5% and a beta of 1.48 5.0) 46.4 55.5 44.Barclays Capital | European Leisure: Online Gambling The company was trading at a 20-30% premium to the FTSE All-Share in 2006 before the US passed the UIGEA.0) 44.7) (8.4 3.1%.6 54.0 (3.4 46.66 0.1 Cost of equity (%) Source: Barclays Capital Our WACC assumptions are based on a risk free rate of 5%.0 (4.8 50.1 11.8 56.31 DCF valuation.0) 46.53 0.2) (8.0) 41. and assume a terminal growth rate of 2%.0) 45.8 41.1.1% we discount seven years free cash flow.81 0. terminal growth rate 2% Using the WACC of 11. It then surpassed this premium in mid-2007 before the global economic downturn took hold.4) (8.3) (8.59 0.5 1.0 (4.0 5. Figure 89: Free cash flow calculation FCF (US$ mn) 2009E 2010E 2011E 2012E 2013E 2014E 2015E Adjusted EBITDA Change in WC Tax paid Capex Free Cash Flow Source: Barclays Capital 44.1 0. 9 October 2009 55 .0 (4.1 47. with a market risk premium of 5.5 53.6 45.9) (8.1 Figure 90: Free cash flows (US$ mn) FCF Discount rate PV of Cash Flow 32 34 33 30 27 25 23 250 2009 2010 2011 2012 2013 2014 2015 Terminal Source: Barclays Capital 35.0 3. DCF valuation Given the highly cash generative nature of the business.1) (8.0 (3. we value the stock using a DCF model as shown below: Figure 88: Weighted average cost of capital WACC Risk Free Rate (%) Market risk premium (%) Beta 5.0 (3.5 3.0) 35.73 0.90 0.

boosting the overall performance of the B2B business.95 5 Using a GBP/USD exchange rate of 1. There is a risk that one of the recently signed deals will experience an unexpected level of success.Barclays Capital | European Leisure: Online Gambling Figure 91: Valuation Valuation Terminal Growth Rate (%) (US$ mn) Net Present value (1-7 yrs) PV terminal value Total NPV (EV) Net (debt) / cash Implied Equity Value Number of shares (mn) Value per share (US$) Value per share (£) Current share price (£) Upside Potential upside/(downside) (%) Source: Barclays Capital 2 203 250 453 98 552 346 1. Upside risk Improvement in the B2C business – success in regulating markets could give a boost to the B2C business. this will have a greater effect on the bottom line. implying a 5% potential upside from the current share price. As the B2B business has a higher margin than the B2C business. believing there are better value options in the online gambling industry We initiate with a 2-Equal Weight recommendation. Outperformance of an existing B2B partner – while the signing of B2B deals is positive for the company. especially with the cross-selling potential between casino and poker.8x This is comfortably within the historical average of 10-15 times one-year forward P/E. although there remains an element of risk associated with discussions with the US DoJ. 9 October 2009 56 . 888’s B2C performance has been weak in recent trading. believing there are better value options in the online gambling industry.00 0. on a 2010E P/E of 13. we believe that recent deals will take time to mature and generate meaningful revenue. Recommendation Initiate with a 2-Equal Weight recommendation. Risks to our price target Downside risk Regulatory risk – a settlement with the DoJ should be viewed positively by the market. however there is a risk that discussions do not end with the desired outcome for the company.60 (FactSet 05/10/2009).59 1. and while we appreciate that the B2B business is arguably best in class and growing strongly. until the partnership has started to mature it is difficult to foresee the revenue generating potential of these. we believe this is a fair valuation of the company. given the improving regulatory environment in which the business operates. Market share gains from US-facing sites – an acceleration in market share gains by US-facing sites would pose a further downside risk to projected poker growth for the company. 888’s two material revenue generators. this returns a valuation of 100p per share. and are already valued in the share price.

260 24. Barclays Capital 25.677 Adjusted EBITDA (pre share benefit charges & FX gains) Clean EBIT (pre share benefit charges) Clean PBT (pre share benefit charges) Clean PAT (pre-share benefit charges) EPS (¢) 55.602) (83.112) (1.272 18 (90.948 113.1 12.628 28.078) 55.495 262.583 73.564 13.857 119.535 20 (95.5 14.033) (17.272 34.521 (10.307) (27.857 53.132) 44.270 46.7 16.250 242.661 33.376 47.1 9.094 Operating expenses exc.635 48.300 189.8 Dividends paid DPS (¢) Source: Company data.644 37.242 37.960) 39.143 25.5 19.289) (17.755 54.512) (23.1 9.723 36.588 43.248 31.9 9 October 2009 57 .643 43.600) 44.888) 53.9 10. Depn / amortisation Research & Development costs Selling & Marketing costs Other Admin costs (pre share benefit & FX) Adjusted EBITDA (pre share benefit charges & FX gains) Margin (%) (77.3 13.352 73.362 49.116 34.208) (85.701) 42.305 51.832) 54.4 13.554 52.635 21 (85.379) (80.535 46.941) (24.186 5.274) (71.211 122.897 (11.7 9.232) (25.839 4.376 19 Share benefit charges FX gains (losses) EBITDA EBIT PBT PAT attributable to shareholders Clean numbers (8.1 8.675 35.361 203.813 117.362 45.445) (19. Share based payments) 10.293 Total Operating Income B2B Total Operating Income 38.600 262.750 195.314 40.628 7.628 32.208 19 (92.391) (2.370 51.096) (24.989) 50.2 16.661 34.208 42.2 6.074 31.168 4.962 21.1 9.6 12.588 39.634 50.335 (11.872 47.802 280.378 Basic Diluted Reported (exc.7 6.661 37.522 48.900) 32.145 273.389) (18.585 29.143 47.063 66.5 11.612) (80.420) 42.725 200.800 223.2 9.Barclays Capital | European Leisure: Online Gambling Figure 92: 888 P&L US$ ('000s) December year end Net Gaming Revenue 2008A 2009E 2010E 2011E 2012E Casino Poker Emerging Offerings Total Net Gaming Revenue B2C 136.374 35.262 24.4 8.576 44.185 (10.5 Basic Diluted Dividends 13.448 4.3 9.2 12.155) (22.356 76.233 45.0 11.223 32.614 32.

8 44.4 205.0 (2.4 22.8 123.8 67.0) (25.2 0.0) 53.0) 3.8 41.8 35.2 8.4 7.8 202.7) (22.4) 141.8 (4.4 2012E (US$ mn) Fixed Assets (Tangible and Intangible) Investments Working Capital (ex cash) Cash Net Assets Equity Shareholders’ funds Source: Company data.3 98.5) 3.2 11.6 Cash at start of year Cash at end of year Free Cash Flow Balance sheet 104.0 45.4) 56.4) 98.6 11.5 2008A 98.6 0.0 (8.4 111.6 7.3) 8.0 53.0 56.0 43.9) (8.0) (14.4 (1.4 65.5 2010E 141.4) 113.2 (61.0 60.4) 202.2 (52.1 35.4) 28.4 48.5 (3.9) 52.4 25.4 (8.4) 41.6 2011E 171.2 0.7 49.7 11.4 47.7) 49.2 0.4 9 October 2009 58 .4 (3.2 (64.1 8.0 (0.4 205.2 (55.0) (19.8 176.2 (3.4 45.8 2009E 113.2 149.6) (5.0 (8.4 111.Barclays Capital | European Leisure: Online Gambling Figure 93: 888 Cash flow and balance sheet Cash flow (US$ mn) 2008A 2009E 2010E 2011E 2012E PBT Share Benefit Charges Profit before tax and share benefit charges Depreciation Interest (received) Change in WC Tax paid Net operating cash flows 40.8 176.2 (58.2) 15.6 7. Barclays Capital 65.2 66.2 0.9 32.8 123.6 (1.0) (16.8 171.8 141.6 7.4 113.4 (4.0) (16.0) 3.0 10.7) 3.8 149.3 (3.0 57.2) 30.4 Maintenance Capex Aqn / Sale of business & other investments Dividends Paid Net increase (decrease) in cash (14.5 36.8) 30.8 65.4) 171.6 37.

but acquired Ongame. We forecast that the acquisition of Gioco Digitale will grow poker revenue by 100% in 2010. with a 25% poker market share. The company is also pushing its B2B side of the business after launching an upgraded poker platform. and renamed in 2006. based on our analysis. is the largest listed online gaming operator by net gaming revenues. the fastest growing online gaming market in the world The acquisition of Gioco Digitale has made the company the market leader in Italy. Acquisition of Gioco Digitale has made the company the market leader in Italy. bwin operated exclusively in Europe. where it generated 6% of NGR in Q4 2006. After exiting the US in Q4 2006.Barclays Capital | European Leisure: Online Gambling BWIN – STRONG POSITION IN REGULATING MARKETS – TOP PICK bwin is our top pick for the online industry due to its positioning in key European markets. When the US market closed in October 2006. bwin generated only €17. and we initiate with a 1-Overweight recommendation. History bwin.1x with a DCF-derived price target of €45 per share. founded in 1997 under the name betandwin. it is also well positioned in France and Spain ahead of the expected regulation of these territories. bwin receives the majority of its revenue from one core product. in this case. In Q3 2006. sports betting. the company also exited Turkey in Q1 2007 for regulatory reasons. something that has not yet been included in consensus numbers. due to the large European footprint that the company had already established. a US-facing site. Figure 94: NGR by product (€ mn) 120 100 80 60 40 20 0 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Poker Q1 08 Q2 08 Turkey Q3 08 USA Q4 08 Q1 09 Q2 09 18 5 3 13 12 35 5 5 3 14 13 40 3 3 15 18 4 13 19 52 52 50 4 14 19 4 15 20 5 15 18 5 15 20 56 6 17 23 6 15 28 6 15 20 54 37 3 13 19 43 31 41 44 Sports betting Source: Company data Casino Games 9 October 2009 59 . We value the company on a 2010E P/E of 19. bwin was able to adapt better than its peers. the fastest growing online gaming market in the world. Revenue bwin receives the majority of its revenue from sports betting As with all online gaming operators. implying a 37% potential upside from the current share price. at the end of 2005 due to growth in other operators’ US revenues.5mn of net gaming revenue (NGR) from the US. c20% of NGR.

due to unanticipated growth in Italian revenues Poker became the second largest product by NGR in Q1 2007. Figure 95: GGR product mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Poker Q1 08 Casino Q2 08 Games Q3 08 Q4 08 Q1 09 Q2 09 57% 56% 54% 50% 55% 58% 58% 58% 53% 51% 53% 47% 20% 21% 23% 27% 24% 21% 21% 20% 4% 19% 4% 19% 4% 19% 4% 19% 4% 17% 5% 16% 5% 16% 5% 17% 5% 18% 24% 5% 13% 30% 5% 15% 27% 7% 18% 28% Sports betting Source: Company data Sports betting has accounted for an average 54% of gross gaming revenues (GGR) over the past three years. Consolidation of poker business – at the start of the year. customers who predominantly play casino or sports betting on bwin are also happy to remain on the same site for poker. the company would have shown zero growth in poker year-on-year.Barclays Capital | European Leisure: Online Gambling Poker has shown year-on-year growth at a time when other operators have suffered. following the acquisition of Ongame in 2005. management suggested in the Q2 analyst presentation that this may be revised. Whereas poker players largely chase liquidity. as the gross win margin was affected by short-term sporting results. at a time when other operators have suffered. Casino growth has been limited due to the company’s strict corporate social responsibility guidelines that has prevented extensive marketing of the casino product. and 50% of the liquidity of the Ongame network. We believe that this is due to a number of reasons: Unanticipated growth in Italy – we calculate that Italy accounts for c25% of poker revenues. Cross-selling from other products – bwin’s poker offering is largely a product of crossselling. Without this. However. A particularly poor margin in Q2 09 meant that sports betting accounted for less than 50% of gross gaming revenue for the first time in the company’s history. which has raised the profile of the bwin offering. allowing further growth in this offering. which derived over 75% of net revenues from poker. almost all of which is incremental versus H1 2008. however. which appears to be more resilient. Poker has shown year-on-year growth in the past couple of years. the company migrated all its poker brands (EuroPoker. B2B deals – B2B now accounts for 20% of poker revenue for the company. Poker Room etc) into bwin poker. although it has also been the most volatile product due to the variable sports betting margin. as shown by the large migration to US-facing sites. bwin has the most diverse product mix 9 October 2009 60 . we expect this to normalise in Q3 09 and that sports betting will once again contribute over 50% of GGR. although this would still have been an improved performance on its peers. Despite a reliance on sports betting.

Sports betting margins have remained relatively constant over the past three years. with a period of particularly strong or poor sports results normalising in the following quarter. In Q3 2008. but a result of adverse sporting results that we expect to normalise in Q3. Although bwin does not split out live betting. which was only missed in Q2 07 (7. The largest competitors for the company in live streaming are bet365 and betfair. The sub-target betting margins in Q2 07. The company has acquired the Internet rights for all the main events in most territories. with up to 5. a respectable live betting margin.Barclays Capital | European Leisure: Online Gambling of the European-listed online operators. but considerably lower than that of Sportingbet. and the most recent sports margin decline has been reflected in the financial results of all major European sports betting operators.000 customers watching top events.9% was not due a structural decline in the business. with a period of particularly strong or poor sports results normalising in the following quarter 12% 10% 8% 6% 4% 2% 0% Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Sports betting margin Source: Company data Sports betting margins have remained relatively constant over the past three years. This was a structural shift in the business. at a margin of c6%.2%) and Q2 08 (7. 9 October 2009 61 . The recent Q2 09 margin of 5. company guidance suggests that it represents c50% of total sports betting. representing c10% each. who produce 50% of the live content themselves. Figure 96: Sports betting margin Structural shift in sports betting margin with an increase in live betting bwin’s target sports betting margin was 8-10% until Q2 2008. Live streaming of matches is a key selling point for bwin. and we expect the target margin to remain at the current 7-9% level. a lower margin product. the target margin was revised to 7-9% to reflect the increased volume of live betting. Football accounts for c70% of bwin’s sports betting revenues. followed by US sports and tennis.9%). Q2 08 and Q2 09 are due in part to the increased predictability of European soccer results at the end of the season.

Central Europe is bwin’s largest market. bwin’s large European footprint left the company in a dominant position following the closing of the US market. This is due to the increased activity in Italy and Spain. this has been the main driver behind the increase in gross revenue from Southern Europe. Argentina and Mexico. and continues to be. and is set to contribute over 10% of revenues in 2009. with 35% of revenues attributable to Southern Europe in Q2 09 versus 29% the previous year. bwin’s largest market. Argentina currently represents less than 2% of group revenues. However. compared to competitors who lost up to 75% of revenues and 95% of profits following the passing of the UIGEA. 9 October 2009 62 . it is unsurprising that marketing costs represent the highest expenditure for the business. bwin launched tournament poker in Italy in Q3 2008. Europe bwin’s large European footprint left the company in a dominant position following the closing of the US market. bwin already has an Argentinean licence in the Misiones province. there has been a noticeable shift in the proportion of gross revenues from Southern Europe since Q4 2008. Dow Jones Newswire (14/08/09) that the country is going to open online gaming to boost much needed tax revenues.Barclays Capital | European Leisure: Online Gambling Figure 97: Geographic distribution (% of GGR) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Central Europe Source: Company data 8% 9% 25% 8% 9% 28% 6% 8% 28% 6% 9% 26% 6% 9% 26% 5% 8% 28% 4% 8% 30% 4% 8% 29% 4% 8% 28% 4% 8% 36% 3% 7% 35% 3% 8% 35% 58% 55% 58% 59% 59% 59% 58% 59% 60% 52% 55% 54% Q4 07 Q1 08 Q2 08 Q3 08 ROW Q4 08 Q1 09 Q2 09 S. namely. with Germany the largest market for the company at c30%. as opposed to profitability. ROW revenue is principally from Canada. but the central government in Buenos Aires claims that it is not valid outside that area. Europe N. we believe this could increase to c5% going forward. and Spain likely to continue its movement towards licensing the online gaming market. Buenos Aires would be a material market for the company. we expect the contribution of revenue from Southern Europe to increase materially going forward. Therefore. as well as sports betting in Greece. With Italy set to introduce poker ring games in 2010. and there have been press reports. with Germany accounting for c30% of revenues Central Europe has always been. Costs bwin’s traditional approach to drive brand awareness has resulted in high marketing costs bwin’s traditional approach has been to drive brand awareness and revenue growth. but if access to the BA market does materialise.

Recently there has been a shift towards profitability. with the company investing approximately €40mn annually Sports sponsorship is a key part of bwin’s marketing strategy. Italy. excluding the German Soccer League payments and FX-losses. Real Madrid) is a key part of bwin’s marketing strategy. customer bonuses) Sports sponsorship (AC Milan. Being affiliated with major sports teams/events builds the credibility of a company. Portugal and Spain. Share based compensation) SGA (exc. Below is a chart of the distribution of marketing costs and gross revenue by market maturity. with Moto GP and basketball (which both have a Southern European bias) other key areas. with the second column showing rebased SGA costs. We have included Q4 08 twice. Share based compensation) Source: Company data Marketing (inc. and this has been reflected in the reduction in marketing spend Recently there has been a shift towards profitability. is also due to the maturity of the core markets that the company now operates in. Germany. and this has been reflected in the reduction in marketing spend between Q4 08 and Q1 09. 9 October 2009 63 . with a recent brand awareness study conducted by the company showing that bwin holds a top two position in sports betting and poker in Austria. cutting both marketing costs and other operating expenses by €20mn. Real Madrid and Bayern Munich are the company’s most notable football sponsorship deals. The planned decrease in marketing spend. The company aims to decrease costs by €40mn in 2009. with the company investing approximately €40mn annually. AC Milan. This strategy has clearly paid off. and in the online gaming space credibility and trust are key drivers of customer acquisitions.Barclays Capital | European Leisure: Online Gambling Figure 98: Development of costs (€ mn) 140 120 100 80 60 40 20 0 31 14 27 25 33 14 31 38 15 43 18 39 30 37 18 49 21 36 37 52 22 52 22 43 35 29 36 21 29 40 22 39 21 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q4 08 Q1 09 Q2 09 Personnel (ex. from €49mn in Q2 08 to €40mn in Q2 09. Greece.

Although Italy is yet to fully regulate. and France is expected to open up the online market next year. therefore we believe it should achieve a return on marketing closer to that of an established market. rather than a new market. Figure 101: Market maturity Marketing costs (% of total) GGR (% of total) Marketing costs (% of GGR) Established markets > 5 years Recent markets > 2 yrs < 5 yrs New markets < 2 years Source:: Barclays Capital. Company guidance 40 40 20 60 30 10 30 50 70 As markets have matured. 9 October 2009 64 . This is a factor of both increased revenues. analysing marketing spend as a proportion of gross revenue shows how this expenditure should naturally fall as markets mature. marketing spend as a percentage of gross revenue falls. and a decrease in marketing spends as brand awareness becomes more prevalent. bwin already has a strong brand in both these markets. However.Barclays Capital | European Leisure: Online Gambling Figure 99: Development by segment – marketing costs Figure 100: Development by segment – GGR New 10% New 20% Established 40% Recent 30% Established 60% Recent 40% Source:: Company data Source:: Company data A higher proportion of marketing is spent in established markets than emerging markets due to the relative size of these.

we expect this number to fall going forward.730 25.062 30% 20% 10% 0% % of NGR There was a definite downward shift in marketing costs between Q4 08 and Q1 09. Figure 103: GGR / bonuses & free bets 16. customer bonuses as a percentage of gross revenue increased in Q2 09 to 14.0% 8.0% 6. The second component of marketing spend is customer bonuses.0% 4.000 35. from 11. due to the fall in revenue. On an annual basis.000 15. making the increase in bonuses as a percentage of gross revenue higher than the increase in customer bonuses in actual terms.418 37. which are also set to fall as the focus shifts to existing customers as opposed to attracting new ones.0% 0. customer bonuses) to be c 25% of NGR going forward.0% 10.Barclays Capital | European Leisure: Online Gambling Figure 102: Marketing Costs 40.000 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Marketing costs exc.0% 12.5%.144 29.000 30.000 10. as a percentage of NGR marketing costs increased significantly. The unusually low sports betting margin decreased GGR in Q2 09.3% in Q2 08. we forecast marketing costs (exc. 9 October 2009 65 .138 24. although this increased by only 3% in Q2 09.443 50% 40% 25.0% 117 95 102 82 72 86 76 86 105 103 14.640 28. bonuses (€ '000s) Source: Company data 37.0% 2. given this is a one-off.0% 96 Bonuses & free bets (% of GGR) Despite this change in strategy.000 20. which are also set to fall as the focus shifts to existing customers as opposed to attracting new ones 140 118 120 100 80 60 40 20 0 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Gross Gaming Revenue (€m) Source: Company data The second component of marketing spend is customer bonuses.314 26.604 33.000 5. to aid the changeover of other poker platforms onto the bwin one.442 29.000 25.

Bonuses and free bets are used to both attract new players. however this increased to over €150 in Q2. the gross revenue per active customer has also fallen over this time. where the rate of unemployment is particularly high. and retain existing customers. cheaper leisure activities and greater leisure time due to unemployment There has been better-than-anticipated growth in new active customers recently.Barclays Capital | European Leisure: Online Gambling We expect bonuses to stabilise at c10% of gross gaming revenue going forward. This is responsible for c60% of bonuses. this is similar to that of Sportingbet and compares favourably to PartyGaming’s 25%. Figure 104: CPA 350 300 250 200 150 100 50 0 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 New active customers ('000s) Source: Company data 323 283 216 234 199 173 192 254 186 296 295 251 350 300 250 200 150 100 50 0 Cost per acquisition (€) bwin reduced the cost per acquisition of a new active customer from over €200 to under €125 in Q1 2009.com New players are attracted through sign-up bonuses. especially the higher-end players which have a greater lifetime value. usually in the form of matching a player’s first initial deposit. a distraction from the economic downturn. especially Portugal. There has been better-thananticipated growth in new active customers due recently to a distraction from the economic downturn. which tends to have lower bonuses than other products. This pattern has been particularly pronounced in Southern Europe. however. This is not high relative to other operators. up to a certain amount. as potential reasons for this. with points earned by playing more / higher stakes. this is similar to that of Sportingbet and compares favourably to PartyGaming’s 25% We expect bonuses to stabilise at c10% of gross gaming revenue going forward. There has been a distinct shift away from player acquisition towards player retention. cheaper leisure activities and greater leisure time due to unemployment have all been cited by gaming operators. On the other hand. Spain and Greece. most recently at 888’s Interim results presentation. 9 October 2009 66 . b’inside loyalty programme bwin distributes bonuses and free bets through its ‘b’inside’ loyalty programme. encouraging them to play more on bwin. due in part to the proportion of revenue generated from sports betting. spend per customer has also fallen. The other 40% is used for player retention. These bonuses / free bets are distributed via a points system.

000 800 600 400 200 0 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Unique active customers ('000s) Source: Company data 1. where the economic downturn has reduced revenue per active player.095 926 795 774 758 827 894 925 892 1. In terms of other costs. personnel costs have remained relatively stable despite a continued increase in headcount. especially on Google. and has changed the marketing mix to increase efficiency. the CPA must also fall for the company to maintain levels of profitability.057 160 140 120 100 80 60 40 20 0 GGR / active (€) As GGR/active falls. with further cost control expected. and has changed the marketing mix to increase efficiency. with search engine optimisation proving particularly successful for the company.168 1.400 1. leading us to believe that there is scope for margin improvement. bwin has only recently started to implement its own cost cutting. Margins Like many industries. although this has fallen recently as advertising costs have decreased due to the economic downturn. Total costs in Q2 09 were down over 10% year-on-year.Barclays Capital | European Leisure: Online Gambling Figure 105: GGR / active 1. 9 October 2009 67 . as both the frequency of play and the stake size has decreased. the economic downturn has forced the online gaming industry to implement cost cutting. increased competition has driven up the CPA. The company targets €1 of marketing spend to return €4 of gross gaming revenue. online marketing has become more prevalent. This has been a theme seen throughout the industry. At the same time. with a move towards search engine optimisation The company targets €1 of marketing spend to return €4 of gross gaming revenue.200 1.161 200 180 1. While many companies started cost-cutting programmes 18 months ago. bwin’s CPA has been consistently lower than that of its competitors over the past couple of years.

a 21% GGR margin. company guidance In Q2 2008. but increased EBITDA of €110mn. as demonstrated below. with a payout ratio of 30-50% of net profit. However this will also be dependant on the growth of the higher margin B2B business. We believe that a long-term EBITDA margin of 25-30% of gross gaming revenue is achievable for the company (3035% of net gaming revenue) We believe that a long-term EBITDA margin of 25-30% of gross gaming revenue is achievable for the company (30-35% of net gaming revenue). At the FY 2008 results. a GGR margin of 25%. This change in strategy towards increased profitability has coincided with the company’s decision to payout a dividend for the first time in 2010. analyst consensus numbers estimated €466mn of gross gaming revenues. This was revised at the Q2 2009 results to a narrower GGR range of €435-440mn. Figure 107: FY 2009E consensus estimates 500 450 400 350 300 250 200 150 100 50 0 466 438 438 30% 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 97 Q2 2008 Clean EBITDA (€m) 100 FY 2008 GGR (€m) 110 Q2 2009 Clean EBITDA Margin (% GGR) Source: Analyst consensus provided by bwin. 9 October 2009 68 .Barclays Capital | European Leisure: Online Gambling Figure 106: Adjusted EBITDA margin (as % of net gaming revenue) 35% 30% 25% 20% 20% 15% 10% 5% 0% 2007 2008 2009E 2010E 18% 29% 30% Source: Company data. which the company hopes will expand with the introduction of the new P5 poker platform. and €97mn of EBITDA. a GGR margin of 23%. Barclays Capital This is reflected in the change in consensus estimates. as well as potential synergies from the Gioco Digitale acquisition. bwin gave FY 2009E guidance numbers of €430-445mn GGR. and €100mn EBITDA.

representing c5% of group revenues. or the lower propensity to play online poker / casino in the summer months. bwin will supply the technology and Amaury will supply the marketing. Contingent on the French market regulating. bwin is well placed to capitalise on this. Size The B2B business now accounts for 20% of poker revenue. and demonstrate further seasonality below. the overall liquidity of operators becomes less relevant. the new platform is a modular system which allows each client to choose which aspects they want to include. We believe that as more markets open in this way. as it can offer the whole product suite of poker. 9 October 2009 69 . and will be a key growth driver of the business. and with countries looking to ring-fence their own poker liquidity. The company has not been approached by the DoJ and the company is not aware of any wrongdoing. given the higher margin of the business. Clear of US prosecution bwin is not in talks with the US DoJ regarding any settlement Unlike other European poker operators. Poker is the only product that is currently offered in the B2B business. A clear example of this is a JV between bwin and the Amaury Group. despite having no connection with gaming.Barclays Capital | European Leisure: Online Gambling B2B business The introduction of the new P5 poker platform has allowed the company to offer a tailored B2B poker product to new clients. be it due to the break in European football for operators with sports betting as the core product. we believe this will be a material revenue stream going forward. We have already shown how the company is affected by sports margin weakness in the second quarter of the year. Seasonality All online gaming companies suffer from seasonality. however there is a long-term view of expanding this to include sports betting Poker is the only product that is currently offered in the B2B business. in a regulated market there will be competition from existing land-based corporations with a strong brand presence. bwin is not in talks with the US DoJ regarding any settlement. will look to leverage their brand power and offer online poker in a revenue share. poker remains the most important B2B offering at present. large corporations with a significant brand presence in a certain country. a large media company in France. bwin believes that is not the case for Ongame. However. Whereas previously the main poker offerings were those of online operators themselves. representing c5% of group revenues The B2B business now accounts for 20% of poker revenue. With Italy and France opening their markets to poker (Italy has confirmed and France is subject to legislation passing through parliament). Although this gives 888 and PartyGaming a competitive advantage. B2B agreement. however there is a long-term view of expanding this to include sports betting. with a revenue share agreement already in place. whereas the old platform was a take-it-or-leave-it offering. and while PartyGaming’s settlement centred around some transaction discrepancies. casino and bingo etc to clients. The company only operated in the US through Ongame for six months. we are seeing a change in dynamics of the industry.

followed by Q1.000 50.000 20.000 15. Figure 110: Seasonality – quarterly NGR (€ mn) 400 350 300 250 200 150 100 50 0 FY06 FY07 Q1 Source: Company data 101 89 70 75 62 66 56 59 81 92 FY08 Q2 Q3 Q4 102 FY09 88 78 84 In terms of profitability.000 40.000 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 70 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Pro Forma NGR (€ '000s) Source: Company data Source: Company data Q2 09 Pro Forma Clean EBITDA (€ '000s) Q2 and Q3 are weaker periods for the company in terms of both revenue and profitability. where Q4 tends to be the largest revenue generator.000 60.000 70. the disparity in quarterly performance becomes even more pronounced.000 100.000 90.000 10.000 5.000 Figure 109: Seasonality – clean EBITDA 25.Barclays Capital | European Leisure: Online Gambling Figure 108: Seasonality – NGR 110. 9 October 2009 .000 80. This is further reflected below.

7mn FY 08) and €9. The acquisition is subject to approval by bwin’s Supervisory Board. With the introduction of PokerStars into the Italian market.5mn FY 08). there is a risk that the company would not be able to attain our growth forecasts. This shows the importance of the first and final quarter of the year in the company’s overall annual performance. Gioco Digitale The acquisition of Gioco Digitale.3mn bwin shares and a total cash consideration of €50mn on 7 October 2009. the company announced an agreement to buy Gioco Digitale. and we expect this to continue going forward. with only a handful of acquisitions having taken place in recent years. with a poker market share of over 25% in the fastest growing online gaming market worldwide. We believe this is a shrewd. the leading provider of online poker in Italy. cash-free basis. Were this not to be the case. given that these have not occurred thus far. and we have valued the company under the assumption that the acquisition will complete by year end. is subject to approval by bwin’s Supervisory Board In September 2009. as opposed to any major acquisitions. and the increased competition that this has brought. implying a 7. 9 October 2009 71 . However. strategic acquisition that will potentially be highly earnings accretive. on a debt-free. and in the third quarter in two of the past three years. Although Gioco is losing market share as an increasing number of operators have entered the Italian market. This acquisition makes bwin the largest operator in Italy.1mn in H1 09 (€13. bwin completed the acquisition of 100% of the company in return for 2. Gioco Digitale generated net revenue of €20. with a poker market share of over 25% in the fastest growing online gaming market worldwide This acquisition makes bwin the largest operator in Italy. there is yet to be any meaningful activity in the industry.2mn EBITDA (€1. we believe bwin will be able to arrest this decline due to its brand strength and potential marketing synergies.Barclays Capital | European Leisure: Online Gambling Figure 111: Development of clean EBITDA (€ mn) 80 70 60 50 40 30 20 10 0 -10 -20 -30 FY06 FY07 Q1 Source: Company data Figure 112: Development of clean PAT (€ mn) 40 30 20 10 0 -10 -20 -30 -40 -50 -60 FY08 Q2 Q3 Q4 YTD 09 FY06 FY07 Q1 Q2 FY08 Q3 Q4 YTD 09 Source: Company data The company has made a loss after tax in the second quarter in each of the past three years. a spate of smaller acquisitions have occurred recently. M&A activity Despite continuous talk of consolidation by operators. we estimate 2009E EBITDA of c€15mn.6x EV/EBITDA multiple. the leading provider of online poker in Italy.

There is also the possibility of bwin introducing Asian MMO products in Europe.522.844 33. as opposed to generating meaningful profit from UnitedGames itself.659 9.3 -10.8 24. bwin will leverage this to improve its games offering going forward. Figure 113: H1 09 versus H1 08 gross win and net revenue (€’000s) H1 09 H1 08 Growth (%) Sports betting turnover Gross win margin (%) Sports gross revenue Casino Poker Games Gross Gaming Revenues Net revenue Source: Company data. and be triggered only if bwin re-entered the market on a B2C basis.448. and the passing of the UIGEA in October 2006 had an adverse effect on the company. a massive multiplayer online (MMO) games publisher and developer. Sportingbet In March 2007 bwin announced that it was in preliminary discussions to acquire Sportingbet.3 119.7 0. Ongame At the end of 2005. Ongame had a strong presence in the US. in H1 09 gains from FX transactions were €8.6mn. We estimate that FX movements have had an immaterial affect on results. Barclays Capital 1. Any B2B entry would not activate this clause. Sportingbet announced that the discussions had been discontinued. set at €83mn including interest. 15% of this was deferred as a contingent payment. with the rest of the business largely in euros.37 times Ongame’s net revenues in 2005. The purchase price was over €500mn. This would be capped at the original €83mn level.927 207.com) and ran the Ongame poker network as a B2B service provider.456 57.5mn and losses were €8. poker is mostly conducted in US$ (Italian poker in euros). effectively netting themselves out. This was transformational for bwin’s poker offering. should the country re-open. and in turn UnitedGames promoting poker in its key markets. to be paid in Q1 2009.0 9 October 2009 72 .7 4.866 1. however in July of that year. the main benefit being the intellectual property of the management of UnitedGames. and turned the company into a B2B provider.4 2.352 212. In 2007 the sellers of Ongame waived this claim in return for 30% of net revenues from US customers for five years.2 -1.983 7.8 32.Barclays Capital | European Leisure: Online Gambling UnitedGames bwin acquired a majority shareholding in UnitedGames. which owned a number of poker websites (including PokerRoom.892 5.962 35. bwin announced the acquisition Ongame. a multiple of 5.764 179.273 8.0 106. depending on certain financial criteria in 2006.246 179. For example. Recent trading Recent trading at bwin has been less affected by FX movements Recent trading at bwin has been less affected by FX movements.816 43.994 12. This is a very small-scale acquisition.

After a period of pronounced growth and brand awareness campaigns.74. This weak sports margin was reflected by all operators and we believe that this is the effect of a period of favourable sporting results for the punters. We forecast FY 2009 gross revenue of €430mn. again. rather than any structural decline in the business. strategy has shifted towards profitability. This led to a 40% increase in clean EBITDA. A cost-cutting initiative reduced overall costs by 5% between H1 08 and H1 09. however. B2B operations The new P5 platform should give a boost to bwin’s B2B business The new P5 platform should give a boost to bwin’s B2B business. through a joint venture with the Amaury Group. We believe the company has a better combined position than any other online operator in the three most important European growth markets over the next few years. at a margin of 28% versus 20% in H1 2008. we believe the company is well placed to capitalise on continued regulation of the online industry going forward. Net revenue was flat year-on-year due to an increase in bonuses relating to the migration of the company’s poker platform. despite offering payment processing and client management services. we view this as a one-off rather than a structural shift in the business. This compares to consensus estimates of €442mn gross revenue. Combined with an improved B2B poker offering. through a stake in Bet Bull which has a land-based licence in the Madrid region.7% in the face of a poor margin in the sports book which drove sports gross win down 11% despite growth in sports turnover of over 5% Gross revenue grew 2. Regional regulation As well as being the market leader in Italy. we expect this to normalise going forward.7% in the face of a poor margin in the sports book which drove sports gross win down 11% despite growth in sports turnover of over 5%. and adjusted EPS of €1. and also in Spain. Outlook The acquisition of Gioco Digitale has made bwin the market leader in the largest growing market in the world. 9 October 2009 73 . and this has been reflected in recent results. clean EBITDA of €105mn.Barclays Capital | European Leisure: Online Gambling Gross revenue grew 2. with marketing costs (including bonuses) falling by 12%.78 adjusted EPS. €104mn clean EBITDA and €1. we believe 888’s full product suite gives it the edge in this market. bwin is also well positioned in France.

Figure 115: PE relative to FTSE Eurofirst 300 (2003-present) 800% 700% 600% 500% 400% 300% 200% 100% 0% -100% Apr-04 Apr-05 Apr-06 Apr-07 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Apr-08 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Dec-08 Source: FactSet bwin has generally been at a premium to the FTSE Eurofirst 300. although this premium has been negated in the past year as the index recovered and the effects of the economic slowdown have affected the company’s top-line growth. we look at the 2008-09 data for the best comps. therefore generating minimal earnings. given the change in strategy of the company. bwin has traded between a 10x and 20x one-year forward P/E multiple. We believe this to be the most relevant comparative period.Barclays Capital | European Leisure: Online Gambling Valuation Historical data Figure 114: bwin historical P/E (2003-present) 120 110 100 90 80 70 60 50 40 30 20 10 0 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Apr-09 Apr-09 Aug-09 Aug-09 74 Source: FactSet bwin has traded between a 10x and 20x one-year forward P/E multiple Since 2008. 9 October 2009 . as before this the company was run for growth. Again. as opposed to profit.

0 (25. we value the stock using a DCF model as shown below: Figure 116: Weighted average cost of capital WACC Risk Free Rate(%) Market risk premium (%) Beta 5 5.5% we discount seven years free cash flow.0) 105.0 (6.50 5.9) (26.90 0.9) (25.5 1.0) 150.7 185.0 (22. WACC of 11%.3 142.8 150.0 (26.1) (28.0 2.8 2.0) 137.8 2.1 126.2 134.67 0.0 (18.5% and a beta of 1.5 Cost of equity (%) Source: Barclays Capital Our WACC assumptions are based on a risk free rate of 5%.85 DCF valuation.6) (27.0 155.0 10.0 (14.1 150.9 2.1 0.4 2.9) (33.0 (23.7 137.2 74.0) 126.1 Figure 118: Free cash flows (€ mn) FCF Discount rate PV of Cash Flow 43 61 78 85 83 78 75 878 2009 2010 2011 2012 2013 2014 2015 Terminal Source: Barclays Capital 47. with a market risk premium of 5.0 105.55 0.6) (53.1 174.82 0.0) 142.0) 47.9 2.3 192.74 0. terminal growth rate 2% Using the WACC of 10.61 0.7 2.Barclays Capital | European Leisure: Online Gambling DCF valuation Given the highly cash generative nature of the business. 9 October 2009 75 .0) 74.8 199.4) (48. Figure 117: Free cash flow calculation FCF (€mn) 2009E 2010E 2011E 2012E 2013E 2014E 2015E Adjusted EBITDA Change in WC Tax paid Capex Free Cash Flow Source: Barclays Capital 104. and assume a terminal growth rate of 2%.

1x. This is towards the top end of the recent average of 10-20 times one-year forward P/E. which implies 37% potential upside from the current share price. Recommendation We initiate with a 1-Overweight recommendation. and the positioning of bwin within key markets. we believe this is a fair valuation of the company. on a 2010E P/E of 19. 9 October 2009 76 . in our view. were the regulatory environment to deteriorate. We forecast the acquisition of Gioco Digitale will grow poker revenue by 100% in 2010.380 106 1.1x This returns a valuation of €45 per share. an underperformance of this newly acquired business would make our forecasts difficult to achieve. something that has not been included in consensus numbers.Barclays Capital | European Leisure: Online Gambling Figure 119: Valuation Valuation Terminal Growth Rate (%) (€ mn) Net Present value (1-7 yrs) PV terminal value Total NPV (EV) Net (debt) / cash Implied Equity Value Number of shares (mn) Value per share (€) Current share price (€) Potential upside/(downside) (%) Source: Barclays Capital estimates 2 503 878 1. on a 2010E P/E of 19. which implies 37% potential upside from the current share price. believing that the company’s position in key regulating markets will drive growth We initiate with a 1-Overweight recommendation. Risks to price target The main risks to our price target. believing that the company’s position in key regulating markets will drive growth. However. however given the improving regulatory environment in which the business operates.487 33 45 33 37 Price target of €45 per share. Performance of Gioco Digitale – we forecast that the acquisition of Gioco Digitale will grow poker revenues 100% in 2010. projected growth rates would be difficult to achieve. are: Regulatory risk – bwin is well positioned in key markets that are on the verge of regulation.

463 3.801 95.308 28.400 90.822 125.976 125.103 3.74 0 2.53 3. Barclays Capital (0.470 94.912 508.58 3.53 3.549 17 (16.536) 497.604 29 109.011 (12.891 0 (51.939) (69.606 7.21 9 October 2009 77 .319.789 27.038 249.854 121.113 3.188 52.200 48.35 2.295 93.449 143.449 Adjusted PBT Reported PBT 4.728) (82.652) (75.953 84.004 155.414 49.365 69.976 106.332 Reported EPS Reported EPS (diluted) Adjusted EPS Adjusted EPS (diluted) Dividend payout (%) DPS (€) Source: Company data.5 261.39) (0.867 Commissions.017 56.229) (50.421 8.39) 0.252) 455.802 174.01 3.339 7.162) 59.29 2.370 7.29 2.121 155.854 147.722 81.994 94.914 52.868) 364. duties and fees Customer bonuses Net Gaming Revenues Net Gaming Revenue Growth (%) (11.853 3.023 421.13 0 1.300 98.565 (12.394 132.01 3.53 3.022 31 131.714 7.230 21.92 3.153 685.717 629.304) 541.14 0.993) 362.4 224.449 147.540 286.938 (12.45 1.659.912 550.095 95.5 248.350 577.390 430.927.485.235) 66.747 Adjusted EBITDA Reported EBITDA 65.836 425.912 594.45 1.436) (44.835 9 Other operating income Total Revenue Earnings 60.031.0 235.448 106.74 1.Barclays Capital | European Leisure: Online Gambling Figure 120: bwin P&L December year end (€ '000s) Revenues 2008A 2009E 2010E 2011E 2012E Sports betting turnover Gross win margin (%) Sports gross revenue Casino Poker Games Gross Gaming Revenues 2.53 40 1.01 40 0.746 54.854 125.854 32 153.682) 29 69.332 125.5 274.35 40 0.276 9 (61.01 3.385 59.012 216.264 420.996 108.162 71.698 83.085 134.565 25.802 Adjusted EBITDA margin (%) Adjusted EBIT Reported EBIT 18 20.027 104.004 174.912 26 (56.824 52.704 30.449 Adjusted Net Income Reported Net Income EPS (€) 5.

3 190.0 (18.1 39.8 376.2) 288.4 (14.2 4.1 328.1 (2.0 59.4 (4.0 136.2 2009E 155.4 25.3 53.2 (4.8 (22.0) 48.6 106.5 (66.0 82.0 40.6) 76.9 (28) (5.9 33.2) 106.5 45.Barclays Capital | European Leisure: Online Gambling Figure 121: bwin cash flow and balance sheet Cash flow YE Dec (€ m) 2008A 2009E 2010E 2011E 2012E PBT Share Benefit Charges Profit before tax and share benefit charges Depreciation Interest (received) Change in WC Tax paid Net operating cash flows (12.2) 17.1 48.4) (4.1 2011E 288.7) 2.0) 2.8) 87.8 328.3 288.4 59.5 (64.8 64.4) 122.4 147.4 2008A 106.9 60.0 2010E 212.4 155.6 56.5 24.3 74.8 (28.6 34.2) 376.0 125. Barclays Capital 130.3 254.9 Cash at start of year Cash at end of year Free Cash Flow Balance sheet 81.9 (28.8 2.5 54.8) 2.0) (19.3 47.1 147.5 411.2 95.4) 17.5 (70.2) 212.8 105.8 190.0 176.7 411.9) 138.7 66.9) 56.0) 2.9 125.5 (62.3 254.5 (28) (42.7 2012E Fixed Assets (Tangible and Intangible) Investments Working Capital (ex cash) Cash Net Assets 77.8 (6.1) 154.4 31.2) 155.3 98.1) 76.0) (25.7 Maintenance Capex Purchase / Sale of investment Dividends Paid Share purchase Net increase (decrease) in cash (48.1 9.0 157.3 9.6) 100.7 126.5 (68.0 106.0 Equity Shareholders’ funds Source: Company data.3 212.3) 0.5 (1.2 (4.0 9 October 2009 78 .7 (0.4 130.0) (20.0) (32.

three years of restructuring has seen revenues and profitability recover as the company has grown its European footprint. FY 2006 revenue from continuing operations was US$325mn. and US$200mn in H1 2009. The company is at the forefront of M&A activity. PartyGaming plc was founded in 1997 with the launch of Starluck Casino. in this case.com was the world’s largest poker site. and when the US market closed in October 2006. We believe the company’s entry into Italy and the potential poker growth in other markets expected to regulate will drive revenues.6bn.com in 2001. poker. This grew to US$473mn in 2008. with a market capitalisation of c£4. and the company lost over 70% of revenues and 95% of profits. and is aggressively pursuing growth in its B2B business which management expects to generate US$30-50mn by 2012. PartyPoker.Barclays Capital | European Leisure: Online Gambling PARTYGAMING – ITALIAN MARKET SHOULD RETURN GROWTH TO POKER We initiate with a 2-Equal Weight recommendation. However. negating market share losses to US-facing sites. and introduced PartyPoker. Revenue Recent growth in the casino business has diversified the revenue stream away from a dependence on poker As with all online gaming operators.5x with a DCF-derived price target of 290p per share. this will be further diversified with bingo revenue from the Cashcade acquisition. PRTY has relied on one core product to generate the majority of revenue. recent growth in the casino business has diversified the revenue stream away from a dependence on poker. Settlement with the DoJ removes a level of risk previously attributed to the company Settlement with the DoJ removes a level of risk previously attributed to the company. over 75% of NGR. but we do not view this as a pre-requisite for growth going forward. The company listed on the London Stock Exchange on 30 June 2005. the company lost over 70% of revenues and 95% of profits. After exiting the US in Q4 2006. The acquisition of Cashcade has also given the company a dominant position in the expanding bingo market. When the US market closed in October 2006. implying a 7% potential upside from the current share price. However. In H1 2006. We value the company on a 2010E P/E of 19. Figure 122: NGR by product (US$ mn) 140 120 100 80 10 60 40 20 0 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 1 25 1 27 1 30 46 10 65 67 77 59 71 74 76 74 81 73 65 55 54 49 10 2 14 5 1 3 0 16 29 2 1 35 4 1 36 5 1 42 5 1 42 4 1 47 5 2 46 4 1 40 5 1 41 3 1 48 Poker (ex skins) Source: Company data Casino Bingo Sports Betting 9 October 2009 79 . PRTY generated US$510mn of net gaming revenue (NGR) from the US. History PartyPoker.com was the world’s largest poker site.

although the underlying growth in the casino business should offset this. generating less than 5% of net revenue. we expect this to grow rapidly going forward following the acquisition of Cashcade. in particularly blackjack. Casino growth has been accelerated by cross-selling. we note that FX has had a significant affect on results since the company exited the US market in October 2006. The decline in poker will therefore also have an adverse effect on casino revenues. with weak margins affecting performance. a non-US sports betting business. Figure 123: NGR product mix 120% 100% 80% 60% 40% 20% 0% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 95% 96% 96% 83% 86% 87% 82% 75% 67% 66% 65% 60% 63% 5% 4% 4% 17% 14% A cqn o f Gamebo o kers 2% 13% 15% 4% 0% 21% 4% 1% 27% 2% 1% 31% 4% 1% 31% 4% 1% 35% 4% 1% 33% 3% 1% 37% 4% 2% 39% 4% 1% 40% 4% 1% 41% 3% 1% 48% 58% 55% 55% 54% 48% Poker (ex skins) Source: Company data Casino Bingo Sports Betting Poker has been PRTY’s core product. added to PartyGaming’s current offering this would have represented c15% of net revenue 9 October 2009 80 . However. sports betting is yet to generate any meaningful income for the business.7mn. Casino growth has been accelerated by cross-selling. in an attempt to break into online sports betting. 90% of which was bingo. based on our analysis. Sports betting growth has been poor for the company. due to cross-selling of the casino product to poker players. In 2008 Cashcade generated £45mn of net revenue.Barclays Capital | European Leisure: Online Gambling In August 2006 PRTY acquired Gamebookers. although its contribution has fallen in relative terms as other products have grown. Whilst Bingo still represents only c1-2% of revenues. 90% of which was bingo. the UK market leader in online bingo. Although this has given PRTY the full spectrum of products. which has had a cannibalisation effect on poker revenues. which has had a cannibalisation effect on poker revenues The relationship between poker and casino is complicated. In 2008 Cashcade generated £45mn of net revenue. and in actual terms since a Q1 2008 peak of US$80. added to PartyGaming’s actual bingo offering this would have represented c15% of net revenue.

0% 3.0% 5.0% 9.0% 6.3% in Q2 09 versus 1. and made the decision to outsource the live betting to a third-party supplier.0% 4. compared to Sportingbet’s live betting margin of almost 10%.5% is very poor compared to that of its peers PRTY’s average sports gross win margin of 5. The live betting margin increased to 2.8% to 4.0% 1. and the company selected a preferred party. Although the main book will be retained by PRTY.9%. any improvement in the live book should increase the overall sports betting gross win margin going forward.0% 8. the gross win margin fell from a high of 8.5% PRTY’s average sports gross win margin of 5.5% is very poor compared to that of its peers.Barclays Capital | European Leisure: Online Gambling Figure 124: Sports betting margin 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Gross win margin (%) Source: Company data Av 5. The contract went out to tender.0% Gross win margin (%) PartyGaming’s inability to successfully launch sports betting serves as evidence that it is not an industry which can easily be entered with success PartyGaming has acknowledged there is a problem with sports betting. 9 October 2009 81 . Live betting grew by over 50% last year. Although the amount wagered almost doubled between Q1 07 and Q108. most likely on the basis of a share in the upside should the margin go above a certain level (from the 2009 interim results presentation).0% 0.0% 2. and now accounts for just under 50% of total sports betting.9% in Q2 08. the deal is currently on hold as PartyGaming evaluates potential solutions through M&A. European football remains the most popular sport for betting customers. however.0% 7. Figure 125: Amount wagered on sports betting / gross in margin 160 140 120 100 80 60 40 20 0 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Amount wagered ($m) Source: Company data 10. who target a margin of c6%.

9 October 2009 82 .Barclays Capital | European Leisure: Online Gambling PartyGaming’s inability to successfully launch sports betting serves as evidence that it is not an industry which can easily be entered with success. high-quality odds compilation is a complex process. with almost all of PartyGaming’s revenue generated in EMEA coming from Europe. Europe now represents the largest global online gaming market. however. the time difference in the Americas has made this particularly prevalent. Figure 127: Geographic distribution (US$ mn) 150 125 100 75 50 25 0 2 11 14 2 11 15 2 12 17 4 20 32 5 24 46 6 23 49 7 25 Enactment of UIGEA 5 22 5 15 78 83 86 92 99 96 91 78 78 6 23 6 26 6 25 5 25 7 23 6 21 4 19 4 18 5 19 62 59 77 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 EMEA Source: Company data Americas (ex-US) AsiaPac Americas (ex-US) suffered the most after the enactment of UIGEA. as players moved to sites still accepting US players. Figure 126: Geographic distribution (% net revenue) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6% 41% 7% 41% 7% 39% 7% 35% 7% 32% 7% 30% 7% 26% 6% 19% 5% 21% 6% 20% 5% 22% 5% 20% 4% 19% 5% 19% 5% 18% 4% 19% 4% 18% 5% 19% 53% 52% 53% 58% 61% 63% 67% 75% 74% 74% 73% 75% 76% 76% 77% 77% 78% 76% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 EMEA Source: Company data Americas (ex-US) AsiaPac The importance of Europe has increased dramatically since the closure of the US. and PRTY’s experience illustrates the difficulty in profitably competing in this market. Although this skewed liquidity has attracted players from all regions to sites accepting US customers. attracted by the resultant higher liquidity. Many industry sceptics suggest low barriers of entry will squeeze margins.

there has been a concerted effort to decrease costs. as expected.7% 40.9% 86. France currently contributes only 3% of group revenue. France currently contributes only 3% of group revenue.8% 45.1% 83.5% 60. Costs Since PartyGaming pulled out of the US market. Outside of Europe.1% 40.3% 78.1% 41.4% 33. Italy is set to introduce poker ring games in 2010.5% 38. Canada is the largest market for PRTY. generating c17% of revenues.1% 2005 2006 2007 Distribution costs 2008 Admin costs H1 08 H1 09 Source: Company data Cashcade acquisition will push distribution costs up as the company spends more on marketing Distribution costs tend to be front loaded. and France is also likely to license online gaming next year. Germany is PartyGaming’s largest European market.6% 92. and therefore we expect this to be c42% for the full year. the company has confirmed that it will apply for a licence early. representing c20% of group revenues in 2008. with more advertising at the start of the year. Admin costs as a percentage of net revenue have fallen by one-third. Fixed costs represent the largest fall.0% 78. and we anticipate this to grow considerably should PRTY attain a licence. the Cashcade acquisition will push distribution costs up as the company spends more on marketing. however.2% 51.8% 40. The UK is the second largest European market for the company. where it generates approximately 10% of group revenues. and as more countries open up. The company issues the geographical split for key markets for the group. as expected.0% 41. Figure 128: Development of costs (% of net revenue) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 93.4% 41. and we anticipate this to grow considerably should PRTY attain a licence.3% 38. 9 October 2009 83 . notably other overheads and staff costs. PartyGaming launched its Italian poker network in Q2 2009.Barclays Capital | European Leisure: Online Gambling As Europe continues to regulate we expect the proportion of revenues generated from EMEA to increase.

0% 3.4% 15.3% 6.7% 9.8% 40. and we expect it to remain at this level going forward.9% 15. there is post-Cashcade revised guidance of 41-42%. Figure 130: Development of distribution costs (% of net revenue) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 41.7% 38.Barclays Capital | European Leisure: Online Gambling Figure 129: Development of admin costs (% of net revenue) 60% 50% 40% 30% 21. In H1 09 customer acquisition and retention costs fell.2% 7.8% 45.9% 5.7% 2007 Staff costs We expect admin costs as a percentage of revenue to continue to fall as revenue grows.4% 1.8% 4.0% 7.1% 3. Transaction fees are the only truly variable cost.9% 6.4% 2.1% 6.0% 20% 10% 0% 2006 Other overheads Source: Company data 51.0% 41.7% 4.1% 15. due to the natural operational gearing of the business model.0% 18. 9 October 2009 84 .5% 17.0% 19. although whether this is attributable to cheaper advertising costs or more efficient marketing is yet to be seen.8% 0.6% H1 08 Depreciation 6.4% 38.1% 6.0% 16.6% 2.1% 1.6% 6.8% 41.3% 6.7% 6.4% 7.2% 6.4% 6. due to the natural operational gearing of the business model We expect admin costs as a percentage of revenue to continue to fall as revenue grows.1% 1.7% 19.2% 14.6% 17.3% 2008 Transaction fees 4.5% 3.3% 40. which has remained at 6-7% of revenues.0% 0.9% 5.4% 16.1% 40.3% 14. Affiliates spend increased reflecting the continued pressure from US-facing sites.2% 0.4% 0.5% 16.4% 1.3% 2006 2007 2008 H1 08 Customer acquisition and retention Affiliates Web-hosting and tech services Other customer bonuses Customer bad debts Source: Company data H1 09 Distribution costs ex-bonuses have fallen as a proportion of net revenue since 2006.7% H1 09 Amortisation 14.5% 1.4% 3.2% 19.

and affiliate costs at c1516%. Customer bad debts have fallen due to an increase in spend on preventing fraud on the website (web-hosting and tech services). respectively.3% 16. over the same period.2 25% 20% 18.9% 15.4 0% Affiliate costs ($m) Source: Company data % of net revenue Affiliate costs were abnormally high in 2007 as the company targeted an increase in players to boost liquidity Affiliate costs were abnormally high in 2007 as the company targeted an increase in players to boost liquidity. bwin and Sportingbet. We forecast customer acquisition and retention costs to stabilise at around 16-17% of net revenue as the company continues to expand the player base.5 70.1 16. whose average level of customer bonuses have been c11% and 9% of gross revenue.0 10% 5% 0% 2005 2006 2007 2008 50 40 30 20 10 0 23.Barclays Capital | European Leisure: Online Gambling Figure 131: Customer acquisition and retention costs 90 80 70 60 50 40 30 20 10 0 2005 2006 2007 2008 Customer acquisition and retention costs ($m) % of net revenue Source: Company data Figure 132: Affiliate costs 25% 20% 90 80 70 60 16.9 10% 5% 19.2%15% 77. Barclays Capital Source: Barclays Capital Admin costs 31% An increase in amortisation costs following the acquisition of Cashcade leads us to forecast a slight decrease in EBIT margin for 2009E.3% 17. from 22% to 19%.5% 13. after the closure of the US market. Figure 134: Clean EBIT margin 2009E Figure 133: Clean EBIT margin 2008 Clean EBIT 22% Distribution costs 38% Depn & Amortisatn 9% Clean EBIT 19% Distribution costs 39% Depn & Amortisatn 11% Admin costs 31% Source: Company data. Bonus rates PartyGaming’s average rate of bonus as a percentage of gross revenue is considerably higher than that of 888. 9 October 2009 85 .0 56.7% 60.4 71. many of these players were signed-up through affiliates. this results in a clean EBITDA margin of 30%.8%15% 76.7% 14.

2 5% 0% 10% 30% 25% 20% Bonuses and fair value adjustments ($m) Source: Company data. most notably in poker.Barclays Capital | European Leisure: Online Gambling Figure 135: Bonuses and fair value adjustments 70 60 50 40 15% 30 20 10 0 H1 07 H2 07 H1 08 H2 08 H1 09 42. will increase the blended bonus rate to 25% going forward. 888 or SBT Bonuses and fair value adjustments (including the Party Points loyalty scheme) have risen over time in both actual terms. This has been caused by two factors: Increased competition – this has led to an increase in bonuses across the board for operators. which has bonus rates of 50% plus. the blended bonus rate has naturally increased.3 52. Shift in product mix – casino. However. Barclays Capital % of gross revenue Bonus rates are considerably higher for PRTY than those of BWIN. Sports bonuses were ineffective and therefore have been reduced. and as these have formed a larger proportion of the product mix. but poker remains the least bonus intensive. where increased bonuses have been used to compete with sites still accepting bets from US players.9 65. the acquisition of Cashcade. Barclays Capital Bonuses have increased across all product classes since 2007. and as a percentage of gross revenue.9 63. according to company guidance. Figure 136: Bonuses and fair value adjustments by product 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Poker Poker Poker Casino Casino Casino Sports Sports Sports Bingo Bingo Bingo 2007 2008 H1 09 2007 2008 H1 09 2007 2008 H1 09 2007 2008 H1 09 Bonuses and fair value adjustments (% gross revenue) Source: Company data.7 62. sports and bingo are more bonus intensive for the company. 9 October 2009 86 .

00 2. Figure 137: New player signups (‘000s) 300 250 200 150 150 108 100 50 0 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 New player signups ('000s) Source: Company data.Barclays Capital | European Leisure: Online Gambling PartyGaming post-UIGEA After PartyGaming’s exit from the US market. and US$380mn EBITDA. Figure 138: PRTY share price 2006-present 16. This compares to US$473mn of revenue in FY 2008. and this increase in players was important in stabilising PartyGaming’s market share.00 30-Dec-05 28-Feb-06 30-Apr-06 30-Jun-06 30-Aug-06 30-Oct-06 30-Dec-06 28-Feb-07 30-Apr-07 30-Jun-07 30-Aug-07 30-Oct-07 30-Dec-07 29-Feb-08 30-Apr-08 30-Jun-08 30-Aug-08 30-Oct-08 30-Dec-08 28-Feb-09 30-Apr-09 30-Jun-09 30-Aug-09 87 Source: FactSet 9 October 2009 . Barclays Capital 245 199 156 159 130 172 150 152 138 168 182 113 38 48 61 78 Liquidity is the key driver for poker.00 12.00 4. and has yet to mount a serious recovery with the company struggling to compete with poker operators still accepting bets from US customers.00 10. The share price fell 73% in the three weeks from 29 September 2006 to 20 October 2006.00 14. as well as increasing the company’s limited footprint in Europe. 77% of this revenue was generated from the US. and US$133mn of clean EBITDA.00 6. PartyGaming achieved US$662mn of revenue in H1 2006. the company went on a growth drive to increase liquidity on its site. resulting in an influx of new players in Q1 2007. which suffers from competition by US facing sites Liquidity is the key driver for poker.00 8.00 0.

5 3.5 434 430 484 460 600 480 410 454 395 416 500 400 300 200 100 0 516 Active player days (m) Source: Company data. 9 October 2009 88 .com to USfacing sites.1 5.Barclays Capital | European Leisure: Online Gambling DoJ Settlement The company has settled with the DoJ for US$105mn In April 2009 PartyGaming announced the conclusion of a Non-Prosecution Agreement with the US Attorney’s Office for the Southern District of New York. The result of this was that not only did PRTY lose all its US customers (which generated 77% of group revenues) but also some of its high yielding non-US customers as well. Figure 139: Poker active players 7 6 5 4 3 2 1 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 230 3. affecting revenues The lost liquidity from no longer accepting US customers had a knock-on effect to non-US players. the push for player signups in Q1 2007 resulted in an increase in the number of players (ex-US) on PartyPoker.3 4.1 6. who migrated to sites still accepting US players. Barclays Capital Unique active players (000s) Whilst the aggregate numbers of players increased. However. The payments will be made from existing facilities. and in return will not be prosecuted for accepting bets from US customers prior to the UIGEA on 13 October 2006.1 3.7 4.9 4.9 279 314 340 4. Poker High yielding players migrated from PartyPoker. The company agreed to pay a forfeiture of US$105mn over 42 months.6 4.6 6. payable as follows: 10 April 2009 30 September 2009 31 March 2010 30 September 2010 31 March 2011 30 September 2011 31 March 2012 30 September 2012 US$5mn US$10mn US$15mn US$15mn US$15mn US$15mn US$15mn US$15mn PartyGaming’s violations of US law referred to the processing by third parties of certain gaming-related activity.0 5. revenue fell as the yield per player decreased.1 6.com after the US market closed.6 6.

000 8.0 11.8 11. resulting in lower yields for the operator A number of sites have continued to accept US players. whereby sites not accepting US customers are at a competitive disadvantage due to the lower liquidity levels.000 UIGEA 16.2 13. PartyPoker’s average number of peak players in the week ended 1 October 2006 was 9 October 2009 89 . Barclays Capital The yield per active player day fell because: The high value players moved to sites with higher liquidity New signups tend to play lower stake tables. in more detail in the Poker section of the note.5 12.5 12.2 13.000 4.6 Enactment o f UIGEA 19.com.2 11.Barclays Capital | European Leisure: Online Gambling Figure 140: Poker yield per active player day 25 20 21. and the unlevel playing field caused by operators still accepting US players.1 15 10 5 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 19.7 Yield per active player day Source: Company data. The implementation of the Unlawful Internet Gambling Enforcement Act in October 2006 resulted in PokerStars overtaking PartyPoker to become the largest online poker site.1 12. Figure 141: Peak poker players. September 2006 – November 2006 20. which has led to the creation of an ‘unlevel playing field’ Listed European operators exiting the US market while a number of sites continued to accept US players has led to the creation of an ‘unlevel playing field’.000 12.0 13.9 14. Barclays Capital PartyPoker Full Tilt The chart above shows the 24 hour peak number of players on each site per day.2 11. We analyse the underlying problems of the European poker industry.000 0 01-Sep-06 08-Sep-06 15-Sep-06 22-Sep-06 29-Sep-06 06-Oct-06 13-Oct-06 20-Oct-06 27-Oct-06 03-Nov-06 10-Nov-06 17-Nov-06 24-Nov-06 Pokerstars Source: Pokerscout.

5% from 9.000 for casino). In the same period.950 players to 10. which should increase liquidity on its Italian network. US$1.000 new players signing up each day PartyGaming still has a strong presence in the US. PartyGaming restructured its loyalty programme in this fashion. This was achieved but the scheme became too complex which many customers found off-putting. While the loyalty programme has improved player retention. PokerStars’ and Full Tilt Poker’s average peak players increased 6. Spain and Denmark. PartyGaming still has a strong presence in the US. comprehensible structure which the company believes is now competitive with Poker Stars and Full Tilt.com. thereby making US liquidity irrelevant for these markets. with 66.800 players to 5. with brand name and marketing power the key drivers of revenue. which has benefitted the company in terms of reduced CPA. The gap has grown considerably since 2006. and we believe it could also be implemented by France next year.904 and 19.700 respectively. versus 34.000 players daily on its free play site. as opposed to liquidity already on the network. while the average lifetime value of a player remains above US$700 (US$500 for poker. PokerStars were averaging 12. according to data from pokerscout. the cost of signup is currently US$210 (US$280 in H1 2008). and 4. seeking to retain and increase the value of its VIPs by making the programme more attractive to highend players.Barclays Capital | European Leisure: Online Gambling 14.000 new players signing up each day. and 50% from 3. This has been successfully implemented by Italy. Europe The regulatory framework implemented in Italy. the recent economic downturn has led to a fall in advertising costs. This has since been rectified with a straightforward.136 for PokerStars and Full Tilt Poker. which we believe could be adopted by France. with 66. and 4. Operators effectively have a carte blanche. 9 October 2009 90 . With the potential introduction of ring games next year. Yield per player The shift from poker to casino has increased the yield per unique active player.244 players between May and August 2009. with casino yielding the highest return out of PRTY’s product offerings. we believe this could be a material revenue stream for the company. However. PartyGaming has taken advantage of this by signing a deal with INTRALOT.600.150 in the week ended 1 November 2006.000 players daily on its free play site. respectively. negates the unlevel playing field by ring-fencing poker liquidity within the country of origin. with PartyPoker averaging a 24 hour peak of 8.450 and this fell 57% to 6. By 1 December 2006.600 players at peak time. Italy could be a material revenue stream for the company next year Loyalty programme There has been an industry shift towards redistributing bonuses and free bets to better compensate high-end players (VIPs) as opposed to more casual players with a lower lifetime value. the cost of acquisition of new players has trended up due to increased competition.

has fallen as high-value players chase sites with higher liquidity. has also driven yield in the casino product. which has been the star performer in 2009. which is a lower yielding game. on the other hand.Barclays Capital | European Leisure: Online Gambling Figure 142: Yield per unique active player (US$) 350 319 300 250 200 150 100 50 0 2007 2008 2007 2008 2007 2008 2007 H12008 H12009 H12008 H12009 H12008 H12009 2008 H12008 H12009 91 289 220 173 322 273 245 290 95 92 69 47 75 96 74 61 Poker Casino Sports Bingo Yield per unique active player ($) Source: Company data. The introduction of new games. Poker yield. due in part to a decline in blackjack as a proportion of overall casino revenue. Barclays Capital Yield per unique active player has increased for casino. in particularly slots. we note that this is unadjusted for currency movements. which we believe would negate these yield declines. However. 9 October 2009 .

Barclays Capital Figure 145: Sports betting yield per unique active player ($) Figure 146: Bingo yield per unique active player ($) 100 90 80 70 60 50 40 30 20 10 0 90 68 68 94 67 55 50 90 80 70 60 50 40 30 20 10 0 Q1 07 Q2 07 59 80 69 56 47 30 75 63 61 35 47 43 32 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Bingo yield per unique active player ($) Source: Company data. Barclays Capital On an aggregated basis. Barclays Capital Casino yield per unique active player ($) Source: Company data. 9 October 2009 92 .Barclays Capital | European Leisure: Online Gambling Figure 143: Poker yield per unique active player ($) 200 180 160 140 120 100 80 60 40 20 0 170 154 178 153 157 153 159 121 136 118 Figure 144: Casino yield per unique active player ($) 300 250 200 150 100 50 0 125 177 198 218 183 195 224 190 198 278 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Poker yield per unique active player ($) Source: Company data. Barclays Capital Source: Company data. yield per unique active player has remained at a relatively stable level for the past two years.

at a 50-60% margin. targeting the UK market. DM is a producer of gamecards with a database of several million UK customers. PartyGaming expects the B2B business to generate US$3035mn of revenue by 2012. DM plc – PartyGaming will develop and launch a DM-branded casino and bingo site. Five – PartyGaming signed a deal with Five TV in June to launch a Five-branded bingo and casino eGaming service. promoted through DM’s own marketing channels. 9 October 2009 93 . an operator of bingo halls. with a number of deals already signed this year. to pursue Internet gaming opportunities in Spanish speaking countries. casinos and amusement arcades. Barclays Capital Yield per unique active player ($) B2B business The company expects the B2B business to generate profit in 2010. promoting online poker through its 600 betting outlets in the country. We expect CIRSA to add liquidity to PRTY’s Spanish poker network. and a further 15 estimated by the company (2009 interim results presentation) to be in the pipeline.Barclays Capital | European Leisure: Online Gambling Figure 147: Yield per active player (US$) 700 600 500 400 300 200 565 100 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 520 511 587 632 620 539 584 556 547 50 0 186 231 250 200 172 180 185 150 100 216 219 208 204 203 Unique active players ('000s) Source: Company data. at a 50-60% margin PartyGaming expects the B2B business to generate US$30-35mn of revenue by 2012. INTRALOT – the lottery provider became the first member of PartyGaming’s poker network in Italy. ensuring higher margins for PRTY than the B2C business. Co-operation will expand to other markets. Deals already signed include: CIRSA – the company agreed a three-year alliance in February 2009 with CIRSA. the marketing is undertaken by the White Label partner. In general. There is a distinct strategy to leverage PRTY’s software and drive this higher margin business going forward.

We expect this to eventually generate a material contribution to the business.2 7.0 6.0 4. as well as a decrease in the actual number of average players. Seasonality All online gaming companies suffer from seasonality. or the lower propensity to play online poker / casino in the summer months.8 Active player days (m) Source: Company data This is driven both by a decrease in frequency of play.3 6. such as Playtech’s iPoker Network are populated with a multitude of smaller sites.7 5.0 8. be it due to the break in European football for operators with sports betting as the core product.0 0.0 9.0 5.9 6. Figure 148: Seasonality – active player days (m) 10.3 7. Given the nascence of these contracts. given the majority of the current array of networks.0 3.3 6. given the higher margin that can be attained compared to B2C operations. B2B deals tend to take at least six to nine months to reach critical mass and generate meaningful returns for the company.Barclays Capital | European Leisure: Online Gambling The B2B business has now spread to PartyGaming’s online poker offering.0 2.5 6. we do not expect them to generate material earnings this year. growth in skins was driven by high levels of rake back. 20% of players on the PartyPoker network came from skins.1 5. At its peak. Joining the PartyPoker network should be an attractive proposition to operators of a meaningful size. PartyGaming stopped offering poker ‘skins’ a few of years ago. with the INTRALOT deal in Italy. 9 October 2009 94 . with the thinking that it was not beneficial for the business to be supplying the software and liquidity of the world’s largest poker site to competitors.6 7. However.0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 7. operators of a certain size are unwilling to share their liquidity with these fringe operators.0 7.0 1. at that time PartyPoker had a 40% market share. compared with the 8% market share that it now holds. We demonstrate this below by looking at the number of active player days for each quarter.

The company expects (from its 2009 interim results presentation) to generate £15mn EBITDA in FY 2009 and £19mn in FY 2010. In 2005. implying an acquisition multiple of 5. 9 October 2009 95 . for the consideration of PartyGaming shares valued at approximately US$66mn. The operations were purchased for a cash consideration of US$12. acquiring several online gaming websites. This deal should strengthen the PartyPoker brand in the US.8 Daily Average Players (000) Source: Company data M&A activity M&A activity includes Cashcade and WPT Enterprises The widely expected large scale consolidation of the industry is yet to materialise. for €102mn. assets and players.7 63. the operator of the World Poker Tour.9 68.5 63. In August 2009 PRTY announced that it had agreed to acquire the business and the majority of the assets of WPT Enterprises.4mn of wagers in 2005. Despite this.1 81. The acquisition was made on a cash free / debt free basis. In January 2007 PRTY purchased Empire Online Limited and Intercontinental Online Gaming Limited. generating gross win of €10. financed from existing cash resources. Poor gross win margins have forced the company to look into outsourcing live betting to a third party or further M&A activity. for an initial cash payment of £71.1mn at a GW margin of 5.9 67.8 79. with two announced in the five months since settlement with the DoJ.9 times 2008 EBITDA. the UK market leader in online bingo.9mn). with a minimum aggregate payment of US$3mn.5mn) and EBITDA of £12.2mn (2007: £4. and EBITDA of €4.5 78. Cashcade generated net revenue of £44.9mn with a further £24mn contingent on future performance.6%.1 72. In July 2005 PartyGaming acquired Gamebookers.6mn.9mn in 2008 (2007: £28. Gamebookers took €179. PRTY have been unable to meaningfully enter the sports betting market.3mn and an ongoing revenue share agreement of 5% of ongoing WPTE participation fees over the next three years. In July 2009 the group acquired Cashcade Limited. a non-US facing online sports betting business.Barclays Capital | European Leisure: Online Gambling Figure 149: Seasonality – daily average players (000s) 100 90 80 70 60 50 40 30 20 10 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 81.9 73. however PartyGaming has made a number of mid-sized acquisitions in recent years. leaving the company well placed should the market reopen.

7 201 230 61 72 -17 -33 0 -13 -32 -21 -10 -6 11 Despite adjusting for currency movements. adversely affecting gross revenue.Barclays Capital | European Leisure: Online Gambling Leading global position PartyGaming has the third largest online poker site and largest casino globally. Figure 150: H1 09 versus H1 08 gross win. PartyCasino is the largest online casino in the world. Pressure from US-facing sites. Barclays Capital 318 154 90 8. Increased bonus levels used to compete with these sites have resulted in a greater affect on net revenue (-21% versus -17% gross revenue growth).7 1. including FX-adjusted net revenue growth. in particular PokerStars and Full Tilt Poker. driven by a marked decline in poker revenue. behind PokerStars and Full Tilt Poker.5 255 255 65 65 264 103 89 7. especially higher-yielding players. Playtech’s iPoker Network is the only network to have a larger liquidity than PartyPoker. and the acquisition of Cashcade has propelled the company into a top three position in online bingo globally. affected by FX movements and the continued competition from US-facing sites. sports betting remains a major weakness for the company.com is the third largest online poker site in the world. FX accounted for 53% of the deterioration in H1 09. Below we show growth between H1 08 and H1 09.9 2. net revenue still fell by 10%. Recent trading Recent trading has been poor at the top line. 9 October 2009 96 . net revenue and clean EBITDA (US$ mn) H1 08 H1 09 Growth (%) Gross revenue Net revenue Poker Casino Sports Betting Bingo Net revenue FX-adjusted net revenue Clean EBITDA FX-adjusted Clean EBITDA Source: Company data. However. affected by FX movements and the continued competition from US-facing sites Recent trading has been poor at the top line. has had a double impact on net revenue: US-facing sites with high liquidity are drawing players away from European sites. but sports betting remains a major weakness for the company PartyPoker.

and we note that comps start to ease going into Q4. 9 October 2009 97 . Casino and bingo growth (with the acquisition of Cashcade) should also compensate to a certain extent. even on a B2B basis? Regional regulation Has launched in Italy with PartyPoker. This compares to consensus estimates of US$444mn net revenue. However. We forecast FY 2009 net revenue of US$444mn.Barclays Capital | European Leisure: Online Gambling In Q2 09. the Intralot partnership) would be more beneficial. US$133mn clean EBITDA and 20. with the acquisition of Cashcade and WPT. Margin improvements year-onyear should continue to feed through into H2. casino generated as much revenue as poker for the first time in recent history. The company has acknowledged that it was off the pace in Italy. will a company that is yet to settle with the DoJ be allowed exposure to the US should the market open. and we note that comps start to ease going into Q4 Margin improvements year-on-year should continue to feed through into H2. bwin compensated for the decline in its existing poker offering with the incremental poker revenue generated in Italy.it and through a partnership with Intralot (intralot.it and through a partnership with Intralot (intralot. Poker will remain under pressure while the unlevel playing field of US-facing sites continues. and we believe that PartyGaming should be able to do this now that it has an Italian licence. PartyGaming’s cost-cutting initiatives have resulted in 11% FX-adjusted clean EBITDA growth. clean EBITDA of US$132mn. given the immaturity of the product. we believe that acquisitions / joint ventures which will increase exposure to regulating markets (e. this is progressing well. versus -6% reported. The recent settlement with the DoJ removes some uncertainty from the stock.g. B2B operations The B2B operation is yet to generate material earnings. Outlook Since the DoJ settlement earlier this year. along with the growing B2B business. and has stated that it intends to be an early entrant to France and any other country where it becomes a requirement to license. although we note that comps start to get easier in Q3 and Q4.7 cents adjusted EPS. it has now launched in Italy with PartyPoker. Cost-cutting initiatives have resulted in 11% FX-adjusted clean EBITDA growth. Although Cashcade has turned the company into a market leader in bingo. This is a strong performance in adverse economic conditions. although 888’s deal with Harrah’s backs up our view that a settlement is not a pre-requisite for future growth. and adjusted EPS of 20 cents. Despite the late entry. and was taken by surprise by the extent of its growth.it) which has joined the group’s network. however we expect this to become a meaningful part of the business going forward. PartyGaming has been at the forefront of M&A activity. versus 6% reported At the profit line.it) which has joined the group’s network PartyGaming was very slow to react to the potential of licensing in Italy.

9 October 2009 98 .Barclays Capital | European Leisure: Online Gambling Valuation Historical data Figure 151: PartyGaming historical P/E (2005-present) 45 40 35 30 25 20 15 10 5 0 Apr-06 Apr-07 Apr-08 Apr-09 Apr-09 Oct-05 Jan-06 Oct-06 Jan-07 Oct-07 Jan-08 Oct-08 Jan-09 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-09 Source: FactSet Since the IPO in 2005. Figure 152: PE relative to FTSE All-Share (2005-present) 250% 200% 150% 100% 50% 0% -50% -100% Apr-06 Apr-07 Apr-08 Jul-05 Oct-05 Jul-06 Oct-06 Jul-07 Oct-07 Jul-08 Oct-08 Jan-06 Jan-07 Jan-08 Jan-09 Source: FactSet The company has also tended to trade at a premium to the FTSE All Share. PartyGaming has tended to trade between a 10x and 20x one-year forward P/E multiple.

0 10.7 221.61 0. and assume a terminal growth rate of 2%.5% and a Beta of 1.0) (10.0) 187.0 122.4 2.0 (7.2) (10.2) (10.0 (10.0) (9.0 2.9) (30. a market risk premium of 5. Figure 154: Free Cash flow calculation FCF (US$ mn) 2009E 2010E 2011E 2012E 2013E 2014E 2015E Adjusted EBITDA Change in WC Tax paid Settlement costs Maintenance Capex Investments Free Cash Flow Source: Barclays Capital 132.0) (25. 9 October 2009 99 .8 187.5 195.2 180.0) (14.4) 85.8 206.5 176.0 168.90 0.55 0.0 2.5 1.0 2. we value the stock using a DCF model as shown below: Figure 153: Weighted average cost of capital WACC Risk Free Rate (%) Market risk premium (%) Beta 5 5.5% and a terminal growth rate of 2% Using the WACC of 10.7 0.0 (8.Barclays Capital | European Leisure: Online Gambling DCF valuation Given the highly cash generative nature of the business.9) (30.1 2.0) 133.82 0.0) 85.0 (5.174 2009 2010 2011 2012 2013 2014 2015 Terminal Source: Barclays Capital (14.0) 122.0 (6.0 (11.0) (10.7 200.9 2.7 200.5) (30.4) 154.0) 176.0) 200.0) (119.0 (12.74 0.5 Cost of equity (%) Source: Barclays Capital Our WACC assumptions are based on a risk free rate of 5%.4 2.2 133.3) (10.67 0.0) (10.85 DCF valuation using a WACC of 10.5% we discount seven years free cash flow.7 Figure 155: Free cash flow (US$ mn) FCF Discount rate PV of Cash Flow (13) 70 91 90 107 103 100 1.50 5.4) (15.

Recommendation We initiate with a 2-Equal weight recommendation.721 193 1. Risks to price target Downside risk Regulatory risk – PartyGaming has a strong poker brand that should give the company a competitive advantage in markets that are on the verge of regulation. we believe that this is a fair valuation of the company.90 Value per share (£) Current share price (£) Potential Upside/(downside) (%) Source: Barclays Capital 2.5x.65 2. were the regulatory environment to deteriorate. Signing of a material new B2B deal – there is a risk that the company could sign a B2B deal with a partner that is capable of generating material revenues for the company. However. this would have a greater effect on the bottom line.5x Using a GBP/USD exchange rate of 1.60 (FactSet 05/10/2009) this returns a valuation of £2. and the entry into Italy in both a B2B and B2C capacity. given the company reports in dollars but generates revenues in other currencies. on a 2010E P/E of 19. This is at the top end of the historical average one-year forward P/E. negating market share losses to US-facing sites.174 1.71 7 This returns a valuation of £2. believing that the company’s entry into Italy and the potential poker growth in other markets expected to regulate markets will likely drive revenues. which implies 7% potential upside from the current share price. which implies 7% potential upside on a 2010E P/E of 19. Market share gains from US-facing sites – an acceleration in market share gains by USfacing sites would pose a downside risk to projected poker growth for the company. Upside risk Currency movements – appreciation of the US dollar would have a positive effect on the company’s reported results. the reduced regulatory risk from a DoJ settlement. As the B2B business has a higher margin than the B2C business. however given the improving regulatory environment in which the business operates. there would be downside risk as projected growth rates would be difficult to achieve. The acquisition of Cashcade has also given the company a dominant position in the expanding casino market. 9 October 2009 100 .90 per share.90 per share.914 412 4.Barclays Capital | European Leisure: Online Gambling Figure 156: Price target Valuation Terminal Growth Rate (%) US$ mn Net Present value (1-7 yrs) PV terminal value Total NPV (EV) Net (debt) / cash Implied Equity Value Number of shares (mn) Value per share (US$) 2 547 1.

Barclays Capital 19.7 31.Barclays Capital | European Leisure: Online Gambling Figure 157: PartyGaming P&L Year to December (US$ mn) Gross gaming revenues 2008A 2009E 2010E 2011E 2012E Net revenue Bonuses Gross gaming revenues Net revenue 472.4 62.9 202.3 25.7 443.4 94.8 123.0 176.3 73.3 25.1 527.2 104.4 29.7 14.2 127.3 240.2 90.5) 154.3 (5.4 116.4 30.1 (5.7 76.9 107.0) 168.1 21.1 5.3 136.8 116.5 Poker Casino Sports Betting Bingo Total net revenue Clean EBITDA 274.7 (202.6 15.4) 52.9 92.7 214.8 (103.9 122.7 130.5 25.3 28.5 104.3 28.5) (33.4 189.7 109.0 4.8 106.3 30 102.7 226.9 23.2 96.7 86.1) 825.6 9 October 2009 101 .8 (152.1 118.9 20.1 87.8 87.9 472.2 140.9 9.8) 601.9 16.2 24.4) 132.4) 596.6 527.4 104.9 (7.2 118.5 101.4 565.3 50.5) 730.4 77.1 (5.4 125.1 82.1 236.1 24.2 (1.0) 180.1 3.3 (229.8 209.5 90.6 28.7 37.2 Basic EPS (Cont ops) Clean EPS (Cont ops) Basic EPS Clean EPS Source: Company data.9) 66.0 30.1 96.6 18.0 29.2 69.2 16.2) 19.8 56.4 75.2 596.6 77.9 (128.5 85.3 17.6 3.7 31.1 112.8 (10.2 130.1) (3.7) 89.8 20.9 82.8 20.3 98.4) 84.2 2.8 3.0 (8.5 22.6 90.2 565.0) 133.3 (217.3 Poker Casino Sports Betting Bingo Unallocated corporate Total Clean EBITDA EBITDA margin (Cont) (%) Clean EBIT (cont) EBIT (cont) PBT (continuing operations) PAT (continuing operations) (Loss) profit after tax of discontinued operations Profit after tax attributable to shareholders Clean PBT (Continuing operations) Clean PAT (continuing operations) Clean PAT EPS (¢) 76.1 101.3 28.5 596.0 18.1 443.6 23.2) 782.1 (0.5 225.1 (21.1 66.

0 124.9 137.2 (3.2 (6.9 (3.0) 533.2) 110.0) (10.0 (119.4 (1.9 (88.8) 2.1 127. Barclays Capital 201.0) 1.3 (7.0) 3.5) 1.3 193.3 114.7 81.5) (15.4) 1.6 151.4) (30.6 119.8 (15.0 (121.0 133.1) 2.0) (9.3 192.2 (30.0 181.8 144.1 0 279.0) 1.0) 3.3 279.8) 2.3 (14.5 2012E Fixed Assets (Tangible and Intangible) Investments Working Capital (ex cash) Cash Provisions for settlement Net Assets Equity Shareholders’ funds Source: Company data.6 41.7 51.3 75.3 601.4 112.1 601.2 0 -115 193.1 46.6 (4.2 (29.0) 270.8 88.0 139.1 471.0) (10.1 75.5 318.0 104.3 133.1 (8.2 12.8 (11.9) 2.1 (1.0 (123.0) (10.1 126.0 2010E 192.0 156.0) (119.5) 257.0) 73.1) (2.5 46.7 88.9 257.8 (5.9) 1.2) (30.0) (25.0 (117.5 (4.0 (59.6 144.3 87.1 43.9) 1.1 104.9 119.9) 354.9 21.3 144.1 12.0 2008A 193.6 130.5 85.8 Settlement costs Maintenance Capex Other investments Financing activities Net increase (decrease) in cash (8.2 2011E 318.6 122.0) 396.7 12.6) 1.2 12.3 9 October 2009 102 .9 0.7 354.6 173.4) 2009E 104.2 46.0) 181.2 (30.6 163.0 92.0 169.9) 471.6 456.3 162.7 Cash at start of year Cash at end of year Free Cash Flow Balance sheet US$ mn 119.Barclays Capital | European Leisure: Online Gambling Figure 158: PartyGaming cash flow and balance sheet Cash flow US$ mn 2008A 2009E 2010E 2011E 2012E Net income Share Benefit Charges Profit before tax and share benefit charges Depreciation Interest (received) Change in WC Tax paid Non-cash items Net operating cash flows 66.

viewing the extent of the discount that it trades to its peers as unwarranted. coming from the regulating markets of Italy. the clean EBIT margin was 22%. History Sportingbet plc was founded in 1998 and is a market leader in online sports betting. However. while it also has no B2B offering. 9 October 2009 103 . with the company losing almost 60% of gross win and over 95% of profits when the UIGEA was passed. in Q3 2009. Poker was virtually destroyed as liquidity plummeted on the company’s Paradise Poker website. France and Spain. as Q4 is a less profitable period for the company. Sportingbet lacks a meaningful poker offering. poker was virtually destroyed as liquidity plummeted The majority of revenues were generated from the US in 2006. the company already generated 17% of 2009 revenues from Spain. we estimate an FY 2009 EBIT margin of c19%. Expansion into the less competitive Eastern European markets has the potential to generate significant revenues We foresee large-scale growth in the online gaming industry. our analysis shows. and has spent the past three years restructuring and rebuilding margins. 2008:17%) eases the regulatory risk associated with the stock.3x with a DCF-derived target price of 90p per share. When UIGEA was passed. 11% Canadian players and only 9% Europeans. and a reduction in dependence on Turkey (2009: 13% of revenues. The company listed on the Alternative Investment Market (AIM) of the London Stock Exchange in January 2001. which we consider a material growth driver should the market regulate as we expect. The company’s best-in-class sports betting systems give it the highest gross win margins in the online gambling industry. comprising of 80% US players. We initiate with a 1-Overweight recommendation on the stock. However. We view expansion into the less competitive Eastern European markets as a strategically sound decision with the potential to generate significant revenues. We value Sportingbet on a 2010E P/E of 10. implying 23% potential upside from the current share price. Casino was launched in 2002 and European poker in 2003.Barclays Capital | European Leisure: Online Gambling SPORTINGBET – STRATEGICALLY PLACED IN EASTERN EUROPE Sportingbet’s decision to pursue market share in the less competitive markets of Eastern Europe should bolster revenues significantly medium-term. which puts the company at a disadvantage in the regulating markets. The business had a 30% margin pre-UIGEA. vs 15% in FY 2008. and B2B transactions.

8 10.4 4.8 6.3 9.4 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 3.7 28.8 6.4 17.7 7.6 2. which the company buys from third-party suppliers (Boss Media for poker and casino.9 8.0 6. which accounts for over 60% of group revenues.5 13. Figure 159: Gross Gaming revenues by product (£ mn) 60 50 40 30 20 10 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 3.0 5.7 7.0 8.6 4.7 5.1 2. 9 October 2009 104 .6 8.2 20.1 11.1 7.6 4.6 8. multiple operators for flash games). We forecast casino and games to represent a steady revenue contribution (2025% of group revenues) going forward.1 10.4 2.7 4.Barclays Capital | European Leisure: Online Gambling Revenue Sportingbet receives the majority of revenue from sports betting.8 4.1 16. and future growth should be rebased from this level.6 2. and we expect this trend to continue.0 6.1 7.6 7.3 6.4 6.2 26. Poker and casino & games are very much supplementary products.3 10.8 16.4 5.7 7.7 3.1 7.4 9.9 22.5 7.2 16.9 6. Sports betting in Australia fell in Q2 09 due to the new tax regime.8 10. Figure 160: GGR product mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Poker Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 32% 30% 36% 30% 41% 29% 29% 28% 23% 30% 49% 49% 27% 31% 50% 50% 51% 43% 47% 55% 57% 13% 26% 11% 30% 8% 29% 15% 25% 12% 25% 8% 21% 23% 8% 19% 14% 28% 11% 16% 23% 11% 15% 24% 12% 14% 23% 16% 14% 27% 17% 12% 9% 12% 24% 9% 12% 22% 24% 24% European Sports betting Source: Company data Casino & Games Australia Sports betting Poker has decreased as a percentage of total gross gaming revenue due to the liquidity problems associated with the closure of the US market.1 European Sports betting (£m) Source: Company data Casino & Games (£m) Poker (£m) Australia Sports betting (£m) Strong growth in sports betting is representative of the company’s focus on its best-inclass product Strong growth in sports betting is representative of the company’s focus on its best-in-class product.1 5.7 5.5 6.9 8.4 6.6 22.1 8.8 9.9 11.1 10.

In-running is a lower margin product. and the margin achieved on this is far superior to that of its competitors. Figure 161: Sports betting margin 12% 10% 8% 6% 4% 2% 0% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Gross win margin (%) Source: Company data In Q4 2007 the company rolled out in-running sports betting.0% Sports betting turnover (£m) Source: Company data Gross win margin (%) In-running now accounts for over 50% of the company’s European sports betting In-running now accounts for over 50% of the company’s European sports betting. whereas now it is nearer the pre-match betting level of 8-10%. and more recently. Figure 162: Amount wagered on sports betting / gross in margin 300 250 200 150 100 50 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 12.5%).0% 2. particularly in certain products.0% 0.0% 6.0% 4. compared with bwin (c8%) and PartyGaming (c5. 9 October 2009 105 . where punters are able to place bets while sporting events are in progress.0% 8. and as this increased.0% 10.Barclays Capital | European Leisure: Online Gambling Sports betting Returns the highest sports betting gross win margins of any operator at an average of over 9% over the past four years Sportingbet has a best-in-class sports offering. returning the highest gross win margins of any operator at an average of over 9% over the past four years. north of 10%. the overall margin was expected to fall. which we believe is similar to its competitors. The in-running margin was 5-6% in FY 2008.

Sportingbet is able to manage the book better than its competitors. for instance.8% Basketball 3.5% Tennis 6. with live betting representing 70% of total sports bets.4-6%. whilst maintaining a 10% gross win margin. Geographical distribution The geographical breakdown of post-tax gaming revenue has materially shifted in recent years as the company places emphasis on different regions. where Sportingbet is the market leader.1% Football 58. and its forte in odds compilation. However. In 2009 Greece overtook Spain as the largest territory for the company. with tennis and basketball. and the gap between the pre-match and in-running football margin is minimal.0% Other 6. 9 October 2009 106 .6% Horses 2.0% Source: Company data Football is the predominant sport for the company. Expects in-running to represent 75% of European sports betting revenues within three years.Barclays Capital | European Leisure: Online Gambling Figure 163: FY 09 Sports breakdown (post-tax gaming revenue) Aus Sports 1. the company’s estimates an increase daily in running revenue by 10%.0% Aus Horses 17. given the 50/50 split in pre-match betting and in running. less popular sports produce materially lower margins. producing in-running margins of c. In territories where live betting is available.0% Multiples 5. Live streaming was introduced in Q1 2009 and has enhanced in-running for the company. This adds 5% to the gross gaming revenue. while maintaining a 10% gross win margin Sportingbet expects in-running to represent 75% of European sports betting revenues within three years. Tennis is particularly popular for in running. Due to the number of live bets placed.

and therefore outside of Turkish jurisdiction. Sportingbet became the market leader in Turkey after many operators pulled out for regulatory reasons. In January 2009 a judge released them. to reduce dependence on any one territory (especially those with regulatory risk). the company is well positioned for the opening of the market that we expect. two employees of Sportingbet were arrested while on holiday in Turkey. Since the closure of the US market. 9 October 2009 107 . and charges were made pertaining to online gambling. we believe Sportingbet’s reliance on sports betting could make a licence unattractive. We think the 20% limit on revenues from an individual country would likely be relaxed with regard to Spain. under this scenario we would expect the company to continue to operate through its off-shore licence. given the consequences of the US closing. despite the illegality of online gambling in that country. effectively ruling that the betting takes place outside of the country. we believe this could be relaxed if Greece comes to be viewed as a low risk country by the company. according to Greek law. In May 2008. Although all forms of gambling are expected by H2GC to be regulated. though the company believes that. however. although there has been a strategic decision to reduce the contribution from c25% to less than 15% of net revenues Turkey is still a material revenue stream for the company. although there has been a strategic decision to reduce the contribution from c25% to less than 15% of net revenues. Barclays Capital Greece Greece generates 18% of Sportingbet’s revenue Greece generates 18% of Sportingbet’s revenue. Barclays Capital Source: Company data.Barclays Capital | European Leisure: Online Gambling Figure 164: FY 08 geographical breakdown (post-tax NGR) Germany Other 3% 12% Czech 3% Italy 5% Spain 18% Greece 14% Figure 165: FY 09 geographical breakdown (post-tax NGR) Other 14% Germany 4% Czech 4% Italy 4% Greece 18% France 3% Bulgaria 4% UK 9% Aus 12% France 4% Bulgaria 4% UK 6% Aus 12% Spain 17% Turkey 17% Turkey 13% Source: Company data. despite being outside of the EU. it is still legal to offer sports betting to Turkish citizens through its UK licence. Spain Already generating 17% of group revenues from Spain Already generating 17% of group revenues from Spain. Although there have been no prosecutions in Greece. Turkey Turkey is still a material revenue stream for the company. OPAP’s buying power of the media restricts advertising for online operators. as regulatory risk recedes. the company has stated that no one territory will contribute more than 20% of group revenue. restricting advertising opportunities.

therefore Sportingbet implemented a strategy of growing its presence in Eastern Europe. Therefore. France With France looking to regulate in the near future. and horse racing has never been offered.Barclays Capital | European Leisure: Online Gambling UK The UK has declined in importance for Sportingbet. attributable to a strong betting heritage. as the company looks to maximise its return on investment. Sportingbet has confirmed that it intends to apply for a licence as long as France is able to block unlicensed operators from offering online gaming. and the company has decided to once again increase market share. but still has a strong propensity to gamble. with increased marketing in Eastern European countries to drive growth in a relatively less competitive market with cheaper customer acquisition costs. the cost per acquisition is high relative to other European countries. many of Sportingbet’s competitors are generate meaningful revenues from Germany. among other marketing. Due to competition in the market. without having to pay the tax that licensed operators will be subject to. undermining the whole licensing structure. as the company seeks to avoid joining the ‘blacklist’ of operators that are unlikely to get licensed when the country regulates. based on spend as a percentage of GDP. However. the recent economic downturn has decreased advertising costs in the UK. where £1 of marketing spend goes considerably further than in the UK. Eastern Europe Increased marketing in Eastern European countries to drive growth in a relatively less competitive market with cheaper customer acquisition costs Despite the increased costs of acquiring players in Northern European countries such as the UK and the Nordics. Italy etc) does not have this same heritage. The company is looking to increase its presence in the country going forward. 9 October 2009 108 . licensed operators will be uncompetitive. recently there has been a change of tack. However. Spain. if unlicensed operators are able to still offer gambling to French citizens. Sportingbet is sponsoring Wolverhampton Wanderers in the English Premier League and a number of summer horse races. Sportingbet is reticent to aggressively market in the country. Advertising is done through affiliates on the Internet. companies still generate a positive return due to the increased yield from these players. the company has historically focused on these two territories. Germany With the largest economy in Europe. Southern Europe (France.

one of the world’s largest poker sites. with Sportingbet alone contributing 25% of the network’s liquidity. in return for a relaxation of advertising restrictions There is pressure on the Australia post-tax NGR due to the new tax regime. then the company will be well placed to take advantage of the likely future growth of these countries. in return for a relaxation of advertising restrictions. Figure 166: Poker revenue (£ mn) 10 9 8 7 6 5 4 3 2 1 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Poker revenue (£m) Source: Company data 9 October 2009 109 . and as liquidity dried up. Brazil was launched in Q1 2008. Although the size of these markets remains relatively small.Barclays Capital | European Leisure: Online Gambling In 2008 betting revenue from Poland. and South Africa in Q2 2009. its poker offering was effectively destroyed. Poker When Sportingbet pulled out of the US. with a further 11% from Canada. if Sportingbet is able to achieve a dominant position while these markets are less competitive. had 80% of players from the US. generating 13% of group revenue. this migration lost a further 10% of the remaining players. The knock-on effect has been a reduction in corporation tax. Emerging Markets The emerging markets division comprises predominantly Brazil. as the company only pays this on profits generated in Australia. with profits to be put back into marketing to grow the division. Australia Pressure on Australia post-tax NGR due to the new tax regime. The budget is to breakeven for the next two years. Sportingbet and Betfair successfully challenged a ban on advertising in September 2008. its poker offering was effectively destroyed When Sportingbet pulled out of the US. Boss is far from best in class when it comes to poker. so did the Canadian players. the Czech Republic and Bulgaria grew on aggregate by 79%. however. Paradise Poker. reducing the gross win level for the company. The company decided to migrate the site onto the Boss Media platform in an attempt to rescue the liquidity problem. This led to a plethora of different taxes as each state decided to tax gambling on a state-by-state basis. The US players left overnight. Canada and South Africa. Hungary.

9 6.3 6.3 1.3 2.7 6.8 3. which in turn increased the overall margin and yield of the division.2 7. with a reduction in costs driven by efficiencies in marketing (ex-bonuses).Barclays Capital | European Leisure: Online Gambling Sportingbet’s poker offering has never recovered. Casino and games Boss Media also provides Sportingbet’s casino product.5 5. Figure 167: Casino & Games Revenue 12 10 8 6 4 2 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Casino revenue (£m) Source: Company data High yielding Slo ts 2.8 6.4 1.2 Games revenue (£m) The introduction of slots increased the proportion of games revenue.0 2. and this growth in games is negating declines in the casino business. the company continues to provide poker to retain a complete suite of gambling products. Bonuses) Employees Source: Company data 8% 6% 17% 6% 12% 41% 7% 4% 17% 6% 13% 29% 2008 Payment processing costs Depn IT costs Other admin 8% 5% 18% 6% 11% 25% 2009 9 October 2009 110 .0 6.2 3.0 2.7 2. Figure 168: Development of costs (% of gross gaming revenue) 100% 80% 60% 40% 20% 0% 2007 Marketing (exc.9 5. and for the purpose of cross-selling other products to poker customers.7 4.9 7. while growth of the traditional casino offering has stagnated. Flash games are increasingly popular.0 5.8 8.0 4.1 7.0 4. However. and it remains a dwindling contributor to revenues. Costs A return to the pre-UIGEA 30% margin targeted by 2012 Sportingbet has targeted a return to the pre-UIGEA 30% margin by 2012.

generating 15% of margin. 30% of revenues. 9 October 2009 111 . potentials to 17 months. whilst recreational players have declined by 4%. and represent 5% of the customer base. They represent 3% of the customer base and generate 55% of total margin Potentials – spend £300 per month.Barclays Capital | European Leisure: Online Gambling The high proportion of fixed costs should lead to a natural increase in margins as net revenue increases. and we believe that increasing the yield of existing players will become more important going forward as the cost of acquiring new players increases. and potentials by 13%. VIPs have grown by 32%. 11 months. and recreational players staying at c. They are called potentials. Since this was introduced in 2008. £25 a month Marketing has been skewed to the VIP players. The company splits players into three categories: VIP players – these are players that spend £2.000 per month. spending c. This change in marketing strategy has been very effective for the company. Marketing Marketing costs (ex-bonuses) have decreased as a percentage of gross gaming revenue as marketing has become more focused. increasing the lifetime yield. Figure 169: Development of marketing costs 80 70 60 50 40 30 20 10 0 2007 2008 Marketing (ex-bonuses) (£m) Total Marketing Costs (% GGR) Source: Company data 47% 8 38% 14 35% 18 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 52 46 46 2009 Bonuses (£m) VIPS represent 3% of the customer base and generate 55% of total margin There has been a shift towards an increase in bonuses to increase the lifetime yield of existing players.700 on other sites. as the company estimates that the majority of these are likely to spend another £1. therefore there is potential for significant increases in yield from this group Recreational players – represent 92% of player base but only generate c. as opposed to marketing spend for customer acquisition. especially VIP players. The average tenure of each group has also changed. with a cutback in bonuses to recreational players. capitalising on the operational gearing of the business model. The average tenure of a VIP has grown by 23% to 21 months.

We do see potential value in the B2B business in creating additional brands in markets where the company does not have a strong presence. PartyGaming’s settlement would suggest c. such as superbahis. B2B Greek business is effectively a white label agreement. it would be at a significantly higher cost than the 15-20% of revenue associated with poker or casino products. which would equate to around £30-35m. If there were to be a B2B deal with another operator. and has been extended to Romania and other Balkan states. However. Whereas the marketing partnerships that were brought in-house were with individuals. the company is reticent to roll out the B2B product for fear of cannibalisation of its existing sports book. Sportingbet currently runs multiple brands. Sportingbet’s partnership in Greece is with a plc. negating Sportingbet’s competitive advantage. but reticent to roll out the B2B product for fear of cannibalising its existing sports book Sportingbet’s Greek business is effectively a white label agreement. Although no insight into negotiations has been offered.com in Spain. given the specialised nature of the product. there are a couple of significant differences between the US operations of the two companies. this has been offset by an increase in direct marketing. Brought in-house Spain Hungary Scandinavia Sportingbet has used marketing partners for a number of territories over the years.Barclays Capital | European Leisure: Online Gambling Marketing partners Sportingbet has used marketing partners for a number of territories over the years. 50-75% of net cash over a period of three to four years. however. but retain ownership of the customers. The company also purchased the remainder of the Turkish and Bulgarian businesses in February 2007 and March 2008 respectively. whilst saving partner commissions. leading to substantially increased growth in the territories. However. making it the largest online B2B businesses in the sector. This has been a very successful partnership. 9 October 2009 112 . This has increased control and operational leverage. Bringing the operations in-house has given Sportingbet control over marketing and customer services for these territories. In recent years a number of these have been brought in-house as their effectiveness has dwindled. but retain ownership of the customers. bonuses and additional staff costs. Due to the materially superior returns that Sportingbet achieves with its sports book.com in Turkey and miapuesta. B2B partners could use its best in class technology and offer the same product at a cheaper price. an extension of this into new territories could generate significant revenues for the company without cannibalisation of the existing offering. we do not expect the company to share the technology with rivals in the near future. DoJ Settlement Currently in negotiations with the US DoJ over a settlement Sportingbet are currently in negotiations with the US DoJ over a settlement for offering online gambling products to US citizens prior to the UIGEA.

Sportingbet’s best-in-class sports betting offering positions the company well for future growth. Figure 170: SBT recent revenue growth (FX adjusted) FY 09 FY 08 Growth (%) Q2 09 Q2 08 Growth (%) Sports gross revenue Casino & Games Poker Gross Gaming Revenues Australian sports revenue Group gross revenue Customer bonuses Net gaming revenue FX effect FX adjusted gross revenue 93. aided by the increasing popularity of live betting. PartyGaming offered poker to US citizens. but -6% on a constant currency basis. but the expected liberalisation of sports betting in Italy has not occurred thus far. therefore.2m and estimated closure costs of US$14m.4 181. Recent trading Recent trading has benefited from FX movements.5m. FY 2009 net revenue was +13% year-on-year on a reported basis.8 23.4 38. This is an improvement from +6% in Q2 09 on a reported basis.8 157.1 44. Headline FY 2009 net revenue +13%.3 144.8 40. but FX-adjusted +7% Recent trading has benefited from FX movements. Barclays Capital estimates 9 October 2009 113 .6 43.0 (-5.8 (-13.3 22.2 18 9 (-11) 11 10 9 42 6 (-6) Source: Company data.2 41.3 24 13 (-8) 15 13 15 34 13 7 26.0 19.5) 144. they had only just broken even when the UIGEA was enacted. Leading global position Despite a relatively poor casino. the business generated an operational loss of approximately £1.0 (-3.7 6. but only +7% on a constant currency basis.2) 154. Whilst poker operators suffer from the unlevel playing field created by sites still accepting US bets.7) 38.6 (-4. whereas Sportingbet offered sports betting which is unequivocally highly illegal. During the first eleven months of 2009.4 49.Barclays Capital | European Leisure: Online Gambling Sportingbet bought Paradise Poker and Sportsbook.7 (-18. M&A Sportingbet sold its US casino and sports operations for £1 before the law changed.4 75.9 22.8) 41.8 138.0 159. which is a grey area in US law. games and poker offering.com for around US$300m each.9 45. relieving the company of liabilities of US$13.6 (-9. It was acquired in May 2006. and although they generated high profits. On the other hand. in our view.1 4.7 22. and the company has decided to cut its losses. Sportingbet’s under-penetration in a multitude of markets leaves scope for further growth. Announced the sale of its licensed Italian operation (Sportingbet Italia) to the local management team for a nominal consideration It also announced the sale of its licensed Italian operation (Sportingbet Italia) to the local management team for a nominal consideration on 22 July 2009.6 10.5 5. which has resulted in headline figures that inflate the underlying performance of the business.4) 43. the company argues that it did not generate any significant US earnings.7 11.1) 163.7 6.

which we believe will drive strong growth. according to performance. but strong growth in Eastern Europe Sportingbet is not best placed to take advantage of potential growth in Italy or France in our view. Valuation Historicals Figure 171: Sportingbet historical P/E (2003 – present) 25 20 15 10 5 0 Oct-03 Jun-04 Oct-04 Jun-05 Oct-05 Jun-06 Oct-06 Jun-07 Oct-07 Jun-08 Oct-08 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Jun-09 114 Source: FactSet 9 October 2009 . £42mn clean EBITDA and 5. in our view. Poker has shown weakness.5p. driven by competition from US-facing sites. games should continue to offset any decline in the casino product. although this area does not have the same actual levels of growth as Southern Europe. this remains considerably stronger than that of its peers.7p adjusted EPS. outperforming its peers. given the lack of a meaningful poker offering. We forecast FY 2010 net revenue of £188mn. This compares to consensus estimates of £180mn net revenue. we view the underlying growth as a very encouraging.5%. We believe this is a solid performance. Sportingbet is building market share in a relatively uncompetitive market which has high levels of growth in percentage terms. it was confirmed at the FY 2009 results that this would progressively increase going forward. Outlook Sports betting continues to be the main growth driver for Sportingbet. we do note a slight drop off in margin. while sports betting and casino & games have continued to return strong growth.Barclays Capital | European Leisure: Online Gambling We view the underlying growth as a very encouraging given the adverse economic conditions Despite the inflated headline figures. The company does generate significant revenue in Spain. The sports margin has been particularly resilient at a time when other operators have suffered from adverse sporting results. paying a FY 2009 divided of 1p per share. and given the improved regulatory outlook of the country. we forecast continued decline in the product. clean EBITDA of £44mn. we would expect it to relax the 20% limit of total revenue that was imposed to reduce regulatory risk. and adjusted EPS of 6. although at 8. We view Eastern Europe as the main revenue driver going forwards. Not best placed to take advantage of potential growth in Italy or France. Dividend The company announced that it has re-instated a dividend. and while poker is heading into a period of easier comps. given the lack of a meaningful poker offering. given the adverse economic conditions.

3) (10.0% 5.9 58.3 (2. This beta is higher than that of its peers to reflect the increased regulatory risk of generating material revenues from Turkey.0) 45.0 9 October 2009 115 .5% and a beta of 1.0) 49.9 59. Figure 172: PE relative to FTSE All Share (2003 – Present) 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 1.5% 60.8 50.0) 46.2 (2. There remains regulatory risk with exposure to Turkey. we value the stock using a DCF model as shown below.6 (2.0) 47.7) (10.0) 32.4 54.6% (2.3 (2.2) (10.3) (10.9 Oct-08 5.0) 41.Barclays Capital | European Leisure: Online Gambling Tended to trade between a 7x and 13x 1yr forward P/E multiple Sportingbet has tended to typically trade between a 7x and 13x 1yr forward P/E multiple since the enactment of the UIGEA.0) 38.3) (10.9 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Source: FactSet Sportingbet has generally range-traded at a discount to the FTSE All Share following the exit from the US market. DCF valuation Given the highly cash-generative nature of the business. Figure 173: WACC calculation WACC Risk Free Rate Market risk premium Beta Cost of equity Source: Barclays Capital estimates Our WACC assumptions are based on a risk free rate of 5% with a market risk premium of 5.4 12.5 (1.3 Jun-09 61. and discussions with the DoJ.4) (10.4) (10.2 (2.4. Figure 174: Free Cash flow calculation FCF (GBP mn) 2010E 2011E 2012E 2013E 2014E 2015E 2016E Adjusted EBITDA Change in WC Tax paid Maintenance Capex Free Cash Flow Source: Barclays Capital 44.

70 0. on a 2010E P/E of 10.0 49. on both a P/E and EV/EBITDA basis. Given the market share gains in Eastern Europe and best-in-class sports betting systems. The company’s best-in-class sports betting systems give Sportingbet the highest gross win margins in the industry.9 45.400 0. on our estimates. Sportingbet trades at a discount to its peers. we believe this is a fair valuation of the company. Figure 176: Sportingbet valuation Valuation (£ mn) Terminal growth rate Net present value (1-7 yrs) PV terminal value Total NPV (EV) Net (debt) / cash Implied equity value Number of shares ('000s) Value per share (£) Current share price (£) Upside Source: Barclays Capital estimates 2 188 200 388 44 432 480.43 4. While we understand this.3x.9 47. and assume a terminal growth rate of 2%. 9 October 2009 116 .9 49.9 46.8 38. however.90 0.6% we discount seven years’ free cash flow. we feel the extent of this discount is unwarranted. believing that the company’s decision to pursue market share in the less competitive markets of Eastern Europe should drive revenues.89 0. given its regulatory risk and lack of a material poker offering. Recommendation We initiate with a 1-Overweight recommendation on the stock.Barclays Capital | European Leisure: Online Gambling Figure 175: Free cash flow (£ mn) FCF Discount rate PV of Cash Flow 29 30 29 29 26 23 21 200 2010 2011 2012 2013 2014 2015 2016 Terminal Source: Barclays Capital estimates 32.0 0.79 0. implying 23% potential upside from the current share price.62 0.08 Using the WACC of 12.49 0.73 23 This returns a valuation of 90p per share.55 0. we note the continued regulatory risk of operating in Turkey. This is in line with the historical average of 7-13x one-year forward P/E.4 41.

6 19.0 21. and the company yet to settle with the DoJ. and we believe the current level of regulatory risk does not justify such a discount to peers. Increased growth in Eastern Europe: Eastern Europe is growing strongly. Slower than expected growth in Eastern Europe Upside risk Currency movements: Appreciation of sterling would have a positive effect on the company’s reported results. FactSet We estimate Sportingbet’s calendarised 2009E P/E to be 10. which is a 43% discount to the average 2009E PE of 888.1 (43) (28) (35) Source: Barclays Capital. Accelerated growth provides upside risk to our price target. 9 October 2009 117 . there remains an element of regulatory risk for the company. bwin and PartyGaming.6 19.9 16.9x. Risks to price target Downside risk Regulatory risk: With a large proportion of revenue coming from Turkey. which accounts for 13% of revenues. versus 17% in 2008.Barclays Capital | European Leisure: Online Gambling Figure 177: SBT discount to peers 2009E Calendarised PE SBT 888 BWIN PRTY Average BarCap est Discount (%) Cons 1yr Cons 4yr 10. and a four-year average of 35%. albeit from a low base. Historical consensus data suggests a one-year average discount of 28%. The company is reducing its dependence on Turkey.

0 8.7% 18.8 (-177.2 46.9) 21.5 Basic Diluted DPS Dividend payout ratio (%) DPS (p) Source: Company data.5) (-1.6 36.2 8.7 54.256 9.4 2.9 44.6 29.5 6.4 2.6 39.3 24.7 31. Barclays Capital (-4.9 30.0) 0.6% 1.5) (-1.0) 47.2 47.0 37.5) (-1.4 3.5 7.3 8.3 205.4 (-13.9 30.7 120 48 21 189 21 209.4 24.0 (-11.0) 43.8) 0.1) 0.5 7.3 12.7% (-2.9 5.4 38.5 40.8% Basic Diluted Adjusted cont.0% 44.6% (-2.4 1.5 36.4 187.2 7.7 8.5 22.2 20.1 29.5 137 50 20 208 22 229.2) (-1.5) 31.4 7.1 (-17.1) 39.9 220.5 46.0 18.1 19.2 43.4 39.6% 20.6) 43.7 156 54 20 231 23 253.4) 39.5 9 October 2009 118 .8 8.3) 0.8 32.0 6.8% (-2.0% (-3.2 (-180.2 50.Barclays Capital | European Leisure: Online Gambling Figure 178: Sportingbet P&L July Year end £(m) 2009A 2010E 2011E 2012E 2013E Europe Sports betting turnover Gross win margin Sports gross revenue Casino & Games Poker Gross Gaming Revenues Australian Gross Gaming Revenues (£m) Gross gaming revenue 918 10.6 2.6 (-132.1 33.4 3.8) (-1.2% (-2.7% 50.1 6.395 9.1 24.5 35.8 227.9 7.567 9.8) 29.2 40.1 23.6 38.6 19.0 28.8 150 53 20 224 23 246.8 (-15.5) 0.2 19.6% 58.0 5.9 7.7 (-166.7 42.7 44.2% 1.6 25.1 9.2% 54.1) (-4.5% 19.6) 35.646 9. ops 2.0 33.5% 94 44 22 159 22 181.6) 35.4 6.9 Net gaming revenue Costs Clean EBITA margin Share options Exceptionals Amortisation of other intangibles EBIT EBITDA PBT Total profit for shareholders Clean numbers Clean EBITDA Clean EBITA Clean PBT Clean PAT Clean EBITDA margin Clean EBITA margin EPS (p) Total 163.2 42.6% 19.5% 1.0) (-1.5 (-152.3% 19.8% 1.

5 41.8) 126.5 19.5 144.9 71.6 201.7) 41.6 27.9 99.7 (4.8 171.8 (4.8 32.5 (0.0 119.4 93.4 2011E 100.8) 54.5 2009A 104.4 (5.4 40.2 (10.1) (10.5 119.9) 30.4 (4.5 12.3 (0.7 160.3 30.5 47.3) 55.0) 0.7 128.4 (4.9 2013E 96.0 31.3) 51. Barclays Capital 49.4 (4.9 Maintenance Capex Purchase / Sale of investment Financing activities-interest FX Effect Net increase (decrease) in cash (12.8) 158.1) (49.7) (7.0 2.1 201.1) (49.8 11.6 (0.5 42.5 38.9 2012E 98.2 (2.6 27.3 171.6) 50.2 (2.0) 58.8 36.3 45.8 29.1 25.8 Cash at start of year Cash at end of year Free Cash Flow Balance Sheet Fixed Assets (Tangible and Intangible) Investments Working Capital (ex cash) Net Cash/Debt Net Assets Equity Shareholders Funds Source: Company data.2) 48.5 99.0) 0.7 2.1) (49.6 12.3 71.4 (0.2 93.8) 70.9 44.1 2.3 44.5 (1.2 32.4) (4.8) 97.0) 1.1) (49.6 (10.6) 43.1) (49.1 9 October 2009 119 .0) 0.0) 0.0 2.8 2010E 103.6 (10.5 128.6 144.8) 42.4 44.3 3.Barclays Capital | European Leisure: Online Gambling Figure 179: Sportingbet Cash Flow & Balance Sheet July Year end £(m) 2009A 2010E 2011E 2012E 2013E PBT Share Benefit Charges Profit before tax and share benefit charges Depreciation Interest (received) Discontinued operations Change in WC Tax paid Net operating cash flows 22.2 12.6 (2.4 10.0 (1.5 38.6) 20.6 (2.

negates this advantage. these estimates assume no opening of the US market. at a three-year CAGR of over 10%.000 5. both as a proportion of overall poker revenue and in actual terms.000 4. 888 breaks down poker revenue by geography.Barclays Capital | European Leisure: Online Gambling ONLINE GAMBLING INDUSTRY BY PRODUCT – POKER FASTEST GROWTH Poker – ring-fenced liquidity offers relief in ‘unlevel’ playing field US-facing websites are creating an ‘unlevel playing field’ due to the increased liquidity of the US market. Figure 180: Global online poker revenue (US$ mn) 7.5% CAGR from US$2. which also generates a material amount of revenue for some companies. were this to occur. we estimate that PartyGaming has outperformed its peers due to its superior liquidity.476 1. poker revenue in Europe is projected by H2GC to grow at a 16. and potentially other regulating markets. Spain and France are projected by H2GC to show the fastest growth going forward as the markets regulate. with the charts below showing that the UK has been a diminishing stream of revenue for the company. along with Canada.000 0 2009E Europe Source: H2GC 872 536 1.592 3. European operators have been forced to increase bonuses in an effort to compete. we focus on this area for further analysis. growing to over US$6bn in 2012. Ex-Italy. 9 October 2009 120 .000 3.000 1. Ringfenced liquidity in Italy. from 54% of total global poker revenue in 2009 to 63% in 2012. However. allowing bwin to return to year-on-year poker growth in H1 09. As the vast majority of European operators’ revenue is generated from within Europe.5bn to US$4bn. Italy. given the pent-up demand in the market. but have experienced declines in both revenues and market share.000 6.914 2. Revenues in the global online poker industry are estimated by H2GC to be US$4. we strongly believe that the US would outstrip Europe as the largest global poker market.439 2012E N America Other Over the same period. on a constant currency basis.6bn in 2009. a legacy from US operations.000 2. This would represent an increase in global share.

and by 2012 it is expected to become the largest European poker market. 9 October 2009 Turkey Italy UK Spain . The introduction of cash games expected early next year should boost growth further. US) RoW Source: Company data The closure of the US market in 2006 led to many operators focusing on growing operations in more regulated territories. The UK’s online gambling industry is the most regulated of any country’s in the world. due to the regulatory clarity of online gaming. The UK is the largest poker market in Europe. estimated by H2GC to be the second largest poker market in Europe in 2009. US) H1 06 H2 06 H1 07 H2 07 H1 08 H2 08 H1 09 UK Europe (ex UK) Americas (ex. has become increasingly competitive as companies have viewed it as a safe haven for operations. Figure 183: European poker revenue by country (US$ mn) 900 800 700 600 500 400 300 200 100 0 France Norway Germany Sweden Netherlands Denmark Finland Iceland Ireland Russia Greece 121 2009E Source: H2GC 2012E The legalisation of tournament poker in Italy in September 2008 has led to rapid growth in the Italian poker market.Barclays Capital | European Leisure: Online Gambling Figure 181: Poker by geography at 888 45 40 35 30 25 20 15 10 5 0 H1 06 UK Source: Company data Figure 182: Poker by geography at 888 2 3 3 3 3 2 4 7 2 4 9 2 16 2 3 17 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6% 12% 35% 9% 11% 7% 8% 8% 9% 6% 8% 7% 9% 9% 9% 21 19 38% 42% 41% 45% 46% 45% 21 19 20 18 16 12 H2 08 RoW 47% 43% 43% 43% 41% 38% 36% H2 06 H1 07 H2 07 H1 08 Europe (ex UK) Americas (ex. and as such.

over the next three years. The UK’s low projected growth rate is due to the relative maturity of the market. Italy. due to their monopoly framework. 9 October 2009 122 . Therefore. Figure 184: Poker three-year CAGR (2009E-12E) for top 15 European markets by size 60% 50% 40% 30% 20% 10% 0% -10% France Greece Turkey Italy Germany Netherlands Denmark Norway Sweden Spain Iceland Finland Ireland Russia UK 3yr CAGR (2009E-12E) Source: H2GC Markets where deregulation is imminent have the highest projected growth rates. a result of the impending regulation of the French and Spanish markets. with Germany and Norway languishing at the other end of the chart. and the higher base from which this growth occurs. Figure 185: European poker growth three-year CAGR (2009E-12E) 400 350 300 250 200 150 100 50 0 France Italy Switzerland Czech Rep Germany Spain Sweden UK Poland Finland Iceland Ireland Russia Denmark Austria 70% 60% 50% 40% 30% 20% 10% 0% Actual growth ($m) 2009E-12E Source: H2GC 3yr CAGR (2009E-12E) The chart above includes the top 15 European countries in terms of projected growth.Barclays Capital | European Leisure: Online Gambling Below we show the three-year CAGR of the 15 largest European poker markets. we plot below the growth in both actual and percentage terms. to obtain a fairer view of the performance of each market. and the introduction of cash games in Italy. France and Spain are clearly growth leaders. on an actual basis.

sites not accepting US customers are at a competitive disadvantage due to lower liquidity levels.6 6. they tend to start on the low value tables. On less liquid websites.5 434 430 484 460 516 480 410 454 395 416 600 500 400 300 200 100 0 Active player days (m) Source: Company data. This is only possible if there is a certain level of liquidity. and move on to higher stake games as they improve. the ability to click onto a table of choice and start playing almost instantaneously is key. and were this to generate higher revenues than Italy’s model. This problem of liquidity is compounded by the fact that high-value players yield considerably more for operators than lower value players. Barclays Capital Unique active players (000s) 9 October 2009 123 . This effectively levels the playing field. this results in significantly higher liquidity at lower value tables than at higher value tables. Figure 186: PartyGaming active poker players (ex-US) 7 6 5 4 3 2 1 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 230 3. whereby enough players are simultaneously online that games can start after a minimal wait time for tables to fill. When players first sign up to play online poker. Liquidity is key to poker and a major barrier to entry to the market (although this can be partially mitigated by joining a poker network). which has created an ‘unlevel playing field’. However. Ring-fencing of liquidity is a significant upshot for operators.1 6.5 3.0 5. where operators are licensed and taxed by the Italian authorities. by restricting the competitive advantage of US-facing sites.Barclays Capital | European Leisure: Online Gambling We expect the regulation of European markets to follow a structure similar to that of Italy. The majority of players remain on low to mid-value tables. and choose sites where the wait time for a table to fill is minimal. Denmark is set to regulate with a more liberal structure (see regulations section of report for more details). a number of sites continued to accept US players. higher value players chase liquidity. despite it theoretically being an option.1 5. the same principle applies.7 4. Unlevel playing field When the listed European operators exited the US market.6 4. which came about with the passing of the UIGEA in October 2006.3 4. When the US online gambling market closed in October 2006. Therefore. When a player signs onto a poker site.9 4. Sportingbet estimates that the top 3% of its customer base generate 55% of revenue. as the overall liquidity of a company becomes less relevant.1 6. clearly.1 3.6 6. the aggregate number of players of its non-US business actually increased on the back of an intense push for sign-ups.9 279 314 340 4. and although Sportingbet’s main offering is not poker. and must ring-fence the country’s liquidity. it is almost impossible to play on high-value tables. with only a few moving onto the high-value tables. this might become the regulation blueprint.

In the same period.2 11. revenue fell as the yield per player decreased.5 12. September 2006 – November 2006 20. Figure 187: PartyGaming poker yield per active player day 25 20 21. PokerStars overtook PartyPoker to become the world’s largest online poker site.800 players to 5.2 11.5 12. PokerStars’ and Full Tilt Poker’s average peak players increased 6.0 13.150 in the week ended 1 November 2006. who tend to play lower stake tables.1 15 10 5 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 19.600 players at peak time.000 8. but the majority of this decrease in yields came from the high-value players moving to sites with higher liquidity.000 0 06-Oct-06 13-Oct-06 20-Oct-06 27-Oct-06 03-Nov-06 10-Nov-06 17-Nov-06 24-Nov-06 01-Sep-06 08-Sep-06 15-Sep-06 22-Sep-06 29-Sep-06 Pokerstars Source: Pokerscout.700 respectively.2 13.6 Enactment o f UIGEA 19.1 12.7 Yield per active player day Source: Company data.Barclays Capital | European Leisure: Online Gambling While the aggregate numbers of players increased. PokerStars was averaging 12. however.com.2 13.5% from 9.8 11.0 11.000 4. PartyPoker’s average number of peak players in the week ended 1 October 2006 was 14. When the European operators left the US in October 2006. and 50% from 3.950 players to 10. Figure 188: Peak poker players.9 14.600.450 and this fell 57% to 6. By 1 December 2006. Barclays Capital This was in part due to downward pressure on yields from the increase in new sign-ups. Barclays Capital PartyPoker Full Tilt The chart above shows the 24-hour peak number of players on each site per day. 9 October 2009 124 .000 12.000 UIGEA 16.

40% combined market share. we believe that this is an inaccurate depiction. PokerStars is leveraging revenue from other areas of their business to guarantee jackpots – effectively increasing bonuses to acquire customers. it Pokerscout estimates that they have a c. given that it is purely a network). are intent on being first in line for a licence in other countries opening their borders to online operators. the advantage held by PokerStars and Full Tilt diminishes. and having seen the growth already achieved. Media and marketing companies. which has a database of several million UK customers. Market share PartyGaming has the largest poker offering of any European operator (we exclude Playtech from our analysis. PartyGaming has signed a JV with Intralot in Italy. and the growth exhibited by Italy to date. who already hold a database of customers. versus 34. Positioning for European regulation If European countries continue to regulate by ring-fencing liquidity. we view performance in ring-fenced markets as a material growth driver for operators. with PartyPoker averaging a 24-hour peak of 8. Given the liquidity carte-blanche that a ring-fenced market offers. in our view. and we view a B2B offering as key to success in these markets. in our view. and we see the potential for a number of similar deals going forward. with sponsorship of Real Madrid and AC Milan). PartyPoker). and PokerStars clearly believes. or strong local brands moving into online gaming. they still have the ability to substantially increase marketing spend in newly regulated markets to attract new players at the expense of a higher CPA.Barclays Capital | European Leisure: Online Gambling The gap has grown considerably since 2006. as does the superior liquidity that PartyGaming has over its European rivals. This is a strategic decision for each operator. and this is especially the case in territories that are new to the product. and B2B deals with these companies should be a material growth driver for operators as more countries look to regulate. were late to enter the Italian market.136 for PokerStars and Full Tilt Poker. respectively. This can be through association with poker in general (eg. While other operators may not have the same financial muscle of US-facing sites. earlier this year. A strong brand name is key to success in these markets. H2GC estimates PokerStars and Full Tilt have a global market share of over 50% by player volume and over 55% by revenues (given their disproportionate number of high-value players). PokerStars recently entered the Italian market and is using the money it generates in the US to offer guaranteed jackpots above those of other operators. In Europe. Although it could therefore be argued that a competitive advantage still remains for operators accepting US players. to attract players. generating US$328mn in 2008 – 54% of the group’s total revenue. PartyGaming and bwin. In these circumstances. bwin and sports betting. Trust is a key component in online gaming. among others. 9 October 2009 125 . in our view. familiarity due to other gambling products (eg. local companies with a strong brand are well positioned.904 and 19.244 players between May and August 2009. PartyGaming signed a B2B deal with DM plc. are in a particularly strong position. that a higher initial outflow of funds to acquire a market-leading position in the country is the best long-term strategy. Entering the market early and building high levels of liquidity is going to prove more difficult as the potential of newly regulated markets becomes apparent.

H2GC forecasts the European and Canadian markets to have grown 29% and 25% respectively. this is also the case for 888. versus sports betting contributing over 50%.5% three-year CAGR 2009E-12E. which views the offering as important in so far as it gives the company a full product suite. Poker growth The European poker market is forecast to grow at a 16.Barclays Capital | European Leisure: Online Gambling Figure 189: Poker FY2008 gross revenues (US$ mn) 350 300 250 200 150 100 50 0 PRTY BWIN 888 135 79 39 SBT 328 Figure 190: Poker as percentage of total revenues FY2008 60% 50% 40% 30% 20% 10% 0% PRTY 888 BWIN SBT 33% 22% 17% 54% Source: Company data Source: Company data bwin has a sizable poker offering. In effect. whereas it is the main offering for PartyGaming. and for SBT. the performance in FY09E. and Canada’s at 3% CAGR over the same period (according to H2GC data). but is not regarded as a revenue driver. Between 2007 and 2009E. due to the July year end. For 888. Poker represented only 17% of 2008 revenues for Sportingbet. where poker contributes roughly half the revenue that casino does. bwin and PRTY we look at the performance from H108 to H109. Below we show the revenue performance of each company over the past year. bwin and Sportingbet. a legacy from its US operations. 9 October 2009 126 . although it remains a secondary offering at only 22% of revenue in 2008. PartyGaming has a material interest in Canada. poker is cross-sold from other products for 888.

Barclays Capital | European Leisure: Online Gambling Figure 191: Estimated FX-adjusted poker growth H1 08 – H1 09 30% 20% 10% 0% -10% -20% -30% -40% bwin PRTY 888 -16% -28% 26% Source: Company data bwin is the only operator to show growth in poker revenue in the past year. We have used the estimated currency effects for the groups as a whole as a proxy for the impact on poker revenues. driven by revenue generated from its Italian operations. 9 October 2009 127 . we estimate the company would have reported poker revenue declines. without the incremental Italian revenues. We have excluded Sportingbet given the size of the poker offering and timing differences due to its July year end. though we estimate that currency-adjusted poker performance posts double-digit declines over the same period.

and we do not expect online sports betting to be regulated there in the foreseeable future. 9 October 2009 128 .000 4. This would make it the fastest growing market.457 1. growing to US$12bn by 2012 at a three-year CAGR of 6%.903 2012E N America Asia/ME Other Over the same period. H2GC forecasts sports betting revenue in Europe to grow from US$2.Barclays Capital | European Leisure: Online Gambling Sports – strong growth from Eastern Europe Sportingbet and bwin both generated over 50% of group gross revenues from sports betting in 2008. Eastern European countries are showing particularly strong growth in sports betting. Figure 192: Global online sports betting revenue (US$ mn) 14. No opening of the US market is anticipated.000 12. there is resolute opposition to land-based sports betting in the US.000 2.7bn to US$4bn at a three-year CAGR of 14%. and will likely remain the market leader in 2012. which is dominated by monopoly provider Japanese Racing Association (JRA). The UK is the largest European sports betting market. Sportingbet’s sports offering is best in class.000 8. and we view this as a major growth driver for Sportingbet going forward.000 10. 70% of Asian online sports betting was generated in Japan in 2008. despite generating less revenue than bwin.056 1.498 2. with a projected market share of 48% in 2012.000 6.653 3. and would represent an increase in global market share from 27% to an estimated 33%.613 5. Revenue in the global online sports betting industry is estimated by H2GC to be almost US$10bn in 2009. however. Asia remains the largest sports betting market.000 0 2009E Europe Source: H2GC 810 644 5. returning higher gross win margins than its peers.

Barclays Capital | European Leisure: Online Gambling Figure 193: European sports betting revenue by country (US$ mn) 800 700 600 500 400 300 200 100 0 Greece France Germany Norway Italy UK Sweden Spain Ireland Netherlands Czech Rep Denmark Finland 129 Austria 2009E Source: H2GC 2012E The UK is the largest European sports betting market. given the differential in size of the two companies. Italy’s continued regulation focuses on poker. casino and bingo. Pari Mutuel Urbain (PMU). in our view. significant revenue from the product remains elusive for PartyGaming. 888 does not disclose sports betting revenue. Limited growth in Germany reflects the generally held view that it will not liberalise in the near future. France’s superior growth to Italy is a reflection. while France intends to regulate the market for all sports betting as well. Horse race betting in France will be regulated under a tote model that will be dominated by the current monopoly. of the respective attitudes of the two countries towards regulation. Despite continued efforts to improve its sports book offering following the acquisition of Gamebookers in 2005. although bwin’s gross revenue was far greater in actual terms. 9 October 2009 Croatia . Figure 194: Sports betting FY2008 gross revenue (US$ mn) 400 350 300 250 200 150 100 50 0 BWIN SBT 129 25 PRTY 10% 0% BWIN SBT PRTY 4% 336 20% 40% 30% Figure 195: Sports betting as % of total revenues FY2008 60% 50% 56% 56% Source: Company data Source: Company data Sportingbet and bwin both generated over 50% of group gross revenues from sports betting in 2008. this accounted for 5% of total operating income for the company in 2008. and will likely remain the market leader in 2012. which is instead reported as a component of Emerging Offerings.

Figure 196: Sports betting margin FY2008 12% 10% 8. despite lower-margin live betting accounting for over 50% of total sports betting. 10. ¹ SBT margin annualised as July yr end. where there is less intense competition between operators.12E) Source: H2GC Eastern European countries are showing particularly strong growth in sports betting.7% PRTY Sportingbet is growing its business in Eastern Europe.4% 4.0% 8% 6% 4% 2% 0% SBT ¹ BWIN Sports betting margin FY 2008 Source: Company data. and we view this as a growth driver for Sportingbet going forward. Sportingbet’s sports offering is best in class. 9 October 2009 . and therefore we would expect a lower margin. However. Figure 197: Sports betting four-year CAGR (2008-12E) – top 20 countries by growth rate 60% 50% 40% 30% 20% 10% 0% Ukraine France Czech Rep Luxembourg Hungary Poland Spain Belgium Slovakia Slovenia Estonia Belarus Russia Latvia Serbia Macedonia Lithuania Romania Denmark Portugal Bulgaria 130 4 year CAGR (2008 . with the company returning higher margins than its peers.Barclays Capital | European Leisure: Online Gambling Despite generating less revenue than bwin. we note that lower-margin live betting accounts for over 50% of sports betting at bwin.

000 1. though further regulation in Italy.000 5.000 3.544 2.040 3. growing to US$8bn by 2012 at a three-year CAGR of 12%.277 2012E N America Asia/ME Other Over the same period. Figure 198: Global online casino revenue (US$ mn) 9. Revenue in the global online casino industry is estimated by H2GC to be US$5.000 8. and going forward we expect casino growth to be driven by non-download games and livedealing.022 1575 2.000 2. PartyGaming has outperformed both 888 and bwin on a constant-currency basis in recent trading.Barclays Capital | European Leisure: Online Gambling Casino – Italy fastest growth The UK is the largest European casino market. Figure 199: European casino revenue by country (US$ mn) 900 800 700 600 500 400 300 200 100 0 Germany Greece France Italy Norway UK Sweden Spain Ireland Netherlands Finland Denmark Belgium Austria Russia 131 2009E Source: H2GC 2012E 9 October 2009 . This makes it the fastest-growing major market.000 6. expected in Q2 2010. exposure to Italy will therefore be a key growth driver over the next couple of years.000 0 2009E Europe Source: H2GC 831 383 1010 2. and represents an increase in global market share from 40% to a projected 44%.3bn to US$3. should make it the fastest-growing market.000 7. H2GC forecasts casino revenue growth in Europe from US$2.000 4. as well as further regulation of European markets.7bn in 2009.5bn at a three-year CAGR of 16%.

which would make it the fastest growing online casino market in Europe. making it the largest online casino globally. having also signalled its intention to regulate the market. Figure 200: Casino FY2008 gross revenue (US$ mn) 300 250 200 150 242 100 157 50 0 PRTY 888 BWIN SBT 100 47 Figure 201: Casino as % of total revenues FY2008 70% 60% 50% 40% 40% 30% 20% 20% 10% 0% 888 PRTY SBT BWIN 17% 61% Source: Company data Source: Company data 888 generates over 60% of group revenues from casino. with a three-year CAGR of 45%. although PartyGaming’s gross revenue was far greater in actual terms. 888 has an Italian licence but is waiting for casino to regulate before entering. as well as further regulation of European markets. with a projected three-year CAGR of 100% (according to H2GC).Barclays Capital | European Leisure: Online Gambling The UK is the largest European casino market. Going forward. we believe this should generate material earnings for the company. despite starting in a disadvantageous position due to late entry. One of the reasons for strong growth in casino for the company has been the strong cross-selling between the two products. Exposure to Italy is likely to be a key growth driver over the next couple of years. we expect casino growth to be driven by nondownload games and live-dealing. In recent trading. Denmark is also forecast to show strong growth. 9 October 2009 132 . and we believe operators who already have market share through poker will be at a significant advantage. PartyGaming and bwin are currently both providing poker through their Italian licences and we thus consider them best placed to take advantage of casino regulation. H2GC expects Italy to regulate casino online next year. and will likely remain the market leader in 2012. both through their brand presence from their poker offerings and the cross-selling potential between the products. PartyGaming’s casino offering has outperformed both 888 and bwin on a constant currency basis. PartyGaming’s poker offering is under pressure from US-facing sites and we forecast casino to generate a similar amount of revenue as poker going forwards.

117 1. while the North American market declines by 1%. Europe’s projected growth would represent an increase in global market share from 71% to around 73%.3bn to US$2.1bn at a three-year CAGR of 16%. Figure 203: European bingo revenue by country (US$ mn) 700 600 500 400 300 200 100 0 France Germany Norway Sweden Other Europe Spain Italy UK Finland Ireland Netherlands Belgium Russia Denmark Portugal 133 2009E Source: H2GC 2012E 9 October 2009 .500 2.9bn by 2012 at a three-year CAGR of 15%.Barclays Capital | European Leisure: Online Gambling Bingo – PartyGaming market leader after Cashcade acquisition Online bingo is dominated by a handful of countries.000 1.000 500 0 2009E Europe Source: H2GC 472 297 247 305 2. Spain and Sweden. Figure 202: Global online bingo revenue (US$ mn) 3.9bn in 2009. Not all operators report bingo as a separate product. Revenue in the global online bingo industry is estimated by H2GC to be US$1.341 2012E N America Other Over the same period. compared to less than 1% in H1 2009. We project that bingo will account for c20% of group revenues in 2010.500 1.500 3. growing to US$2.000 2. notably the UK. though the clear market leader is PartyGaming following the acquisition of Cashcade in July 2009. bingo revenue in Europe is forecast by H2GC to grow from US$1.

We project that bingo will account for around 20% of group revenues in 2010. compared to 5% and 2% in 2008. notably the UK. land-based bingo is very popular. the bingo industry’s equivalent to PokerScout. We forecast bingo net revenue of US$100mn in 2010 from the Cashcade acquisition. 9 October 2009 134 .Barclays Capital | European Leisure: Online Gambling Online bingo is dominated by a handful of countries. Not all operators report bingo as a separate product. Sweden’s large market share is a product of the high propensity to gamble of its citizens. though the clear market leader is PartyGaming following the acquisition of Cashcade in July 2009 for 5. currently outsourced to 888. which monitors player numbers on online gaming sites. in-house. estimates that Cashcade has approximately 23% UK market share. Spain and Sweden. Regulation of France and Italy will give the two countries a forecasted European market share of 12% and 8% respectively in 2012. In the UK and Spain. and therefore it is unsurprising that these countries lead the way in the online space.9x 2008 EBITDA. estimated bonuses of over 50% results in over US$200mn of gross revenue. we believe the company could bring some of the services. which would give the company a low double-digit European market share. Bingo Port. although PartyGaming has committed to using 888’s software for the next 30 months. compared to less than 1% in H1 09. Cashcade was signed up to 888 on a B2B deal when it was bought by PartyGaming.

A combination of the threat of infringement proceedings by the ECJ and the need for incremental tax revenue caused by the global downturn has driven regulatory change in Europe. however. National governments’ attempts to close their borders to online operators raises fundamental questions relating to fair competitive practice under the EC Treaty. and therefore no harmonisation for gambling. There is little clarity from Brussels. The ECJ holds that gambling constitutes a ‘service’ to which Article 49 applies. No Europe-wide directive for gambling – Member States granted significant discretion to adopt restrictive regulatory framework There is no Europe-wide directive that applies to gambling services. Article 56 also calls into question the validity of financial transactions blocking as a barrier to the provision of online gambling. With France and Spain expected to regulate in a similar fashion next year. However. However. reasoned opinions and ECJ court cases. the clearest example of this being when operators lost up to 95% of profits overnight with the passing of the Unlawful Internet Gambling Enforcement Act in the US in 2006. and that an overly restrictive licensing regime or monopoly model constitutes a restriction on the freedom to provide services and freedom to establishment. instead favouring regulation at a national level. the content of this document has been written by an investment research analyst. the majority of restrictive frameworks do not meet these criteria. The ECJ says gambling is a service where internal market freedoms apply. and there are a number of cases against Member States waiting to be heard by the ECJ. the recent Schaldemose report 4 even suggests that a ‘one size fits all’ free-market approach is undesirable. EU case law based on compatibility of national law with EU law The majority of EU gambling-related case law is based on the compatibility of the EC Treaty with national legislation that restricts the cross-border provision of gambling services. with a movement towards licensing and taxation as demonstrated by Italy. we expect Europe to trend towards this regulatory framework. Member States are still granted significant discretion to adopt regulatory models that restrict the freedom of movement of gambling services. although European authorities have taken action in the form of comments. a state monopoly) can be justified on the grounds of social policy. the interpretation of the aforementioned regulatory changes represent the views of the research department and should not be relied upon as a formal legal interpretation 4 See Appendix 9 October 2009 135 . as such. 3 The proposed regulatory changes represent an important part of our investment thesis regarding the on-line gambling companies covered in this report. relate to: Article 43 – Freedom Of Establishment – this allows individuals / companies to set up and operate a business in any EU Member State. EU Member States currently apply diverse regulatory licensing frameworks ranging from total prohibition to an open market. Online gambling is extremely regulatory driven. Article 56 – Freedom of Capital – this prohibits any restriction in the movement of capital between Member States.Barclays Capital | European Leisure: Online Gambling EUROPEAN REGULATION – OUTLOOK IMPROVING FOR OPERATORS 3 EU Case Law dictates that a restrictive gambling framework (eg. The key themes. Article 49 – Freedom To Provide Services – this allows an individual / company established in one Member State to offer services to other Member States. as opposed to a purely open or closed market. explained in detail in the Appendix. and therefore compatible with European law.

case law has established that Member States can restrict the freedom to provide services or the freedom of establishment if they are justified by an overriding reason relating to the public interest. The main point of debate is whether a monopolistic / restrictive regime is for protectionist reasons. 9 October 2009 136 .Barclays Capital | European Leisure: Online Gambling Case law has established that Member States can restrict EC Treaty freedoms if justified by reasons relating to public interest. or for public welfare. However. each of which are explained in more detail in the Appendix. We look at the most important case law relating to online gambling.

for reasons of social concern. Ensure some of the proceeds are used for benevolent causes. The opening of national markets is not necessarily needed to comply with EU law This was groundbreaking in that it demonstrated the opening of national markets is not necessarily needed to comply with EU law. The majority of case law is based on land-based gambling. it is up to national courts. 9 October 2009 137 . then a monopoly may by justifiable.Barclays Capital | European Leisure: Online Gambling Case law Most cases brought before the ECJ have concerned the compatibility of monopoly gambling operators with the fundamental freedoms of European law. A monopoly may be justifiable if it is for reasons of social welfare The court stated that the most important factor in determining compatibility with European law is the objective of the gambling framework. to decide whether a more liberalised model is preferable to a monopoly. Läärä 1999 The ECJ found that state monopolies are a barrier to Article 49. Furthermore. Ensure lotteries were operated for charitable or public interest rather than commercial profit. on grounds of nationality). However. rather than the ECJ. The ECJ confirmed these considerations were also applicable to other forms of gambling in the cases Läärä 1999 and Zenatti 1999. Avoid stimulating demand. Although the raising of funds for socially beneficial purposes was not on its own justification for restrictive licensing. as long as the restrictions did not discriminate on the basis of nationality. to prevent harmful moral / financial effects of gambling) is permissible. Reduce the risk of crime / fraud. ensuring greater integrity in the game for the benefit of the players. However. Restrictions were not considered discriminatory if designed to: Prevent crime / fraud. If it is for reasons of social welfare. restriction on the grounds of social policy (ie. with the bwin Liga / Santa Casa case the first time that the ECJ has ruled on an Internet gambling monopoly. non-monopolistic systems may also be incompatible if they discriminate between operators (eg. this is justifiable provided that the monopoly’s role was to: Limit the promotion of gambling. However. Gambelli 2003 This case centred on the validity of Italian betting legislation that prohibited unlicensed operators accepting bets from Italian customers. the freedom to provide services. Zenatti 1999 Public interest concerns are justification for restricting betting services The ECJ ruled that public interest concerns were justification for the restriction of betting services. this would not be the case were the monopoly run for profit. Schindler 1994 Prohibiting competition in national lotteries is compatible with European law The ECJ ruled that prohibiting competition in national lotteries was compatible with European law given the peculiar nature of lotteries. as described above.

Barclays Capital | European Leisure: Online Gambling Advocate general opined that law discriminating against foreign bookmakers could not be justified. Stanleybet challenged this by claiming that its UK licence should be valid in all Member States. Law discriminating against foreign operators is not consistent with the objective of eradicating crime Expansion of a restrictive framework can be compatible with EU law if it is necessary to draw players from illegal gambling The ECJ ruled that this was contrary to European law. ECJ upheld that law was justifiable on the grounds of public interest. it discriminated against non-Italian applicants. and that the restrictions were not consistent with the objective of eradicating crime and fraud in the Italian gambling market. this ultimately upheld the idea that Member States can restrict gambling services on social grounds as long as it is done in a consistent and non-discriminatory way. Läärä and Zenatti. The ECJ also stated that it was for the national courts to decide whether the legislation is consistent with its stated public interest purpose. including Italy. Placanica 2007 This case was also referred by an Italian court concerning the prosecution of three men acting as intermediaries for Stanleybet International. they should aim to bring about a genuine reduction of gambling opportunities. This clarified that for national restrictions to be justifiable. Despite the opinion of the advocate general that the Italian law could not be justified as it was discriminatory against foreign bookmakers. Italian law effectively prevented operators publicly listed on foreign stock exchanges from getting licences. the court turned to its earlier judgments in Schindler. who were excluded from the licence tender process. furthermore. stating that public interest considerations can justify restrictions on the freedom to provide services and the freedom of establishment. along with a certain scale of advertising – therefore expansion of a restrictive gambling offering can be compatible with European law. However. thus excluding them from providing gambling services. 9 October 2009 138 . To do this. it may be necessary to offer an extensive range of products. the theory of controlled expansion was also recognised – that a restricted offering may have to expand in order to draw players away from illegal gambling.

in breach of the principles of the European Treaty? “2) Is it contrary to Community law … to extend that monopoly to ‘the entire national territory. bwin Liga. all parties considered the argument raised by the Commission’s written submission as out of the scope of the questions referred to the Court and irrelevant. as well as advertising regulations that only allow advertising for games of chance operated by Santa Casa. whereby Portugal failed to notify the European Commission of the extension of the Santa Casa monopoly to the Internet – the challenged piece of legislation. originally asking for clarification on just two specific questions: “1) Does the monopoly granted to Santa Casa … constitute an impediment to the free provision of services. the extension of Santa Casa’s monopoly to the Internet was all the more justified as the social policy risks are potentially much higher with the Internet compared to traditional gambling. He considers the monopoly is neither excessive nor discriminatory. and not the ECJ. which saw the league renamed ‘bwin Liga’. ‘Reference for a preliminary ruling from the Tribunal de Pequena Instância Criminal do Porto lodged on 2 February 2007’ 6 www. The ECJ clearly stated in the Läärä case that the question of whether it would be preferable to impose regulations on certain operators. such as Liga or bwin. such as granting concessions to various operators. Santa Casa. which broadly followed previous EDJ rulings on Gambelli and Placanica. In answer to the second question. or grant an exclusive operating right to a licensed public body. held the exclusive right to organise and operate lotteries and off-course betting in the whole of Portugal. Portugal’s state monopoly. the ECJ raised additional questions regarding a ‘technical regulation’.php?id=185 9 October 2009 139 . the advocate general opined that it was perfectly valid for a gambling monopoly to extend its operations to the Internet. as long as it was in keeping with the underlying social policy concerns that justified the monopoly In October 2008 Advocate General Bot delivered his opinion.eu/actuality/details-pdf.Barclays Capital | European Leisure: Online Gambling Pending cases bwin Liga / Santa Casa bwin’s sponsorship of Portuguese football league challenged by the state monopoly.gaminglaw. Advocate General Bot rejected the claim of the Liga and bwin that it is necessary to ascertain whether the aims of the Portuguese legislation can be achieved by less restrictive measures. namely better quality of services at a better price. as long as it was in keeping with the underlying social policy concerns that justified the monopoly in the first place. However. 5 Case 42/07. A Portuguese court referred this case to the ECJ. He concluded that legislation that was not duly notified to the European Commission cannot be relied on in proceedings against private operators. Subsequently. do not arise with gambling. the advantages to the consumer of competition. Even bwin’s and the Liga’s legal counsel were “convinced the lack of notification is not of particular relevance to the matter. including … the Internet’?” 5 Advocate General opined that it was perfectly valid for a gambling monopoly to extend its operations to the Internet.” 6 The most interesting section of Advocate Bot’s opinion is that it explicitly states the aim of EU law is not to open up the gambling market. Santa Casa bwin and la Liga Portuguesa de Futebol Profissional announced a high-profile sponsorship in 2005. is a matter to be assessed by the Member States.

the Portuguese monopoly has been granted to a century old nonprofit making organisation aiming to finance causes of public interest. we therefore expect the court to follow Advocate General Bot’s statement that the penalties cannot be enforced as there had been no notification to the Commission of the extension of Santa Casa’s monopoly to include the Internet. there remains much debate as to the legitimacy of the monopoly. in effect. The restrictions must form part of a consistent gambling policy that does not go beyond what is necessary to achieve the stated objectives. The expansion of the monopoly to the Internet seems consistent with previous gambling policy. the ECJ ruled that the Portuguese legislation constitutes a restriction of Article 49. this preliminary ruling does not change the legality of operators offering gambling products to countries with ‘for-profit’ monopolies. However. According to ECJ case law. with concessions to casinos cited as grounds for inconsistency in legislation. The restrictions must limit betting in a non-discriminatory manner. The majority of EU monopolies are either run for profit. with restriction of competition based on social policy. As the national court did not consider the issue of notification. this simply expands the scope of the ECJ’s previous rulings on land-based case law to the online sphere. this may provide justification for the contravention of Articles 43 and 49. such as Germany and Greece. A Member State should be required to open up if it treats gambling and games of chance as true economic activities which yield maximum profits. and to protect the consumer from crime and fraud. the criteria remain that: The restrictions are based on social policy grounds. but that this can be justified by overriding reasons relating to the public interest. The conclusion is that prohibiting private online gaming providers from offering gambling products on the Internet can be compatible with EU law. in our view. This ruling does not ratify state monopolies. in order to counter harmful moral and financial effects. in our view. which should not be viewed as a great surprise. and will not lead to an exodus of online operators from EU countries which have restrictive frameworks. and will not lead to an exodus of online operators from countries with restrictive frameworks 9 October 2009 140 . Therefore. Conclusion Although this may be perceived as a landmark ruling. the ECJ refrained from addressing the matter. we believe that very little has changed in relation to the ECJ’s view towards restrictive gambling frameworks.Barclays Capital | European Leisure: Online Gambling Preliminary ruling – 8 September 2009 Preliminary ruling: prohibiting private online gaming providers from offering gambling products on the Internet can be compatible with EU law. and arguments that the same social policy objectives can be met by a licensed framework. There also appears to be no evidence of discrimination. In the bwin liga case. This case is the first time that the ECJ has addressed the issue of an online gambling monopoly in the EU. or do not have public interest at the heart of their objectives. For an online monopoly to be compatible with EU law. the freedom to provide services. We note that this ruling does not ratify state monopolies. In a preliminary ruling handed down by the court on 8 September 2009.

An operator with any equipment in the UK must apply for a UK licence. from state-run monopolies to liberal frameworks. although the trend has been towards restrictive licensing regimes as opposed to an open market. the ECJ has ruled that monopoly operators are not necessarily incompatible with European law. such as the UK Online gambling regulations differ greatly between Member States. Operators licensed in the EEA. The Gambling Commission and Department for Culture. or white-listed jurisdictions. Online gambling regulations range from a blanket ban (Germany) to liberal jurisdictions. That said. which entails a 15% gaming duty. Media and Sport announced a review in April 2009 looking at ways to make the UK more competitive.217 29 12 11 8 8 7 3 3 UK – liberal. However. from a blanket ban. can also advertise freely in the UK. and there will remain some countries where online operators will not be able to operate. offshore jurisdictions. which accepts operators who are licensed anywhere in the European Economic Area.30% share of the European gross gambling yield. Figure 204: 2008 gross gambling yield by country GGY (US$ mn) % of Europe UK Germany Sweden Italy France Spain Ireland Greece Europe Source: H2GC 2. in our view. to liberal jurisdictions such as the United Kingdom. the Appendix contains a comprehensive review of online gambling regulations and enforcement. and has gained a c. and that the government missed an opportunity to repatriate online gaming operators in lower-taxed. Europe is starting to open up for online gambling operators. William Hill and Ladbrokes both announced the relocation of their online sports books to Gibraltar in August 2009 to take advantage of the lower tax rate. caused by the economic downturn. not every Member State will open up. as well as potential reforms.Barclays Capital | European Leisure: Online Gambling EUROPEAN ONLINE GAMING REGULATIONS BY COUNTRY Gambling regulations differ greatly between Member States. with a c. This liberalisation has made the UK the largest online market in Europe. allowing all forms of online gambling provided by operators from the European Economic Area (EEA) as well as select ‘white listed’ non-EEA jurisdictions. as seen in Germany. 9 October 2009 141 .30% market share of the European online gross win The UK has the most liberal gambling market in the EU. This has been driven by the threat of infringement proceedings from the ECJ and the need for incremental tax revenue. open market The UK has the most liberal online gambling policy.095 857 809 555 547 534 208 200 7. For a more detailed view of an individual country’s regulations. Below we look at some key European countries when it comes to online gambling legislation. for the most pertinent EU countries. Such a high rate of tax has been criticised as making the UK uncompetitive.

and this is viewed by many as the tipping point where legislation became incompatible with European law. German regulation is further complicated by companies claiming to be operating legitimately under licences granted under the former German Democratic Republic (East Germany). however. and where operators have been granted licences and actually encourage participation in particular gambling events. where a Member State has no consistent or systematic policy to limit gambling. This is a common theme – can a licensing and taxation regime work if the authorities are unable to prohibit illegal operators from targeting their citizens? Germany – blanket ban on online gambling At the opposite end of the spectrum. Germany’s blanket ban on all forms of Internet gambling was introduced as part of the Interstate Gambling Treaty on 1 January 2008. Partial liberalisation of the industry. although they are not expected to be heard in the near future. the resources needed to implement this made it unworkable. which expires on 31 December 2011. such as state-run lotteries and casino games. however a less-restrictive gambling regime looks unlikely in the near future. however these are yet to be implemented by any of the states. and it has never materialised. European Commission initiated formal infringement proceedings.03% European average). citing that a complete ban on Internet gambling is neither proportionate nor justified. All of these regard compatibility with EU law. or rendered impossible. in breach of Community law. Svenska Spel and ATG. the Swedish spend the highest proportion of GDP on online gaming of any European country (0. Both have had online offerings since 2003. There are currently three German cases before the ECJ. to help enforce the prohibition of unauthorised gambling. Sweden – regulation at tipping point Market is dominated by two state-owned monopolies As the third-largest market in Europe. but it is practically impossible for banks to monitor every online transaction to filter out payments to gambling operators. with Svenska Spel offering online poker since 2006. but in almost every instance. the UK government announced a clampdown on illegal online gaming advertising. Germany remains the second largest country in Europe in terms of GGY. citing that a complete ban on Internet gambling is neither proportionate nor justified The European Commission initiated formal infringement proceedings. The treaty allows states to protect their individual monopolies over sports betting and lotteries. The treaty also allowed the blocking of ISPs and financial transactions. but neither of these have been implemented by any of the states Enforcement varies between states. Germany’s blanket ban on online gambling allows ISP and financial blocking to enforce the prohibition. The market is dominated by two state-owned monopolies. Despite this. by the Member State concerned. Payment blocking has been attempted. Svenska Spel’s online poker offering fundamentally changed the Swedish gambling market. whereby a Member State cannot apply criminal sanctions for failure to complete an administrative formality where such completion has been refused. 9 October 2009 142 . We believe that Germany could be found to be in violation of EU law. cases have been successfully defended on the principle laid down by the ECJ in Placanica 2007.Barclays Capital | European Leisure: Online Gambling Akin to Denmark.17% of GDP in 2008 versus 0. A report initiated by the Swedish Ministry of Finance in December 2008 (the Nyren report) outlined two alternative approaches to its gambling regime: Further restriction.

First. making operators subject to Italian tax. and the size of the overall market. it has now sold its loss-making Italian business as sports betting has not regulated as quickly as was originally anticipated here. ISP blocking has been used to prevent ‘illegal’ online offerings. The authorities use ISP blocking measures to stop unlicensed operators. The Swedish government’s decision on future gambling regulation could be a material growth driver for the industry. we see scope for significant market share gains from foreign operators.aams. newspapers and their editors have been prosecuted for publishing gambling ads.Barclays Capital | European Leisure: Online Gambling Report recommending either further restrictions or partial liberalisation. Authorities have announced that cash poker and casino games will become authorised in due course and many operators are waiting until this happens before entering the market. driven by continued regulation of the industry whereby tournament poker was legalised in September 2008. Currently. this report has been widely criticised as being fundamentally flawed. Media companies that advertise unauthorised operators will be penalised. explained in the Appendix. the ECJ would not have commenced infringement proceedings against the country. by the industry. blacklisted websites have found ways to circumvent the blocks.700 websites 7. most notably Gambelli (2003) and Placanica (2007). as it assumes that the current framework is compliant with EC law. blacklisted websites have found ways to circumvent the ISP blocks. However. as current framework incompatible with EC law However. were this to be the case. 7 AAMS. The products currently available online are domestic and international horse racing. Italy established a harsh framework to prohibit unauthorised operators. Freedom to advertise should drive growth of both the market share of foreign operators. the regulation of a market that thus far has been vehemently pro-monopoly could lead to a change in attitude of other pro-monopoly countries. One of the most controversial issues of Italian legislation is applying criminal sanctions to operators not complying with Italy’s regulations. Italy – liberalising. Swedish media and The Football League. Sportingbet had suggested that it is a market that would be of interest if sports betting opened up. including tournament poker (but not ring games). but that the poker licence is too expensive for entry at the moment. compromising the effectiveness of this. it is difficult to advertise in the country. Second. www. but found the effectiveness of this compromised as operators circumvent the blocks. This will ensure that Italy continues to be fastest-growing country in Europe. instant lotteries and sports betting games. However. Italy has adopted a licensing and taxation regime which has turned the country into the fastest-growing online gaming market in Europe. and the AAMS (Amministrazone Autonoma dei Monopoli di Stato – the organisation that regulates gambling in Italy) has powers to make it compulsory for ISPs to block access to blacklisted operators (those not in possession of a licence) – the blacklist currently contains more than 1. but ISP blocking ineffective Italy is the fastest-growing online gaming market in Europe. In partnership with the issuing of licences.it 9 October 2009 143 . Italy’s regulatory framework of licensing and taxation of online gaming has expanded over recent years. leading to a history of ECJ case law. Some games of skill have been available online since September 2008. however. Requirements for a licence are that online operators must have a permanent establishment in the country.

5% for sports betting. A revised draft has been approved by the EC. and domestic pressure has ensured that these were never implemented. A government report on the opening of the French market recommends banning online slot machines. the consumer would pay €10. The Commission remains concerned over the inclusion of a maximum payout percentage and the tax rate. the French authorities issued arrest warrants for Unibet’s CEO Petter Nylander and bwin’s CEO Norbert Teufelberger. France is aware of the need to regulate the online market as more revenues drain from the state-run duopoly to unauthorised online gambling sites. protecting its state-run duopoly and prosecuting unauthorised online operators. but it risked infringement proceedings from the European Commission. Revised draft approved by the EC. We expect the main beneficiaries to be operators who can leverage their existing brand in the country and those who are able to make strategic deals with French companies. whereby France will take into account licences from other EC Member States. currently proposed as 8. however. Criminal prosecutions are not uncommon in France. In the past. PartyGaming closed its French website after receiving a formal request to meet with French police. as did 888 after then CEO John Anderson was taken in for questioning.Barclays Capital | European Leisure: Online Gambling France – licensing regime proposed. Opponents to the bill cite the high levels of tax as making the regime unworkable. However. closed off to operators without a French licence. The same thing happened when France tried to adopt a payment processing block. The European Commission issued a detailed opinion on 8 June 2009 asking for clarification on how the applicants would be licensed. the French have compromised by agreeing to a review after two years to look at the impact of these measures.5% on horse race betting and 2% on poker. even though the Francais de Jeux (French lottery) cycle team competed. For example. if consumers are able to place a €10 bet for €10 with an unlicensed operator. and how the law will apply to operators with licences from other EU Member States. online betting on non-sporting events and online lotteries. The Unibet cycling team was banned from the Tour de France. the whole system will fail as this puts licensed operators at a competitive disadvantage.85. to make a €10 bet. this argument becomes negated – the difficulty is banning non-licensed operators who could undermine the system by offering more competitive odds as they are not constrained by taxation. and this will lead to considerable growth in the French market. with high tax rates France has traditionally taken a very aggressive stance towards online gambling. whereby France will take into account licences from other EC Member States. The most likely scenario is that the tax would be passed directly onto the consumer. and whether they are necessary to meet policy objectives. 9 October 2009 144 . can only work if it is successful in preventing unlicensed operators from providing online gambling services to French citizens Authorities tried to implement ISP and payment processing blocking measures in a bill in 2007. 15. mirroring that of Italy. However. among others. We expect these proposals to come into effect in the first half of 2010. authorising just sports and horse race betting and certain games of skill. fixed-odds betting. based on a violation of stringent advertising laws. The French proposal of licensing and taxation. if all participants face the same level of taxation.

when it was declared that offering online gambling was illegal without authorisation from Spanish authorities. for the most populated regions. In practice. As it falls into a grey area. There was no national legislation on online gambling before December 2006. The regulation of online gambling in Spain is problematic as gambling is traditionally regulated at a regional level. Madrid and the Basque Country. have announced that they will introduce regional gambling legislation. there is only one authorised online operator – state-owned monopoly Loterias y Apuestas del Estado (LAE). There are no express provisions covering online gambling in Ireland. We view further regional legislation as the key to regulation in Spain going forward. Although no operators currently hold a regional licence. Ireland – maximising tax revenues Ireland is looking to license online gaming in an attempt to capture much-needed tax revenues. and the current financial climate is encouraging this. have since regulated online gambling to create a regional licence. however we believe that. Reform is firmly on the agenda. we expect this to change as more regions regulate online gambling. We view further regional legislation as the key to regulation in Spain going forward Given the slow progress of national legislation. 9 October 2009 145 . we now illustrate the disharmony in views of Member States towards online gambling. this is clearly demonstrated by the responses of Finland and Denmark. who had both restricted their gambling markets to a state-run monopoly. However two regions. however. Despite this. there have been no prosecutions. Rioja and Castilla y Leon. Discord in views of Member States towards online gambling Having looked at the regulatory position of the largest European markets. with operators located remotely allowed to openly promote and offer their services to Irish citizens. The economic downturn has forced many countries to look at opening the online market for much-needed incremental income Ireland is a prime example of how the need for incremental tax revenue is driving regulation in Europe. Spain retains a 7% share of total European online gross win.Barclays Capital | European Leisure: Online Gambling Spain – regional regulation The regulation of online gambling in Spain is problematic as gambling is traditionally regulated at a regional level. nor any protective measures to prevent it. the best way to capture tax revenues remains under debate. and the differing reactions show the discord in the views of Member States to European law. this will be an attractive proposition for operators. and expect this to drive further growth of the market. A report in 2008 suggested that it would be an appropriate time to regulate online gambling and turn Ireland into a gaming-friendly territory to attract operators and gain much-needed tax revenue. two more regions. The European Commission issued a reasoned opinion to both countries in 2007. Regional licence holders can only offer online gambling to residents within that region. This is also clearly seen in the contrasting behaviour of Greece and Cyprus towards restricting online operators.

Barclays Capital | European Leisure: Online Gambling Finland – restrictive monopolistic regime Like the majority of Member States. Cyprus – reluctant to impose online restrictions Like Greece. OPAP has a monopoly over land-based lottery and sports betting. although the Cypriot authorities have not issued any licences themselves. regulation does not contain direct reference to online gambling. Unlike Greece. reasons. However. whereas at the moment they are in a monopolistic position due to the licensing system. it has instead opted to regulate the online gambling market by creating a national licensing and tax framework. the government is reluctant to impose restrictions on these operators lest it violates EU law. Cyprus has a very restrictive land-based gambling regime. and the differing reactions show the discord in the views of Member States to European law. with Sportingbet generating almost 15% of revenue from the country in 2008. Reforms are under way to establish a national licensing system for online gambling. Despite the EC issuing a reasoned opinion in 2007. A more liberalised market could significantly increase revenues for online operators. Greece is a lucrative market for many operators. without any ISP or payment processing blocking measures. where Finland appears to be running a monopoly online casino for economic. there is a suggestion that ISP blocking could be used to enforce the regulated market. Denmark – regulating after reasoned opinion Denmark received a reasoned opinion from the EC at the same time as Finland. The European Commission issued a reasoned opinion to both countries in 2007. Greece – ban on online gaming but unable to enforce Despite having one of the highest spend-per-capita on gambling products in the world. licences have only been issued to three state-run operators. however. pg 10 Sportingbet plc year-ended 31 July 2008 results presentation 9 October 2009 146 . but a completely different attitude to restricting foreign online operators and violating EU law. Although there are restrictions on advertising on television and radio. dominated by OPAP. new proposals are set to legally confirm the monopoly status of the three operators. Annual Report 2008. 8 9 Danske Spil. EU-licensed online gambling operators are allowed to offer services in Cyprus. it has proved impossible to prevent Greeks placing bets with foreign online gaming operators. Danske Spil represented only around 40% of all gambling marketing in 2008 8. rather than social. instead of defending the state-run monopoly Danske Spil. Greece has one of the most restrictive gambling frameworks. Despite government previous efforts by authorities to strictly enforce the prohibition of unlicensed operators. EU-licensed operators. Finland prohibits unlicensed gambling. foreign-based online operators have been allowed to advertise freely. which severely restricts online operators’ ability to advertise. however. Despite the unrestricted access enjoyed by foreign. Cypriot authorities prosecute local online operations. this again illustrates showing the inability of authorities to prevent non-licensed operators from providing gambling services to their citizens. where both countries have restrictive landbased gambling frameworks dominated by OPAP. OPAP’s marketing spend allows it to apply financial pressure on media companies. Although there are currently no payment processing bans or ISP blocking measures in force. It also guarantees the monopolies’ rights to provide gambling services online. The new legislation does not appear to be compliant with the EC Treaty. and online gambling is strictly prohibited. However. A similar situation occurs in Greece and Cyprus. Finland and Denmark both restricted their gambling markets to a state-run monopoly. who hold monopolies in different areas of gambling. 9 However.

The main problem facing Member States at the moment is how to block ‘illegal’ online operators. Other countries. although the trend has been towards restrictive licensing regimes as opposed to an open market throughout Europe. Ireland’s decision for reform is based purely on fiscal grounds. Europe is starting to open up for online gambling operators. there has been a trend towards individual Member States issuing licences and taxing operators to capture much-needed tax revenue. This will be the main problem facing countries such as France. are still able to provide gambling services at a more competitive price. demand for online gaming products has flourished. risking infringement proceedings. despite ISP blocks and media restrictions. There have been three main drivers of this regulatory change: Online gaming is now regarded as a potential source of much needed incremental tax revenue. as it is already compliant with EU law. it is practically impossible for banks to monitor every online transaction to filter out payments to gambling operators. but this has only been partially effective given the ability of operators to circumvent the blocks. To do this. As shown in Germany. where Member States are becoming compliant with EU law. The ECJ has ruled that monopoly operators are not necessarily incompatible with European law. The main problem facing Member States at the moment is how to block ‘illegal’ online operators. However. 9 October 2009 147 .Barclays Capital | European Leisure: Online Gambling Conclusion Europe is starting to open up for online gambling operators. who do not have to pay tax. and there will remain some countries where online operators will not be able to operate. Member States. will continue to run monopoly frameworks in contravention of EC law. are becoming compliant with European law. however the plethora of payment processors available make it difficult to implement a full block. we believe this to be the case in Portugal. such as Germany and Finland. where operators will not sign up for a licence which forces them to pay up to 15% tax if non-licensed operators. after the Santa Casa preliminary ruling. the majority of proposed reform is in response to reasoned opinions by the EC. This has been done in Italy but there remains an inability to stop unlicensed operators. although the trend has been towards restrictive licensing regimes as opposed to an open market throughout Europe. authorities have realised that attempts to prohibit this are futile. Increased demand – through increased supply and greater social acceptance. Italy has tried with ISP blocking. Not every Member State will open up. Hungary was successful in implementing payment blocking with certain Hungarian credit cards.

we believe that Sportingbet will be well placed to generate substantial earnings. in France it has a JV signed with a large media company and in Spain it has holdings in bet bull. but meaningful growth going forward will depend on the commercial viability for it to obtain a licence. While PartyGaming’s poker offering continues to come under pressure from US operators. with poker forecast to drive Spain’s online growth. In Italy. we feel that Sportingbet’s positioning in Eastern Europe will prove to be a shrewd strategy. especially with cross-selling from their poker offering. we believe that the company can once again flourish in areas with ring-fenced liquidity. As these grow to a meaningful size. with their Gamebookers brand particularly strong in these markets. should be another source of growth for the company. We note Sportingbet’s market share in Spain. PartyGaming also have a material presence in Eastern Europe. PartyPoker remains a significant brand. France and Spain. as have been achieved already in Turkey and Greece. a company with retail betting shops in the Madrid region. 9 October 2009 148 . which was not the case in Italy. the company has become market leader following the acquisition of Gioco Digitale.Barclays Capital | European Leisure: Online Gambling Beneficiaries of European regulation Short term We view bwin as the best-placed company to benefit from the continued regulation of European markets in the short term. These markets are already growing at a tremendous pace. albeit from a very low base. sponsorship of Real Madrid also contributes to increased brand awareness. The introduction of casino games in Italy. Medium/long term On a medium to long-term view. notably in Italy. and we believe that it could also gain valuable market share once regulation occurs.

Barclays Capital | European Leisure: Online Gambling

US REGULATION – WE FORECAST OPENING ON STATE BY STATE BASIS
We believe that the US will open up, although it is more likely to be on a state level before any Federal legislation is passed. This will allow more liberal states to regulate and capture much needed taxation from the industry without facing such intense Conservative opposition at a Federal level. The timeframe of regulation is difficult to predict; while regulation is inevitable, in our view, there remains staunch opposition that will likely delay implementation of this, leading us to believe a medium-term timeframe of c18-24 months is more realistic. On 13 October 2006, the US President signed the Unlawful Internet Gambling Enforcement Act (UIGEA) into law, piggybacking the unrelated SAFE Port Act, details of which can be found in the Appendix, along with other key legislation relating to online gambling in the US. The passing of UIGEA led to the exit of listed European online gaming operators from the US market. PartyGaming was one of the worst-affected companies, with £3bn wiped off its market capitalisation (72%) in October 2006, with 70% of revenue and 90% of EBITDA attributed to US operations in 2006. Figure 205: Revenue split H1 2006
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

23% 36% 48% 79% 99% 77% 64% 100%

52% 21% 1% WMH LAD

PRTY

SBT

888 US

Bwin Non-US

Source: Company data, bwin data Q3 2006, SBT data FY 2006 (July year end)

PartyGaming had the greatest reliance on US revenue in 2006; Sportingbet and 888 also generated the majority of their revenue from US customers. bwin, on the other hand, only generated 21% of revenue from the US in Q3 2006 from the Ongame acquisition in March of the same year.

Effect on earnings
In 2006, PRTY was set to earn US$750mn EBITDA 10, compared to US$112mn in 2007 and US$144mn in 2008 after the US business was closed. Below we look at the effect on clean EBITDA for each company.

10

Company estimate

9 October 2009

149

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Figure 206: 888 clean EBITDA
80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008

Figure 207: bwin clean EBITDA
70 60 50 40 30 20 10 0 -10 -20 2004 2005 2006 . 2007 2008

Clean EBITDA ($m)
Source: Company data Source: Company data

Clean EBITDA (€m)

Figure 208: PRTY Clean EBITDA
700 600 500 400

Figure 209: SBT Clean EBITDA (July yr end)
120 100 80 60

300 200 100 0 2004 2005 2006 2007 2008
40 20 0 2004 2005 2006 2007 2008

Clean EBITDA ($m)
Source: Company data Source: Company data

Clean EBITDA (£m)

bwin’s clean EBITDA chart is misleading as the company changed strategy in 2007; prior to this, all earnings were re-invested into marketing as the company focused on brand strength rather than profitability. The company now believes it has achieved ‘critical mass’ with regards to brand recognition in Europe and is running the business for profit. It is for this reason that the company is reporting clean EBITDA greater than at pre-UIGEA levels.

Unlawful Internet Gambling Enforcement Act
The UIGEA was a last-minute amendment to the unrelated SAFE Port Act 2006, which was passed by Congress at midnight on the day it adjourned for the 2006 election (30 September 2006), and signed into law on 13 October 2006. In short, this Act prohibits the transfer of funds from a financial institution to an Internet gambling site, with the exception of fantasy sports, online lotteries and horse racing. ‘Unlawful Internet gambling’ is defined as betting, receiving or transmitting a bet that is illegal under Federal, state or tribal law, but does not clarify exactly what this is. The US DoJ tends to use the Wire Act of 1961 as the principal statute for determining that Internet
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gambling is illegal. The UIGEA does not expand the reach of the Wire Act, and this has two main implications: Internet gambling is illegal according to the Wire Act of 1961, not UIGEA 2006. Therefore, even if an operator ceased to offer gambling products to US citizens on 13 October 2006 (when UIGEA became law), it can still be prosecuted for accepting bets before this time. The Federal Wire Act 1961 prohibits ‘interstate or foreign commerce of bets or wagers’ 11. There is some dispute as to whether the Wire Act covers all gambling or just sports betting, however what is clear is that it allows intra-state betting. This is something that was not changed in the Unlawful Internet Gambling Enforcement Act 2006. The result of this is that European operators are being pursued by the US DoJ for illegally accepting bets in the United States, which has already led to PartyGaming entering into a Non-Prosecution Agreement, while other operators are currently in talks with the DoJ regarding settlement. Secondly, it implicitly allows online gambling on a state-by-state basis, as long as the bets do not cross state borders. This means that the US market could partially open without any change to Federal legislation; it is already technically legal to offer online gambling within the state of Nevada.

Effect of the UIGEA on operators
888, PartyGaming and Sportingbet all left the US, causing their respective share prices to plummet; this dramatic loss of market capitalisation caused PartyGaming to fall out of the FTSE 100 to the FTSE 250 index. Figure 210: 6 month share price performance (13 July 2006 – 12 January 2007) rebased to 100
120 100 80 60 40 20 0
13/Jul/06 20/Jul/06 27/Jul/06 03/Aug/06 10/Aug/06 17/Aug/06 24/Aug/06 31/Aug/06 05/Oct/06 12/Oct/06 19/Oct/06 26/Oct/06 02/Nov/06 09/Nov/06 16/Nov/06 23/Nov/06 30/Nov/06 07/Dec/06 14/Dec/06 21/Dec/06 28/Dec/06 04/Jan/07 07/Sep/06 14/Sep/06 21/Sep/06 28/Sep/06 11/Jan/07
151

888
Source: FactSet

BWIN

PRTY

SBT

Each of the operators lost a significant proportion of their market capitalisation during 2006, with PartyGaming and Sportingbet the worst affected.

11

Text of the law (http://uscode.house.gov/download/pls/18C50.txt)

9 October 2009

888 suspended its real money gaming operations in the US as did PartyGaming and all other quoted operators. However. the former management team.5% from 9. not all operators left the market.000 0 03-Nov-06 10-Nov-06 17-Nov-06 01-Sep-06 08-Sep-06 15-Sep-06 22-Sep-06 29-Sep-06 06-Oct-06 13-Oct-06 20-Oct-06 27-Oct-06 Full Tilt Pokerstars Source: Pokerscout. and overtook PartyPoker as the largest poker site in the world.Barclays Capital | European Leisure: Online Gambling Figure 211: Share price performance (21/09/2006 – 21/10/2006) rebased to 100 140 120 100 80 60 40 20 0 03/Oct/06 06/Oct/06 09/Oct/06 12/Oct/06 15/Oct/06 18/Oct/06 24-Nov-06 21/Sep/06 24/Sep/06 27/Sep/06 30/Sep/06 888 Source: FactSet BWIN PRTY SBT Sportingbet sold its US operations to Jazette Enterprises Ltd.950 players to 9 October 2009 152 .2mn and estimated closure costs of US$14m.000 UIGEA 16.000 8. Barclays Capital PartyPoker The chart above shows the 24-hour peak number of players on each site per day. PokerStars launched an unprecedented marketing campaign to attract customers no longer accepted by listed operators.150 in the week-ended 1 November 2006.000 12.com. PokerStars’ and Full Tilt Poker’s average peak players increased 6. relieving the company of liabilities of US$13. with some privately owned businesses continuing to operate US facing websites. PartyPoker’s average number of peak players in the week-ended 1 October 2006 was 14. Figure 212: Peak poker players.000 4. September 2006 – November 2006 20. PokerStars and Full Tilt were the main beneficiaries of the European operators leaving the market. for US$1 on 13 October. In the same period. The company later eliminated its Paradise Poker software.450 and this fell 57% to 6. migrating players across to the Sportingbet Poker platform.

Barclays Capital | European Leisure: Online Gambling

10,600, and 50% from 3,800 players to 5,700, respectively. By 1 December 2006, PokerStars were averaging 12,600 players at peak time. The gap has grown considerably since 2006, with PartyPoker averaging a 24-hour peak of 8,244 players between May and August 2009, versus 34,904 and 19,136 for PokerStars and Full Tilt Poker, respectively. It is currently estimated that PokerStars and Full Tilt have a global market share of over 50% by player volume and over 55% by revenues (given their disproportionate number of high-value players). Within Europe, it is estimated they have a c.40% combined market share. Not only did European operators lose all the revenue from US players overnight, but the non-US business also suffered as high yielding players migrated to the more liquid operators still taking bets from the United States; this meant that operators lost more than just their US revenue. The number of non-US players rose for PartyGaming after the UIGEA but the decrease in yield of these players led to a fall in poker revenues. This US liquidity that listed European operators are unable to access has caused an ‘unlevel playing field’ that has handicapped them ever since; this is a concept we explore further in the poker section of this report.

DoJ settlements
Since the UIGEA was signed into law, the DoJ have been pursuing operators for illegally offering online gambling services to US citizens prior to 13 October 2006, as well as pursuing payment processors. The threat of litigation hanging over these operators has been cited by operators and industry commentators as the principal reason for a lack of the highly-anticipated consolidation within the industry. PartyGaming has reached a settlement with the US Attorney’s Office for the Southern District of New York. The principle of this agreement is that the Group is immune from prosecution for offering bets to US customers prior to 13 October 2006, in return for paying a US$105mn fine, in the following instalments: 10 April 2009 30 September 2009 31 March 2009 30 September 2010 31 March 2011 30 September 2011 31 March 2012 30 September 2012 US$5mn US$10mn US$15mn US$15mn US$15mn US$15mn US$15mn US$15mn

Interestingly, in PartyGaming’s press release, it was stated that “Prior to 13 October 2006, certain of the US customer transactions intended for PartyGaming that were processed by third parties, and other gaming and payment-related activity, were contrary to certain US laws.” It would appear that PartyGaming contravened US law through certain payment transactions as opposed to offering online gambling. The (il)legality of online poker is still regarded as a grey area in certain circles, and it is far from certain that operators would be found guilty in a US court; legislation on payment processing is less ambiguous and more
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likely to guarantee a conviction. This is a common method used by US authorities to ensure a conviction; in 1932 Al Capone was sentenced to 11 years in prison for income-tax evasion, rather than being prosecuted for racketeering or murder, as the authorities believed that tax evasion was more likely to secure a prosecution. This leads us to believe that, despite the DoJ’s insistence that online poker is illegal in the US, it is not confident that a conviction would necessarily be possible. One of PartyGaming’s founders, Anurag Dikshit has also entered into a Non-Prosecution Agreement with the DoJ for US$300mn and a potential prison term of up to two years, the sentencing of which has been deferred for two years until December 16 2010. This is completely independent of PartGaming’s settlement. Sportingbet and 888 are currently in discussions with the DoJ for respective settlements, and we believe that any contravention of US law by PartyGaming will have been mirrored across the industry. Using PartyGaming’s settlement as a framework for future settlements, we estimate that a ballpark figure of 50-75% of net cash, paid over three to four years could be a reasonable assumption. In Sportingbet’s case, with £50mn of net cash, this would mean c.£30-35mn fine payable at roughly £10mn a year. However, there are two distinct differences between PRTY and SBT’s settlement. Sportingbet bought Paradise Poker and Sportsbook.com for US$300mn each, and although they generated high profits, they had only just broken even in terms of payback at the time of the passing of the UIGEA. Therefore, SBT did not generate very high earnings from the US. Sportingbet accepted sports bets from the US, which are explicitly illegal, unlike the ‘grey’ area of poker. Despite these differences, we maintain expectations for a similar structure of fine to that of PartyGaming; this is based on the reasoning that if the DoJ were to offer a fine greater than current net cash in return for a non-prosecution agreement, Sportingbet would refuse the deal. We believe that any deal with the DoJ would have a positive effect on the company’s share price, as it did for PartyGaming (up 14% on the day), although this gain was wiped out the next day, before starting a steady ascent to current levels. Figure 213: PartyGaming share price performance
290 270 250 230 210 190 170 150
01/Apr/09 08/Apr/09 15/Apr/09 22/Apr/09 29/Apr/09 06/May/09 13/May/09 20/May/09 27/May/09 03/Jun/09 10/Jun/09 17/Jun/09 24/Jun/09

Figure 214: PartyGaming share price performance
255 250 245 240 235 230 225 220 215 210 205 200
01/Apr/09 03/Apr/09 05/Apr/09 07/Apr/09 09/Apr/09 11/Apr/09 13/Apr/09 15/Apr/09 17/Apr/09 19/Apr/09 21/Apr/09
154

Source: FactSet

Source: FactSet

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PartyGaming ended the press release by stating that it is “now well-placed to seize organic as well as strategic growth opportunities that previously were beyond our reach.” This reinforces the generally held belief that a DoJ settlement is necessary to capitalise on M&A opportunities, and the much anticipated industry consolidation. Since the settlement, PRTY bought Cashcade, the owner of a number of online bingo websites, for an initial payment of £71.9mn, increasing by up to a further £24mn dependant on performance. 888 was in line to acquire the company before PRTY outbid its rival. Unlike PRTY, who waited until after the settlement before making acquisitions, 888’s attempts to buy Cashcade shows that it believes that it can partake in industry consolidation without the need of a DoJ settlement. A US settlement has been high on the agenda at PartyGaming analyst presentations for the past 18 months or so, whereas it appears a more low-key affair for 888, suggesting the company does not value a settlement as highly as PRTY. However, once in talks with the DoJ, if there is an offer for settlement and the company rejects it then there is the risk of an indictment; this could materially affect the company, especially if it harbours aspirations to do business in the US, should the market reopen. Using a similar structure to PartyGaming’s settlement, we would expect a potential fine to be in the region of US$50-60mn payable over three to four years. bwin bought Ongame, the owner of a number of highly-popular US-facing poker websites, and operator of a highly liquid network, shortly before the US market closed. However, given the timeframe between the acquisition and the market closure, the company’s earnings from the US were minimal (less than 5% of group earnings between 2000 and 2006). The company is not aware of any investigation by the US regarding activities before the passing of the UIGEA, and openly travels to the US. The company never offered sports bets in the US, and believes that all payment-related activity was in accordance with US law.

Status quo is the worst-case scenario
The current situation in the US, whereby European-listed companies are unable to accept US poker players, and at the same time are at a significant competitive disadvantage in other markets against websites that continue to accept US players, means that any change in regulation will be positive for these operators. Regulation of online gambling in the US could allow operators to legally re-enter this lucrative market, leading to a surge in revenues. On the other hand, more stringent implementation of current legislation that prevents any operators from accepting US poker players would rid the industry of the current unlevel playing field, again benefiting operators such as 888, bwin and PartyGaming, that do not have a US-facing website.

Stringent implementation of prohibition of online gaming
PokerStars and Full Tilt are currently the two largest poker sites in the world, with a combined global market share of over 50%. Accepting American players after listed operators had left the US increased both companies’ market shares; however it is the enhanced liquidity that these players provide that has driven the increase in market share to current levels. This is a vicious circle for European operators, whereby the higher market share attained by Stars and Tilt, the more liquidity there is, which in turn attracts players and increases the market share even more. These two companies have an estimated 43% market share of non-US players, driven by US liquidity. The closure of these two websites alone would increase the potential market of 888, bwin and PartyGaming by 50%, without any opening of the US. However, we note that a US crackdown is unlikely to lead to a full
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com. owing to the websites’ inability to find alternative methods of allowing players to deposit funds.com. PokerStars and Full Tilt would still have the lion’s share of non-US liquidity. and Playtech’s iPoker network was up 4%. At the start of June the US authorities froze US$33mn of PokerStars and Full Tilt Poker’s player funds from a number of financial institutions. as we plot peak player numbers for each operator. bwin’s Ongame network traffic was down as the company migrated its poker to the new P5 platform. can cause these players to migrate to a ‘safer’ platform.000. Figure 216: Peak players rebased to 100. although this was mostly down to a high-profile Million Dollar Hand promotion. but this shows the effect that a relatively small seizure of assets can have on player liquidity. however. allowing it to capture some of PokerStars’ market share. Barclays Capital -6 5 4 27 21 We use the seven-day moving average to take into account daily fluctuations. rebased to 100 on 2 June 2009. PartyGaming saw traffic increase 27% over the same period. traffic on PokerStars was down 6% compared to the start of the month. Full Tilt was able to implement back-up payment processing relatively quickly. Figure 215: 7 day average of peak player numbers. This can be seen graphically below. and it is clear that PartyGaming and 888’s Pacific Poker benefitted from the US crackdown. the most popular way of depositing and collecting money from online poker operators in the US.com. 888’s traffic was up 21%. preventing the movement of money from echeque accounts.Barclays Capital | European Leisure: Online Gambling closure of these sites. Barclays Capital Full Tilt Poker PartyPoker PacificPoker Traffic has now normalised. 2 June 2009 130 120 110 100 90 80 70 60 02-Jun-09 04-Jun-09 06-Jun-09 08-Jun-09 10-Jun-09 12-Jun-09 14-Jun-09 16-Jun-09 18-Jun-09 20-Jun-09 22-Jun-09 24-Jun-09 26-Jun-09 28-Jun-09 30-Jun-09 02-Jul-09 156 PokerStars Source: Pokerscout. 9 October 2009 . 16 June 2009 vs. By mid-June. according to data from PokerScout. Poker websites make the large majority of revenues from highstake players and any concern over the safety of deposits. and although it would be materially beneficial for European operators. 2 June 2009 seven-day moving average (%) PokerStars Full Tilt iPoker Network PartyPoker Pacific Poker Source: Pokerscout. which can be in the region of US$20-30.

HR 2266. closure of the US poker market will take more than a few random asset seizures. the Reasonable Prudence in Regulation Act. given the current turmoil of the financial services industry. to delay the implementation of regulations pursuant to the UIGEA. Barney Frank’s anti-UIGEA legislation – HR 2266 and HR2267 Representative Barney Frank introduced two separate pieces of legislation on 6 May 2009. leading to a double stimulus. The UIGEA requires payment processors to block transactions to unlawful gambling sites and it is only if this is implemented that the US will be able to effectively fight illegal gambling. HR 2266 The economic downturn has had a particularly devastating effect on US financial institutions. especially for those players who have large amounts of cash deposited with operators. which Frank is chairman of. unsurprisingly. HR 2266. and there has not been a worse time to implement a confusing. However. the Reasonable Prudence in Regulation Act. and delay the enforcement of the UIGEA’s formal payment-blocking regulations until December 2010. however it would have little effect on the opening up of the online gaming market. regardless of Congress’ position on online gambling. Neither bill would repeal the UIGEA. However. we believe that HR2266 has a reasonable chance of being passed. but yields would also be enhanced. left many questions unanswered. Representative Barney Frank. 9 October 2009 157 . with the share prices of PartyGaming and 888 both up 6% on the day the news broke (10 June). delays the regulations of the UIGEA being implemented for a year. The proposed legislation will stop Federal regulators from enforcing the Act’s formal payment-blocking regulations until 1 December 2010. and was written to aid the financial system as opposed to regulate online gambling (despite the title of the Act). This bill. this was poorly written. At a time of financial crisis. Frank introduced HR 2267. However. failed to secure enough support to pass through the House Financial Services Committee. Not only would we expect player numbers to increase. However. banks neither have the inclination nor the funds necessary to set up such a system. and Enforcement Act. has introduced a bill. The second would establish a Federal regulatory and enforcement framework for the online gambling industry. this is not only prohibitively expensive. While neither Frank’s two bills should be written off. the Internet Gambling Regulation. during which the Congress could decided national policy. but almost impossible to implement. At the same time. the first would delay the implementation of the Act. This was viewed as a positive development by the market. costly and time consuming framework of payment processing blocking since the Great Depression. for at least a year. while HR2267 will face considerable opposition. which are set to go into effect on 1 December 2009. A delay in the implementation of the UIGEA regulations for financial institutions is a logical move. it illustrated that any action by US authorities to restrict the operations of websites illegally offering poker will be beneficial for European operators. Consumer Protection. make passage less likely. chairman of the House Financial Services Committee. This would be regarded as a victory by pro-gambling lobbyists. Frank introduced a bill in 2007 entitled the Internet Gambling Regulation and Enforcement Act. Although this seems to have been an isolated incident which has led to no long-term damage for the US operators.Barclays Capital | European Leisure: Online Gambling Player trust is critical. We therefore expect this bill to pass through both the House of Representatives and the Senate.

we believe that this should be a formality. then Congress can override him by getting a two thirds majority in both houses. should appease many of those moderates who opposed the previous bill. then it goes to the other house. which he currently chairs. Representatives are only elected for two years at a time. it must first pass through the House Finances Committee. Prohibition does not work. and likewise. however now that online gambling has been forced 9 October 2009 158 . What has changed since 2007? Apart from being a more intelligently drafted bill concentrating on player protection. although this has been delayed until at least September due to the Committee concentrating on the economy at present. online poker remains as popular as ever. However. into the Senate. with data from PricewaterhouseCoopers and H2 Gambling Capital suggesting that the online gambling market had grown between 2007 and 2008. and the explicit ban on most sports betting. and we expect strong opposition from anti-gambling activists. there remain many vocal minorities significantly opposed to online gambling. then it goes to the President who can veto it. US legislative process The legislative process is explained in more detail in the Appendix. which should benefit any potential regulation of the online gambling industry. The bill was originally intended to clear Committee in August. They must both agree pass the exact same bill. who are there for a longer term and so often do not stick necessarily so rigidly to their respective side. prohibition of online gambling has been unsuccessful. As well as Frank’s HR 2267. and therefore they tend to stick to their party lines more than Senators. and if one house passes the bill. In this way. especially in the Senate. Because of this. A bill can be introduced in either house. and Enforcement Act. however. and better player protection and licensing restrictions. Although his previous effort failed to do this. Consumer Protection. Prohibition of alcohol did not work in the 1920s. whereas Frank is seeking to legalise all forms of Internet gambling (with the exception of most sports betting). both in number and influence. in the Committee since 2007. in short US Congress is made up of the Senate and the House of Representatives. the political composition of the House of Representatives is more relevant than that of the Senate.Barclays Capital | European Leisure: Online Gambling HR 2267 Introducing a Federal regulatory and enforcement framework for online gambling is another prospect entirely. In three years since the UIGEA became law. If they do. Senator Robert Menendez has also introduced the Internet Poker and Games of Skill Regulation. or pass it. Menendez’s bill is similar to HR 2267. If he vetoes it. Before Frank’s HR 2267 bill can go to the House of Representatives. some key fundamentals have changed since 2007. introducing similar bills to both houses at the same time can expedite the passing of a bill into law. the main difference being that Menendez’s legislation would only legalise online poker. No player protection – one of the main arguments behind the UIGEA was to protect the underage and problem gamblers. Frank’s HR 2267 is better written than his previous attempt in 2007. given the increase in Democratic members.

The above should provide much-needed momentum to any pro-online gambling legislation. If he is willing to use his influence to prevent land-based sports betting in a state 2. Traditional landbased casinos. there is optimism amongst pro-online lobbyists. this does not make the passage of legislation to effectively repeal the law any easier. there is no doubt that he will use all his influence to prevent the opening of online-gaming on a Federal scale. taxation of online gambling has become more appealing. 9 October 2009 159 . but by a small number of long-serving individuals. and with the large majority that the Democrats have in the House. The lack of intense support for Frank’s bill. First. especially as Chair of the House Finances Committee. despite the Supreme Court ruling on the legality of the situation. and land-based casinos pro-online gaming in general. this shows the extent to which Hatch will go to prevent further legalisation of gambling. and has continued to grow strongly. it is possible that this Bill could pass through the House into the Senate. Frank has significant power in the Democratic Party. the power in the Senate is not held by the majority leader. in our view. it has also pushed the subject down the agenda for many people. Although the major sports leagues will still opposed to any online gaming. Although the recession has presented the opportunity to market the regulation of online gaming as a way of capturing much-needed tax revenue. Although the injunction was refused. including Senators Jon Kyl of Arizona and Orrin Hatch of Utah. Legislation banning sports betting in the US exempted four states. thus negating the main argument against legalisation of the industry Economic downturn – with the United States in the grasp of the worst economic downturn since the Great Depression. combined with venomous opposition from a small number of influential conservatives. this should make their opposition to the bill less venomous.000 miles from Utah. and. In the Senate. there is no form of player protection. A recent study by PricewaterhouseCoopers has shown that the US Government could receive US$52bn in revenue over the next ten years if it decided to regulate and tax the industry. and are formidable obstacles to the passage of any legislation to open up the online market. This was exemplified recently by his intervention in Delaware offering sports betting. Both Kyl and Hatch are vehemently anti-gambling. is the Democratic Senator of Nevada. along with the sports leagues. Explicit prohibition of sports betting. with Congress concentrating on more pressing matters. However. The majority leader.Barclays Capital | European Leisure: Online Gambling ‘underground’. he has persuaded a Federal judge to consider an injunction. Senator Harry Reid. with the exception of a few anti-online gambling proponents. and with Harrah’s fully endorsing Frank’s HR 2267 Bill. Increased pro-online poker lobbying. including Delaware. Despite this. makes passage into law look increasingly unlikely. and the Court confirmed its legitimacy. The state asked the Supreme Court if it was compliant with Federal law to offer sports betting. there appears to be little interest in this issue. a member of the LDS Church (The Mormon Church). has asked a Federal judge to issue an injunction blocking the provision of sports betting until a full hearing. The Poker Players Alliance signed up its one millionth member in April 2008. However. the influence that Hatch possesses. Hatch. Senator Hatch sent a letter to Attorney General Holder condemning the decision. often suggested to be anti-online gaming. two things have become clear. Everyone in the US realises that the UIGEA is poor legislation that has failed to protect US citizens from online gambling. who are now looking to offer this product to boost state revenues. Secondly. has been in the Senate since 1977 and wields significant power. are in fact backing the move to legalise the industry.

Frank’s bill has stringent licensing laws. the severe financial difficulties that they find themselves in means that they are not in a position to actively support any proposed regulation. A study by search engine marketing company Greenlight shows that both brands beat PokerStars and Full Tilt Poker in a selection of poker-related searches on Google’s US facing site. Harrah’s have already formed an interactive arm. a US opening on a Federal level must occur. Its current mandate is to offer online gaming to Europe. Google. owing to the strong brand names involved. and we examine the effect of this on listed European operators. led by California and Florida. Effect of Federal regulation In a bid to appease many of the moderates in Congress. The recession has been beneficial in pushing online gaming regulation on a state by state basis. were the market to regulate. for the company to gain maximum value from this. MGM Mirage at 344 and Las Vegas Sands at 519. and in general.000 free players every day. Even if they were to do so. 888 recently announced a long-term deal with Harrah’s to support the UK launch and roll-out of the World Series of Poker and Caesars Casino brands. led by former PartyGaming CEO Mitch Garber. Harrah’s Interactive Entertainment. operators would be subject to similar licensing regulations as land-based casinos.000 daily new signups. The Wire Act 1961 and the UIGEA 2006 both permit intrastate online gambling. 9 October 2009 160 . we would expect them to enter the market aggressively. California. effectively. no details of the revenue share have been released. With an estimated US$20bn budget shortfall. the national sports leagues are still likely to oppose legislation. states can legalise online gaming with no change in Federal law. is in the midst of the biggest deficit of any state in US history. the states with the largest deficits are looking to legalise online poker to capture tax revenue. with 66. However. that is to say. PartyGaming’s free-play site continues to have an estimated 17-18% of the total US online poker market according to the company. we believe that it is more likely that the country will first regulate on a state-bystate basis. an operator based in a state may accept bets from citizens within that state. Illinois and Massachusetts are other states considering regulation. although the end game would appear to be an opening of the US. with none of the operators in the Fortune 100. and 4. Florida has the fifth-largest projected budget deficit of US$6bn. on the grand scheme of things their voice is not particularly loud in Washington. Therefore. While we believe that this could be a lucrative deal for 888. however. On 2 February Standard & Poor’s cut US$46bn of California’s full-faith-and-credit debt to A from A+.Barclays Capital | European Leisure: Online Gambling Despite the pro-online view of the land-based casinos. and with the most prominent casino companies backing the legislation. Despite the exemption of sports betting from the bill. Oregon. a Federal opening remains a distinct possibility in the medium term. despite having not offered real money poker for almost three years. with Harrah’s at 263. We believe that a B2B operation is the most likely path into the US for 888 and PartyGaming. What makes these two operators particularly attractive to potential B2B partners is the continued brand strength in the US. California is looking to increase tax revenues by any means possible.com. We therefore believe that talk of the US opening at a Federal level within the next year is premature. Setting the bar so high could benefit those companies who already have landbased licences. the world’s eighth-largest economy. Intrastate opening Despite industry optimism that the US will pass Federal legislation to regulate online gaming.

The size of the projected shortfall is shown in Table 2.8% 24.2bn $480mn $923mn $150mn $1.6% 23.1% 16.9% 12.4bn $3.2% 49.4bn $1.2bn $1.4% 37.1% 21.9% 23.1bn $779mn $1.8% 16.9bn $4.8bn $345mn $17.6% 11.3% 37.0bn $297mn 0 0 0 0 Yes $1.0bn $3.3% 36.9bn $5.8bn $590mn $725mn $32mn $1.9% 17. *The mid-year shortfall shown for California ($19.5% 13.1bn $1.7% 17.5% 2.2bn $557mn $800mn $5.7bn $1.5bn $1.Barclays Capital | European Leisure: Online Gambling Figure 217: States with fy2010 budget gaps FY2010 before budget adoption FY2010 mid year gap FY2010 Total FY2010 Total – % of Budget Alabama Alaska Arizona Arkansas California* Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois* Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina Ohio Oklahoma Oregon* Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Total $1.4bn 0 $1.5 bn $384 mn 0 0 $150mn 0 $1.8bn $3.8bn $345mn $20.7% 22.0bn $4.1bn $682mn $411mn $13.7% 9.2bn $250mn $8.2bn gap in Illinois has not been closed.0bn $146mn $45.3% 18.3bn figure because it does not include the US$5.2bn $480mn $923mn $150mn $1.3bn $777mn 0 $4.8bn of potential revenues affected by the May ballot measures to avoid double counting and does not include US$1bn to be deposited in reserve.4bn $184mn $3.6% 0.9% 6.4bn $4.0bn $2.2bn $557mn $650mn $5.6% 21.0% 9. Source: Center on Budget and Policy Priorities (www.2bn of the US$13.0bn $4.2bn $1.8% 23.5bn $1.3% 13.5% 19.9% 12.7% 7.7% 30. Oregon has a two-year budget.9% 23.3bn $4.2% 22.1bn 0 0 $700 mn 0 0 0 0 0 0 0 0 0 Yes $2.0bn $278mn $1.1 bn 0 0 0 0 0 0 0 0 0 0 $279 mn 0 Yes $195mn 0 0 $32mn $25.9bn $4.1bn $779mn $1. Some or all of the pre-budget shortfalls have already been addressed.cbpp.2% 1.3% 21.6bn $5.5bn $721mn $278mn $1.0% Notes: States in italics had not adopted FY2010 budgets as of the date of this report.3bn $4.2bn 0 $139.org) 9 October 2009 161 .3bn $777mn 0 $4.0bn $2.9bn $3.2bn $1.4bn 0 0 0 0 $19.0% 19.0% 21.6% 12.2bn $250mn $8.0% 18.8bn $640mn $2.4% 18.8% 10.6bn $184mn $3.5bn) differs from the often-cited US$26.2% 12.0bn $146mn $26.0bn $3.6bn $3.9% 9.8bn $640mn $1.6bn $3. At least US$3.3% 4.8% 19.8bn $3.0bn $1.2bn $1.6% 10.2% 29.2bn $32mn $165bn 16.4bn $3.1bn $978mn $411mn $13.7% 24.1% 3.0% 41.3% 4.8bn $590mn $725mn $32mn $1.

Barclays Capital | European Leisure: Online Gambling

California
Californian lawmakers are currently trying to pass legislation to regulate online gambling, with the bill 12 having good cross-party support. The Californian card rooms would welcome the legislation, with the main opposition most likely to come from Indian casinos. The draft legislation states that “licences to operate intrastate Internet poker websites under this Act shall be issued only to current Gaming Establishments licensed by the State of California and California tribes with gaming compacts.” This would benefit existing Californian gaming establishments, reducing resistance to the bill. Despite being illegal, the online gambling market in California continues to grow. This is emphasised in the first line of the draft legislation: “Leading gaming consultants estimate that in 2008 United States citizens wagered more than ten billion dollars ($10,000,000,000) online at off-shore, non-United States Internet gambling Web sites, that this amount is likely to grow steadily over the next decade and that every week more than 1,000,000 California citizens play poker on the Internet.” There appears to have been a definite shift in attitude from prohibition towards regulation, both for tax revenue purposes and consumer protection. This is prevalent in the wording of the act, which stresses the need for the legislation “in order to protect the millions of Californians who play poker online, and allow state law enforcement to license, regulate Internet poker sites that can ensure these consumer protections”. The legislation goes on to highlight that the UIGEA did nothing to protect citizens who gamble online, and more importantly, that this legislation falls within current Federal law: “...intrastate wagering permitted by individual states is not considered “illegal Internet gambling” under the terms of UIGEA, Congress included specific provisions and an exemption in UIGEA for individual states to permit Internet gambling within their own borders under certain conditions, including a means of reasonably insuring prevention of underage Internet gambling and verification of a player’s physical presence in the state.” Although consumer protection is an important component of the legislation, it is the potential millions of tax dollars that will push the draft into law, especially as the state already regulates and taxes gaming activities. The fiercest opposition is most likely to come from Indian tribes. However, even the tribes appear to be split on the subject. According to a recent report from Capitol Weekly 13, a consortium of Californian-based Indian tribes and card rooms are lobbying to offer online poker to state residents, but face stiff opposition from other tribes, who believe that the bill would breach an exclusivity clause that lets the tribes be the only ones to offer gaming throughout the state. Despite this opposition, the cross-party support and backing of a section of Indian tribes could prove enough to pass legislation that would help the state’s dire economic position, and we believe that there is likelihood that California will legalise online poker in 2010.

Opposition
Given the dire financial situation of California, the fact that land-based poker is already licensed in the State, and the number of online poker players currently using unregulated websites, it would appear that the passage of this legislation is a mere formality. However, there remains considerable opposition to the passing of any bill.
12 13

For the full text of the bill, see the Appendix http://www.capitolweekly.net/article.php?_c=y9c9vxd5sc586z&xid=y6x4l1h42a990i&done=.y9cae0xkmxj96i

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The Indian tribes will provide the most obvious opposition, fearing online competition will affect business at their land-based casinos. That a consortium of Indian tribes are lobbying for the legislation illustrates the disunity between the tribes, and without a consolidated voice, opposition from the tribes alone should not block the legislation. At a Federal level, there will be opposition from high-ranking Senators such as Hatch and Kyl, who illustrated their willingness to get involved in state legislation with their interference in Delaware offering sports betting. If they are willing to intervene in state legislation 2,000 miles from their respective home states, then it seems probable that they will take more than a passing interest in online regulation in California, which borders Arizona, and is less than 200 miles from Utah. Despite the impression of California as a liberal State, there remain a lot of minority groups that are very vocal and well funded. This form of opposition was demonstrated clearly in 2008, when Proposition 8 was passed, blocking gay marriage. The LDS Church in Utah mobilised the Mormon population in California, who were responsible for half of the US$43mn raised to pass the legislation, despite accounting for only 2% of the population. Although online gambling is not as emotive a subject as gay marriage, and it can be argued that the fiscal consequences of the legislation make logical sense in the current climate, opposition from vocal minorities must not be underestimated. As California is the first state to attempt to pass legislation on online gambling, it is regarded by many as a bellweather for the rest of the country; this makes it more likely that Conservatives from out of the state will take an active interest in preventing legislation from getting passed. The proposals have now been put on hold until after Christmas.

Florida
Florida, with the fourth-largest budget deficit of US$6bn, is also actively looking to license and tax online gaming. Unlike California, Florida’s online poker bill is for a comprehensive study of online poker’s potential impact on an intrastate basis, as opposed to actual regulation. The bill also contains follow-up report guidelines, and if it returns positively for online poker, the state could legalise it as early as 2010. The bill was passed by the State congress in May, and is now in the State Senate, scheduled for debate and a vote in December 2009. The Senate is tasked with not only looking at assessing the impact of online poker in Florida, but will also consider a statutory framework that would regulate the Florida online poker industry, ensuring protection for players. This report will examine measures to protect underage and problem gamblers, block unlicensed poker sites based offshore, and look at the potential effect on existing landbased poker operators. Although it remains early days, the generally held belief of industry commentators is that Florida could legalise online poker in 2010, for the same financial and social reasons as California. Although the Florida online poker market is not as big as that of California, it could still be a material revenue stream for any European operator providing B2B services to a licensee. The success of passing online gaming regulation in Florida is likely to be aligned to that of California. If California is able to overcome Conservative opposition and pass online legislature, we expect Florida to follow suit shortly after. Oregon and Massachusetts have both shown interest, while states such as Mississippi and New Jersey, who already have land-based gambling operations, could also be in line to pursue online regulation.

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Nevada
It is currently legal to offer online gambling within Nevada, although it is not offered due to the potential risks of players using the site from outside the state. The view of the land-based casinos is that the potential benefit from offering online gaming in the state is outweighed by the potential legal costs of inadvertently accepting players from across state borders. This is an understandable stance from the large, land-based casino operators, who must conform to stringent regulations to maintain their land-based licences. There is no indication as to how stringently the Federal government would pursue those who inadvertently accept gambling across state borders. Ring-fencing players has been successful in Italy, where poker players are only allowed to play within the country, and we believe that this could be implemented in the US through IP-blocking. Although there remains the possibility that people outside of the state could circumvent these restrictions, we believe this should not pose a problem for two reasons: Strict licensing laws ensuring that proper restrictions are in place to prevent cross-state gambling should suffice to appease Federal authorities. It seems more likely that prosecutions would only occur if operators are shown to be negligent in accepting cross-border players, as opposed to those who are victims of players circumventing IP blocks to appear intra-state. Why would players bother to use IP circumventing procedures to illegally access a limited intra-state liquidity pool, when they can play poker on sites such as PokerStars with global liquidity? We believe that the US will open up, although it is more likely to be on a state level before any Federal legislation is passed. This will allow more liberal states to regulate and capture much needed taxation from the industry without facing such intense Conservative opposition at a Federal level. The timeframe of regulation is difficult to predict, however we believe that predictions of 6-12 months are overly optimistic; whilst regulation is inevitable, in our view, there remains staunch opposition that will delay implementation of this, leading us to believe an 18-24 month timeframe is more realistic. The fact that states are able to legalise online gambling without any change in Federal legislation means that these two routes of regulation can be pursued both simultaneously and independently. In 2006, 85% of players came from the top 15 states. Hence, we believe that the US will be the most important global market in online gaming, even if there is no change to legislation at a Federal level. Operators with a strong B2B business will be in prime position to enter the market, and those that can combine this with a strong US brand, such as 888 and PartyGaming, will be at the top of the ladder. With players ring-fenced within each state, liquidity outside of that particular state becomes irrelevant, negating the advantage currently held by US-facing sites, such as PokerStars and Full Tilt Poker.

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14” Article 49 – Freedom To Provide Services “Within the framework of the provisions set out below. Article 49 16 EC Treaty. Article 56 17 European Commission. under the conditions laid down for its own nationals by the lay of the country where such establishment is effected. 15” The underlying theme of most ECJ-related gambling cases is the compatibility of restrictive national legislation with the freedoms associated with Articles 43 and 49. 16” Article 56 is relevant as it calls into question the validity of financial transaction blocking as a barrier to the provision of gambling services. “Freedom of establishment shall include the right to take up and pursue activities as selfemployed persons and to set up and manage undertakings. Article 56 – Freedom Of Capital “[A]ll restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited “[A]ll restrictions on payments between Member States and between Member States and third countries shall be prohibited. restrictions of the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. case law has shown that individual member states are given a certain amount of autonomy in deciding gambling policy.Barclays Capital | European Leisure: Online Gambling APPENDIX – REGULATION IN DETAIL EC Treaty Restrictions on the freedom of establishment and to provide services are the most common themes that arise in ECJ gambling-related cases. However. due to the sensitive nature of gambling. subject to the provisions of the chapter relating to capital. (January 31 2008) 9 October 2009 165 . 14 15 EC Treaty. ‘Free movement of services: Commission inquires into restrictions on gambling services in Germany’. restrictions on freedom to provide services within the Community shall be prohibited in respect of nationals of Member States who are established in a State of the Community other than that of the person for whom the services are intended. The court holds that gambling is a service. branches or subsidiaries by nationals of any Member State established in the territory of any Member State. and therefore Article 49 applies. This issue was raised by the European Commission in the infringement proceedings against Germany 17 and also in the detailed opinion sent to France in March 2008. Article 43 EC Treaty. and that imposing an overly restrictive licensing regime / monopoly model constitutes a restriction on the freedom to provide services and the freedom of establishment. with restrictive legislation justifiable under certain circumstances. Such prohibition shall also apply to restrictions on the setting-up of agencies. IP/08/119. Article 43 – Freedom Of Establishment “Within the framework of the provisions set out below. in particular companies or firms within the meaning of the second paragraph of Article 48.

Betfair claims the Schaldemose Report blurs the line between licensed European operators and unlicensed foreign gambling companies. and the resultant consequences on social policy. “[Member States] have an interest and right to regulate and control their gambling markets in accordance with their traditions and cultures in order to protect consumers against addiction. that the European Parliament adopted as a non-binding resolution in March 2009. Parliament Magazine. ‘A Fair Flutter’.” 19 Although the report does not seem to diverge vastly from opinions given in gamblingrelated ECJ case law. Managing Director of Betfair.Barclays Capital | European Leisure: Online Gambling The Schaldemose Report The ‘Integrity of Online Gambling’ was a report introduced by Christel Schaldemose. “[The report] blackens the regulated gambling industry in Europe with the unregulated industry further afield. The report argues against liberalisation of online gambling on the country of origin principle. Issue 279 (8 December 2008) 9 October 2009 166 . it appears to add further weight to the growing sentiment that an open market is not a viable option for gambling in Europe. fraud. an EP resolution is considered a strong political message to the European Commission. money-laundering and match-fixing in sports. MEP. from elsewhere in the world. ‘Report on the Integrity of Online Gambling’. making no distinction between gambling operators which are licensed by (and operate legally in) some Member States and those which operate. often unlicensed. 18 European Parliament Committee on the Internal Market and Consumer Protection. due to the sensitivity of gambling. It instead argued for regulation at a national level. an argument used by many online operators and progambling lobbyists. as well as to protect culturally-built funding structures which finance sports activities and other social causes in the Member States.” 18 The report leaves little scope for the opening of the market based on the freedoms of Articles 43 and 49 of the EC Treaty. Although not binding. paragraph 1 19 Mark Davies.

which are major sources of finance for benevolent causes and public-interest organisations. for reasons of social concern. even though the case in question is not before the EU Court. 9 October 2009 167 .R. including: The moral. leading to potentially damaging individual and social consequences. Schindler 1994 Case 275/92 Her Majesty’s Customs and Excise v Gerhart Schindler and Jörg Schindler. Ensure lotteries were operated for charitable or public interest rather than commercial profit. religious or cultural aspects of lotteries in different member states. Avoid stimulating demand. but an interpretation by the ECJ of the EU rules needed for a concrete verdict in a member state. 1-1039 This case was referred to the ECJ by the High Court of England and Wales to determine whether national legislation prohibiting competition of national lotteries was compatible with European Law. ensuring greater integrity in the game for the benefit of the players.Barclays Capital | European Leisure: Online Gambling Case Law Gambling–related case law has developed from referrals by national courts for preliminary rulings on interpretation of EU law. ECJ. Preliminary rulings influence the development of European law at the supra-national level. as competition would have far reaching consequences for a number of established lotteries. [1994] E. National restrictions were justifiable based on the peculiar nature of lotteries. The court stated that restrictions based on public interest considerations could not be regarded as unjustified interference with the freedom to provide services. This landmark case demonstrated that the opening of national markets is not necessarily needed to comply with EU law. The size of stakes and prizes present a high risk of crime or fraud. A preliminary ruling is not a concrete verdict.C. Lotteries may make significant contributions to benevolent causes and public interest organisations. Restrictions were not considered discriminatory if designed to: Prevent crime/fraud. Member states have no right to have their own interpretations of EU law and are obliged to ask the ECJ when the national courts are in doubt on the content of EU law. Such potentially large prizes are an encouragement to spend. as long as the restrictions did not discriminate on the basis of nationality. The court held that the UK could prohibit lotteries from other member states. The opinion of Advocate General Gulmann stated that it ought to be permissible for member states to prevent competition in this particular market.

However.R. Reduce the risk of crime/fraud. it found that this legislation can be justified provided that the monopoly’s role was to: Limit the promotion of gambling. Restriction on the grounds of social policy (ie. The protection of consumers from fraud is only accepted as justification if the national court has established that rules applicable to foreign bookmakers do not provide sufficient protection. ECJ. The restriction must be proportional to the aim and must not go beyond what is necessary to achieve that aim. Markku Juhani Läärä v Kihlankunnansyyttäyä. Zenatti was an intermediary for a UK-based sports betting company who was ordered to cease taking bets on the grounds that it was not an authorised company.R. Questore di Verona v Diego Zenatti. The ECJ held that the legislation constituted a barrier to the freedom to provide services. and the ECJ established the following justifications for restrictions: The raising of funds for socially beneficial purposes was not on its own justification for restriction. [1999] E. 1-7289 This case concerned Italian legislation that prohibited taking bets (except in limited circumstances. by certain authorised bodies). Zenatti 1999 Case 67/98. 9 October 2009 168 . to prevent harmful moral/financial consequences as a result of gambling) is permissible. even if it applies without discrimination. and that only Finland’s own legislative objectives and the effect of the legislation are relevant. Zenatti challenged this on the basis that social policy concerns cited by Italian authorities were not sufficient to justify the restriction. we believe. not the ECJ. Ensure some of the proceeds are used for benevolent causes.C.Barclays Capital | European Leisure: Online Gambling Läärä 1999 Case 124/97. whether a more liberalised model is preferable to a monopoly is a decision for the national courts of the member states. Advocate General Fennelly opined that public interest concerns were justification for the restriction of betting services. The court recognised that the type of regulatory framework adopted by an individual member was irrelevant. [1999] E.C. ECJ. 1-6067 This case concerned the Finnish state monopoly over the operation of slot machines.

furthermore. The ECJ stated that it was for the national courts to decide whether: the legislation is consistent with its stated public interest purpose. refused to grant licences or authorisations to them. However. Placanica 2007 Case 338/04. including the proportionality of imposing criminal penalties. Italian law effectively prevents operators publicly listed on foreign stock exchanges from getting licences. and that the restrictions imposed were disproportionate to the legislative objective of eradicating crime and fraud in the Italian gambling market. Italian law contravenes Articles 43 and 49. under the proportionality test. it discriminated against non-Italian applicants. Placanica.e. or the restrictions it imposes are disproportionate to those objectives. Gambelli. who were excluded from the licence tender process. thus excluding them from providing gambling services. stating that public interest considerations can justify restrictions as long as the objectives are not disproportionate to the restrictions imposed (i. and that restrictions must reflect a concern to limit gambling opportunities.Barclays Capital | European Leisure: Online Gambling Gambelli 2003 Case 234/01. unless they held an Italian licence. restrictive legislation must form part of a consistent gambling policy. 20” 20 Cases 338/04. it ultimately upheld the idea that member states can restrict gambling services on social grounds as long as it is done in a consistent. ECJ.R. As significant as this case was for liberalisation of the industry. Placanica paragraph 64 9 October 2009 169 .C. and the ECJ held that it was a restriction on the freedoms granted under Articles 43 and 49 of the EC Treaty. proportionate and non-discriminatory way. Läärä and Zenatti. Stanleybet International. but this is justifiable as long as it satisfies the test imposed in Zenatti). [2007] This case was also referred by an Italian court concerning the prosecution of three men for operating unlicensed data centres which allowed Italian citizens to place bets with UK-based operator. Non-licensed operators who accepted bets were open to criminal prosecution. the court did not follow the opinion of the advocate general and instead turned to its earlier judgments in Schindler. Advocate General Siegbert Alber opined that the restrictive Italian law could not be justified as it was discriminatory against foreign bookmakers. Gambelli required that. The ECJ ruled that the criminal sanctions were contrary to European law. Stanleybet challenged this by claiming that its UK licence should be valid in all member states. “Articles 43 EC and 49 EC must be interpreted as precluding national legislation which imposes a criminal penalty on persons for pursuing the organised activity of collecting bets without a licence or a police authorisation as required under the national legislation. 1-1 3031 The Italian Tribunale di Ascoli Piceno referred this case to the ECJ for a preliminary ruling on the validity of Italian betting legislation that prohibited foreign or Italian betting operators accepting online or offline bets from Italian customers. including Italy. in breach of Community law. where those persons were unable to obtain licences or authorisations because that Member State. (November 6 2003) [2003] E.

by the Member State concerned. or rendered impossible. To do this. The Placanica judgement clarified conditions for the proportionality test. it should aim to bring about a genuine reduction of gambling opportunities. Articles 43 and 49 of the EC Treaty must preclude national legislation that excludes operators quoted on other EU regulated markets. A blanket exclusion of companies from a tender process constitutes a restriction of freedom beyond that necessary to prevent operators from being involved in criminal or fraudulent activities (i. these should not be less favourable than the rules that govern similar domestic situations. along with a certain scale of advertising – therefore expansion of a gambling market is not incompatible with restriction on social policy grounds. The theory of controlled expansion was also recognised. 9 October 2009 170 . disproportional to stated objectives) National law should provide detailed procedural rules to protect the rights of operators. National courts must determine whether restrictions in the number of operators genuinely contributes to preventing crime and fraud. For a national restriction to form part of a coherent and systematic gambling policy (and therefore justify breaches of Articles 43 and 49). the ECJ stated that controlled expansion of the gambling market was compatible with the objective of drawing players away from illegal gambling to regulated activities.e. however. A licensing system can constitute a sufficient mechanism to control gambling operations. A member state cannot apply criminal sanctions for failure to complete an administrative formality where such completion has been refused. in breach of Community law.Barclays Capital | European Leisure: Online Gambling This ruling changed European gambling legislation by establishing the following main principles: National legislation prohibiting taking bets (in particular sports bets) without a licence contravenes Articles 43 and 49 of the EC Treaty. it may be necessary to offer an extensive range of products. however this alone does not justify the contravention of Articles 43 and 49.

‘Reference for a preliminary ruling from the Tribunal de Pequena Instância Criminal do Porto lodged on 2 February 2007’ 31 Case 42/07. bwin Liga. including … the Internet’?” 30 In October 2008 Advocate General Bot delivered his opinion. which broadly followed previous EDJ rulings on Gambelli and Placanica. This legislation also provides for penalties in the form of administrative fines in case of breach of Santa Casa’s exclusive right and for illegal advertisement. The member state can then either follow this opinion. ECJ 24 Case-203/08. Ladbrokes Betting & Gaming Ltd and Ladbrokes International Ltd v Stichting de Nationale Sporttotalisator 25 Case 212/08. Criminal proceedings against Ernst Engelmann Case 235/08. paragraph 320 22 21 9 October 2009 171 . Société Zeturf Limited v Premier minister. in breach of the principles of the European Treaty?[”] “2) Is it contrary to Community law. There are currently 17 21 gambling-relating cases pending the ECJ involving Portugal 22. The Sporting Exchange Ltd. advising why the member is in breach of European law. for rules of domestic law … to establish a monopoly in favour of a single body for the operation of lotteries and mutual betting and then to extend that monopoly to ‘the entire national territory. Criminal proceedings against Maria Grazia Di Maggio and Salvatore Buccola 27 Case C-447/08. Stichting de Nationale Sporttotalisator and Scientific Games Racing. Criminal proceedings against Roland Langer 29 www. Bot opined that it was perfectly valid for a gambling monopoly to extend its operations to the Internet. which has no physical establishment in Portugal. Otto Sjöberg v Åklagaren Case 448/04. Liga Portugesa de Futebol Profissional (CA/LPFP) Baw International Ltd v Departmento de Jogos da Santa Casa da Misericórdia de Lisboa (bwin Liga / Santa Casa case) 23 Case-409/06. trading under the name ‘Betfair’ and other parties: Minister for Justice. as long as it was in keeping with the underlying social policy concerns that justified the monopoly in the first place. originally asking for clarification on just two specific questions: “1) Does the monopoly granted to Santa Casa.eu/actuality/details-pdf. if it is appropriate for ensuring attainment of the objectives which it pursues. when relied upon against a provider of services established in another [EU member state] in which it lawfully provides similar services. in particular the Internet. Portugal’s 2003 Decree extended Santa Casa’s betting exclusive right to operate betting activities through all electronic means of communication.Barclays Capital | European Leisure: Online Gambling Pending cases Before a court case can begin. Case 258/08. Anders Gerdin v Åklagaren 28 Case 64/08. bwin and the Liga challenged the fines before the Criminal Court of first Instance in Porto 29. Sweden 27 and Austria 28 – the most eagerly anticipated of which is the bwin liga / Santa Casa case. or the case will get taken to court. Winner Wetten GmbH v. Ministre de l’Agriculture et al 26 Case 395/05. bwin Liga. Mayor of Bergheim. ‘Opinion of Advocate General Bot’.000 and €75.gaminglaw. The Netherlands 24. In answer to the second question. Nothing precludes a member state from extending restrictive legislation to the Internet: “… if that legislation is justified by overriding reasons relating to the public interest. the authorities applied a fine of €74. in particular to the above mentioned principles.php?id=185 30 Case 42/07. The Portuguese authorities considered that bwin and The Liga committed an infringement to the prohibition foreseen in 2003 Decree as it constituted a clear off-course betting by electronic means offer and advertising. The Court referred this case to the ECJ. it does not exceed what is necessary for attaining them and if it is applied in a non-discriminatory way. Germany 23. the European Commission will issue a reasoned opinion to a member state. France 25. In consequence. constitute an impediment to the free provision of services.” 31 Gambling Compliance – A European Online Gambling Study 2009 Case 42/07.000 to the respective offenders. Criminal proceedings against Antonello D’Antonio and Others Case 397/05. Italy 26.

namely better quality of services at a better price. constitutes a ‘technical regulation’ within the meaning of Directive 98/43/EC. such as granting concessions to various operators. However. 32 33 Case 42/07. He considers the monopoly is neither excessive nor discriminatory. do not arise with gambling. the advantages to the consumer of competition.eu/actuality/details-pdf.php?id=185 34 Case 42/07. bwin Liga. in law or in fact.Barclays Capital | European Leisure: Online Gambling Bot continued that the extension of Santa Casa’s monopoly to the Internet was all the more justified as the social policy risks are potentially much higher with the Internet compared to traditional gambling. it treats the gambling and games of chance as true economic activities which yield maximum profits … I shall conclude that Community law should be confined to prohibiting situations in which restrictive measures taken to protect consumers against excessive gaming are manifestly distorting their purpose. paragraph 8 9 October 2009 172 . paragraph 6 www. Subsequently. ‘Opinion of Advocate General Bot’. all parties considered the argument raised by the Commission’s written submission as out of the scope of the questions referred to the Court and irrelevant.gaminglaw. “A Member State should be required to open up this activity to the market only if. bwin Liga. ‘Opinion of Advocate General Bot’. the ECJ raised additional questions regarding the failure of Portugal to notify the challenged piece of legislation: Can fines be applied to a cross-border Internet gambling provider. when the national piece of legislation applicable has never been notified as Directive 98/34 requires it? “Legislation of a Member State which grants a single entity the exclusive right to offer offcourse betting on the Internet and which provides for penalties in the form of fines on persons disregarding that right.” 33 The most interesting section of Bot’s opinion is that it explicitly states the aim of EU law is not to open up the gambling market.” 32 Thus he concluded that legislation that was not duly notified to the European Commission cannot be relied upon in proceedings against private operators such as Liga or bwin.” 34 Bot rejected the claim of the Liga and bwin that it is necessary to ascertain whether the aims of the Portuguese legislation can be achieved by less restrictive measures. Even bwin’s and the Liga’s legal counsel were “convinced the lack of notification is not of particular relevance to the matter.

gambling activities are excluded from the directive under Article 2(2)(h). 37 The interesting part of the Directive is the country of origin principle. whereas selling services via the Internet is generally not considered a form of active sales. seeking to guarantee service providers with legal certainty of the freedoms under Articles 43 and 49. 36 35 9 October 2009 173 . Directives can have direct effect (i. operators in licensed territories could argue they were exempt from regulations in other EU member states in which the consumer resides. section 5(d).Barclays Capital | European Leisure: Online Gambling Relevant secondary legislation 35 Directives are general injunctions which are left to the national member States to implement in detail. This means that the EC must be notified about all draft national legislation and rules relating to information society services (including online gambling) and these are subject to a standstill period while the Commission formulates feedback in an attempt to create a standardisation of policy across member states. which entail implementation by Member States of policies relating to public policy and consumer protection. However. 2000). Information society directive This Directive is to enhance transparency on proposed national regulations concerning information and information technology. Amongst other things. Services directive The objective of the Services Directive is to achieve a genuine internal market in services.e. should be excluded from the scope of this Directive in view of the specific nature of these activities. apply at the national level irrespective of being formally integrated into national law) if they are precise enough. If the Directive were to be extended to online gambling. (June 8. and hence subject to those laws. active sales is regarded as advertising.” 36 Electronic commerce directive Adopted in 2000. Gambling Compliance – A European Online Gambling Study 2009 Directive 2006/1123/EC. The European Commission has focused on how services are marketed in the country of reception. Countries can be fined for not implementing directives into national law within the set deadline. and therefore the laws of the consumer’s country of residence are not applicable if the operator is located abroad. with active sales meaning that the operator is established in a jurisdiction. Internet gambling operators are expressly excluded from the scope of the directive. including lotteries and betting transactions” are excluded from the directive. the applicable law is that of the country where the action/service is performed. which states that where an action or service is performed in one country. “Gambling activities which involve wagering a stake with monetary value in games of chance. but received in another. ‘On Certain Aspects of Information Society Services. Failure to do so could result in regulations being unenforceable – a technicality currently being looked at in the bwin liga case. “… gambling activities. However. Article 25 37 Directive 2000/31/EC of the European Parliament and of the Council. under Article 1. its main objective is to ensure the free movement of information society services between member states. in particular E-Commerce (‘Directive on electronic commerce’)’. including lottery and betting transactions.

institutions can obtain authorisation in jurisdictions with a liberal approach to online gaming to overcome a denial from a more restrictive member state.Barclays Capital | European Leisure: Online Gambling Payment services directive A regulatory initiative to regulate payment services and payment service providers throughout the EU. this directive states that operators providing online gambling from outside the EU are obliged to register and pay VAT in the country of consumption of the services. and from 1 November it will be a criminal offence to provide payment services into or out of the UK without authorisation from / registrations with the UK’s FSA. this will also apply to businesses within the EU. In addition. The Directive could serve as a method to prevent online gambling services in a jurisdiction as a member state could refuse to authorise a payment service provider that specialises in processing payments for online gambling. 9 October 2009 174 . However. and this will also apply to operators within the EU from 2015. From 2015. The deadline for implementation is 1 November 2009. Third anti-money laundering directive Member states require that all casino customers are identifiable. This should also apply to online casino games. VAT directive The VAT Directive specifies that the place of taxation for e-services from a business outside of the EU to a consumer inside the EU is the place where the consumer lives. using a simple notification procedure. The UK was the first to pass this into national law.

as well as criminalising participation in unauthorised gambling. The advertising of foreign games of chance is prohibited. However. The EC launched infringement proceedings against Austria over advertising restrictions but these were closed following amendments to the Gambling Act. there remains no doubt as to the illegality of online gambling. Online gambling advertising restrictions are very stringent. These amendments will allow EU companies to apply for lottery concession. and websites that have banner adds for gambling sites. The EC sent a formal query to the Belgian government questioning the legitimacy of this ban under EC law. Belgium The Gaming Act 1999 states: “No person shall operate one or more games of chance or gaming establishments without a licence previously granted by the Gaming Commission.Barclays Capital | European Leisure: Online Gambling Online gaming regulations by country 38 Europe Austria Austria has a de facto monopoly for online lottery. and how the Belgium law prohibiting the advertising of unlicensed gambling operators could supersede the EC Treaty. the Unibet cycling team was banned from competing in Belgian events in 2007. The proposed amendments were notified to other member states in November 2008 and received no comments. EU-based operators can obtain a provincial licence to offer sports betting throughout the whole of Austria.” 39 As the Belgian Gambling Commission does not currently offer online gambling licences and. the licensee must have a registered office in Austria within three months. with ISPs tasked with implementing the ban. The current 15-year licence expires in 2012. maintains a policy of prosecuting those that violate this. However. following oral and written replies from the Belgian government. It also proposes granting operators with land-based licences the authority to supply online services. This requirement has attracted some scrutiny as it could be deemed to be incompatible with EU law. under the Gaming Act. online sports betting is regulated at the provincial level and therefore falls outside scope of the Federal Gaming Act. and therefore violates the EC Treaty. Austrian courts are reluctant to enforce this as they deem it noncompliant with EU law. and hence is in line with EU case law. casino and poker. while others believe that it is consistent with current gambling policy. In March 2009 a draft bill was presented that proposed the creation of a blacklist of gambling websites. 38 39 Gambling Compliance – A European Online Gambling Study 2009 Gaming Act 1999. However. However. however once granted. unlike Austria. the EC was satisfied that it had not violated European law. there remains much debate as to the compatibility of this with EU law as it restricts online licences to those who currently hold a terrestrial one. and the government has reiterated that participation in illegal (unlicensed) online gambling is punishable by fine and / or imprisonment. section 56. Article 4 9 October 2009 175 . with unlicensed online gaming prohibited. The draft law also includes sanctions on ISPs and financial institutions that may facilitate the operations of an unlicensed gambling operator.

and no such licences exist. However. in which foreign parties have no holdings. Gaming licences in general can only be issued to Czech entities. 2008) 9 October 2009 176 . Cyprus Cyprus has a very restrictive land-based gambling regime. EU-licensed online gambling operators are allowed to offer services in Cyprus. As licensed Czech bookmakers were refused authorisation to provide online services by the government. “None of these sites have applied before the state gambling commission to be licensed and therefore their activity is illegal and can be prosecuted. that will comply with EU law. Although there are restrictions on advertising on television and radio. Despite the unrestricted access enjoyed by foreign. In a speech by the head of the Bulgarian State Gambling Commission. The government is reluctant to impose restrictions on these operators lest it violates EU law.” 41 The State Gambling commission has suggested that Bulgaria will adopt an online licensing regime with an enforced prohibition of non-licensed operators.000 of them have even translated their web pages into Bulgarian. (September 30. ‘Legal Framework of Gambling Regulation in Bulgaria’. At the beginning of the year. although the Cypriot authorities have not issued any licences themselves. ‘Explanatory Statement: Article 6 (Article 4 of the Act on Games of Chance)’ D Terziev.000 websites offering online games to Bulgarian players. Bulgarian authorities have articulated that they support the position of the Schaldemose report. but will not issue online casino licences. Online gambling is illegal without a licence issued by Bulgarian authorities. the Czech Republic granted five online sports betting licences to operators already holding a Czech terrestrial licence. Cypriot authorities prosecute local online operations. 40 41 Draft Gaming Act 2009. regulation does not contain direct reference to online gambling. EU-licensed operators. Bulgarian State Commission of Gambling. Czech Republic There is no legislation that explicitly addresses online gambling.Barclays Capital | European Leisure: Online Gambling “Without the presence of participants. Eastern European Gamin Summit 2008. Chairman. This has led to an abundance of activity from foreign operators – bwin sponsors FC Slovan Liberec and the Czech MotoGP. dominated by OPAP. it would be impossible to operate illegal gambling. foreign companies operated in a market free of incumbents. foreign-based online operators have been allowed to advertise freely. he stated that: “… there are about 40. Reforms are under way to establish a national licensing system for online gambling. there has been little evidence of enforcement. Nor is there any ISP blocking or payment processing bans in place. Although unlicensed gaming activities are prohibited. and about 4. This criminalization introduces a significant deterrent to the participation in games of chance via illegal sites” 40 Bulgaria Bulgaria’s regulated gambling industry is solely land-based. and are observing the EU-level debate closely.

Estonia Estonia’s new gambling act will come into force on 1 January 2010. Despite the issuance of licences. Operating without a licence is prohibited in Denmark. Danske Spil represents only around 40% of all gambling marketing 42. pg 10 9 October 2009 177 . however the details are yet to be announced. Foreign operators could lodge a complaint with the European Commission that this is discriminatory and therefore violates EU law. and the sole licence is held by the state-controlled monopoly. Annual Report 2008. Online gambling advertising is prohibited except on the operator’s website.Barclays Capital | European Leisure: Online Gambling The Czech Republic is now moving towards controlled regulation of the online gaming industry. For example. so Estonia should provide a case study in overcoming the practicalities of banning unlicensed operators. Another potential problem is that online gamblers are currently obliged to register personally at a land-based betting shop before they can bet with that operator online – something that is unable to occur if the online operator does not have a network of betting shops. unlicensed foreign companies continue to operate without intervention from the Czech authorities. Foreign operators remain concerned at the potential licensing fees and level of taxation that is yet to be announced. The Danish government has downplayed the threat of having a case brought against it by the ECJ. There are currently no payment processing bans or ISP blocking measures in force. Details of the ISP and payment processing blocking are yet to be confirmed. existing legislation makes it impossible for foreign operators to gain a licence. with certain exceptions. 42 Danske Spil. however. creating a national licensing and tax framework. showing the government’s inability to prevent non-licensed operators from providing gambling services to Danish citizens. Denmark Denmark’s online space is dominated by monopoly operator Danske Spil. Illegal gambling will also be combated through financial transaction and ISP blocking. instead claiming that the reasoning behind a relaxation of online gambling laws was due to the volume of Danes playing illegal games. although there is a suggestion that ISP blocking could be used to enforce the regulated market. In 2004 the European Commission issued a letter of formal notice to the Danish government concerning the monopoly. There is no limit on the number of online gambling licences that will be made available. organisers of games of chance must have share capital of at least €1m and pay fees of €48. and unsatisfied with the response. One option being considered is to allow companies that hold a valid gaming licence in another member state to operate in the Czech Republic. regulating online gambling through a national licensing system. no EU state has yet implemented both these methods. The main requirement of the new gambling act is that online operators must have servers located in Estonia. but there are differing fees and share capital requirements depending on the type of gambling.000. issued a reasoned opinion in 2007. Denmark announced in April 2009 a liberalisation of online gaming.

and new legislation aims to tighten it to reduce illegal gambling. EU operators. EU operators would be given the same opportunities to verify Finnish clients as Finnish licensed operators. whereas Finland appears to be running a monopoly online casino for economic. which could move to create its own liberalised online gaming regime. but they do not have the right to offer online operations. While the law does not apply to games of skill. rather than social. Arrest warrants have been issued 9 October 2009 178 . with the authorities noting the difficulties. However. such as Svenska Spel in Sweden. in implementing these. Svenska Spel can only offer online poker. Finland’s mainland gambling market consists of three state-owned monopoly operators. where Paf operates. In January 2009 Paf. Criminal prosecutions are not uncommon in France. and the third will start offering its products online following proposals published in April 2009. The European Commission commenced infringement proceedings against Finland in April 2006 when it issued an official comment regarding the free movement of sports betting services. based on a violation of stringent advertising laws (although advertising on the Internet is generally ignored by French authorities). whether non-Finnish. Francaise Des Jeux (FDJ) has a monopoly on lottery products. would not suffice. over half its customers were Finnish and promoted its product to Finns via email. Poker has been ruled as a game of chance by French courts. a gambling company operating in an autonomous region of Finland. Unibet cycling team was banned from the Tour de France. with proposed legislation likely to be challenged at both a national and European level. Finland’s situation is further complicated by the autonomous region of the Åland Islands. with the scope of online gambling offered by the monopolies seen to be significantly wider than that of other monopolies based on social policy grounds. protecting its state-run duopoly and prosecuting unauthorised online operators. reasons. There are a number of casinos in France. France France has traditionally taken a very aggressive stance towards online gambling. Regarding the 18-year old age limit and verification regulations. the EC commented on the bill in February 2009 in two specific areas: The bill contravenes Article 49. The new legislation does not appear to be compliant with the EC Treaty. and Pari Mutuel Urbain has the exclusive right to offer betting activities (only horseracing is offered). It also guarantees the monopolies’ rights to provide gambling services online. These proposals do not include any payment processing or ISP blocking measures. can Finland prove the necessity of prohibition and state why applying the same marketing restrictions to non-Finnish.Barclays Capital | European Leisure: Online Gambling Finland Finland has one of the tightest gambling regimes in Europe. was found guilty for organising an unlicensed lottery because it had a website in Finnish . followed by a reasoned opinion the next year. two of which have offered online gambling for a number of years. New proposals legally confirm the monopoly status of the three operators. whereas at the moment they are in a monopolistic position due to the licensing system. 2009 looks set to be a landmark year in deciding Finland’s regulatory landscape. both technically and legally.

The Commission remains concerned over the inclusion of a maximum payout percentage. fixed-odds betting. however. PartyGaming closed its French website after receiving a formal request to meet with French police. Operators are expecting an opening of the market.5% on horse race betting and 2% on poker. amongst others. with French online betting operator BetClic already securing sponsorship agreements with Olympique de Marseille and St Etienne football clubs.H2GC. and whether they are necessary to meet policy objectives. as did 888 after then CEO John Anderson was taken for questioning. whereby France will take into account licences from other EC member states. declared the need to reform gambling laws. if all participants face the same level of taxation. but the bill risked infringement proceedings from the European Commission. H2GC’s most recent note on regulatory issues 43 suggests that these proposals will come into effect in the first half of 2010. and this will lead to considerable growth in the French market. However. Germany Germany’s blanket ban on all forms of Internet gambling was introduced as part of the Interstate Gambling Treaty on 1 January 2008. The European Commission issued a detailed opinion on 8 June 2009 asking for clarification on how the applicants would be licensed.Barclays Capital | European Leisure: Online Gambling for Unibet’s CEO Petter Nylander and bwin’s CEO Norbert Teufelberger. Eric Woerth. with Bavaria and North Rhine-Westphalia the most aggressive regions. or cancelled at the end of any calendar year. France tried to implement ISP and payment processing blocking measures in a bill in 2007. Budget minister. It can be extended further by state prime ministers. however status quo and an extension looks the most likely scenario. and how the law will apply to operators with licences from other EU member states. the French have compromised by agreeing to a review after two years to look at the impact of these measures. Enforcement varies between states. this argument becomes negated – the difficulty is banning non-licensed operators who could undermine the system by offering more competitive odds as they are not constrained by the taxation. and former defence minister Bruno Durieux prepared a report on the opening of the market.5% for sports betting. mirroring that of Italy. and the tax rate. and domestic pressure has ensured that these were never implemented. authorising just sports and horse-race betting and certain games of skill. online betting on non-sporting events and online lotteries. 15. This report recommends banning online slot machines. Opponents to the bill cite the high levels of tax as making the regime unworkable. In almost every instance cases have been successfully defended on the principle laid down by the ECJ in Placanica 2007. A revised draft has been approved by the EC. whereby a member state cannot apply criminal sanctions for failure to complete an administrative formality where such 43 www.com 9 October 2009 179 . which expires on 31 December 2011. The treaty allows states to protect their individual monopolies over sports betting and lotteries. France is aware of the need to regulate the online market as more revenues drain from FDJ and PMU to unauthorised online gambling sites. and provides a uniform method of legislation across the country without states having to sacrifice any legislative power to the federal government. It is binding among the 16 German states. currently proposed as 8.

however these are yet to be implemented by any of the states. This law was later relaxed. However. allowing people to play computer games in their own homes. by the Member State concerned. but online gambling will remain illegal. and where operators have been granted licences and actually encourage participation in particular gambling events. Greece has one of the most restrictive gambling frameworks. OPAP has a monopoly over landbased lottery and sports betting. Greece is a lucrative market for many operators. All of these are regard compatibility with EU law. Greece imposed a blanket ban on all electronic games. Given that OPAP is a profit-making organisation that advertises and actively encourages gambling. although there are those who question the legitimacy of this. as a vote by the commission on a draft reasoned opinion was cancelled at short notice. The EC has yet to respond. citing that a complete ban on Internet gambling is neither proportionate nor justified. Following infringement proceedings. Germany replied to the EC on 20 May 2008. to help enforce the prohibition of unauthorised gambling. OPAP’s marketing spend allows it to apply financial pressure on media companies which severely restricts online operators’ ability to advertise. or rendered impossible. and in December 2008 enquired whether infringement proceedings had been discontinued. Greece Despite having one of the high spend-per-capita on gambling products in the world. and exempts the commercial GDR licence for sports betting from the prohibition by the interstate treaty and confirms validity in the territory of the former GDR. without any ISP or payment processing blocking measures. although they are not expected to be heard in the near future. Greece aggressively enforced online prohibition with a crackdown on Internet cafes and other establishments where it was believed that electrical games were being played. which are regulated at a national level. German regulation is further complicated by companies claiming to be operating legitimately under licences granted under the former German Democratic Republic (East Germany). and online gambling is strictly prohibited.Barclays Capital | European Leisure: Online Gambling completion has been refused.K. due to the illegal conversion of many machines into unauthorised games of chance. 44 However. There are currently three German cases before the ECJ. The ECJ is currently reviewing whether Greece is compliant with EC law. the Greek government is proposing legislation to relax laws on leisure games. such as state-run lotteries and casino games. A more liberalised market could significantly increase revenues for online operators. the administrative court of appeal in Bautzen (Saxony) confirmed the validity of the commercial GDR licence of bwin e. bwin is the most notable operator to use this approach. it seems 44 Sportingbet plc year ended 31 July 2008 results presentation 9 October 2009 180 . it has proved impossible to prevent Greek players placing bets with foreign online gaming operators. However. with Sportingbet receiving almost 15% of revenue from Greece in 2008. and that German gambling law as a whole is not consistent as its provisions do not apply to horse racing or slot machines. The European Commission initiated formal infringement proceedings. The treaty also allowed the blocking of ISPs and financial transactions. where a member state has no consistent or systematic policy to limit gambling. in breach of Community law.

it would be an appropriate time to regulate online gambling and turn Ireland into a gaming-friendly territory to attract operators. However. Advertising of unauthorised operators remains prohibited. The controversial aspect of the new law is the requirement for operators to pay a flat tax of €3. A report in 2008 suggested that. With EU member states increasingly regulating their markets via licensing to capture tax revenue. The Irish market remains open to foreign operators. provided it registers with the Hungarian Tax and Financial Control Administration (APEH). In theory. due to payment blocking measures. we believe that Ireland could get more revenue by taxing online gaming provided to Irish citizens.Barclays Capital | European Leisure: Online Gambling probable that the monopoly will be found to be incompatible with the EC Treaty. the best way to capture tax revenues remains under debate. nor any protective measures to prevent it. with the prohibition of online gambling in the US. and trying to attract operators to base themselves in the country. with operators located remotely allowed to openly promote and offer their services to Irish citizens. Therefore. This could be considered a barrier to entry by the EC. and the current financial climate will only encourage this. Online operators may not advertise in terrestrial betting shops or Internet cafes. The European Commission argued that this was inconsistent with European law. at least for sports betting. and gain much-needed tax revenue. with advertisements of authorised operators subject to approval by regulators. with no threat of prosecution. but in practise this is widespread. any liberalisation of the market would not necessarily affect the online gambling industry. The new law allows an operator headquartered and licensed in an EEA country to offer online sports betting and horseracing to Hungarian customers. stating that it cannot justify a restrictive regime on the basis of social policy if it encourages gambling at the same time. and in 2006 Sportingbet’s website warned that it could not accept payments from Hungarian citizens on certain cards. although reference has also been made to obligations of payment providers as well. 9 October 2009 181 . given that the current prohibition applies without discrimination to domestic and foreign operators. however. Ireland There are no express provisions covering online gambling in Ireland.5m per year to the APEH – this is expected to be considerable higher than the land-based tax of 20% of net gambling revenues. Reform is firmly on the agenda. Hungary Hungary has been significantly more aggressive in defending its monopoly compared to other Eastern European countries. As it falls into a grey area. ISP blocking is set to be the primary tool to prohibit unauthorised online gambling operators. However. there is a prohibition on advertising football betting. Many operators believe this not to be the case. it would be up to the ECJ to decide whether a blanket ban on online gaming is consistent with gambling policy and proportionate to objectives. with territories such as Gibraltar and Malta already firmly established. there have been no prosecutions. in practise this is unlikely to be achieved. rather than setting a tax rate comparable to that of Gibraltar or Malta. It instituted legal proceedings against Sportingbet in 2004 for offering its products on a Hungarian language website.

45 46 AAMS. instant lotteries and sports betting games.5bn 45. by the Member State concerned. There was no national legislation on online gambling before December 2006. and the AAMS have powers to make it compulsory for ISPs to block access to blacklisted operators (those not in possession of a licence) – the blacklist currently contains more than 1. or rendered impossible. but only on grounds of social policy. Italy established a harsh framework to prohibit unauthorised operators. Despite this. leading to a history of ECJ case law. Portugal – monopoly operator There is an express prohibition on all gambling unless it is operated by the state or a licensed third party. In Placanica.aams. and although there are no ISP-blocking measures or payment bans. In April 2009 bingo was added to the games authorised online. www. but has expanded considerably in recent years. Gambling Compliance – A European Online Gambling Study 2009 AAMS.Barclays Capital | European Leisure: Online Gambling Italy Italy has adopted a more open policy to online gaming in recent years. and 888 is waiting until this happens before entering the market. in breach of Community law. Media companies that advertise unauthorised operators will be penalised.it 9 October 2009 182 . Authorities have announced that cash poker and casino games will become authorised in due course. the ECJ determined that Italy could not apply criminal penalties for failure to complete an administrative formality where such completion has been refused. In partnership with the issuing of licences. including tournament poker (but not ring games). when it was declared that offering online gambling was illegal without authorisation from Spanish authorities. In 2008. the ECJ determined that restrictions could not be justified on for economic purposes. with operators able to obtain a licence for a limited range of games. Amongst the products currently available online is domestic and international horse racing. One of the most controversial issues of Italian legislation is applying criminal sanctions to operators not complying with Italy’s regulations. compromising the effectiveness of this. Monopoly operator Santa Casa holds the exclusive right to operate lotteries and gaming through the Internet. In Gambelli. the number of licences was originally very limited.it. Spain – regional regulation The regulation of online gambling in Spain is problematic as gambling is traditionally regulated at a regional level. but that the poker licence is too expensive for entry at the moment. Requirements for a licence are that online operators must have a permanent establishment in the country. Spain retains a 7% share of total European online gross win. licensed online operators in Italy had a turnover of nearly €1.aams. The two most famous cases are Gambelli (2003) and Placanica (2007). making operators subject to Italian tax. However. Sportingbet have suggested that it is a market that would be of interest if sports betting opened up. Licences are issued through the Italian Monopolies Authority (AAMS). Some games of skill have been available online since September 2008. www. blacklisted websites have found ways to circumvent the ISP blocks. authorities have fined non-licensed operators. See the Santa Casa case for more details.700 websites 46. although it will not be implemented for six months. Poker has shown particularly impressive growth.

However two regions. however we believe that. with Svenska Spel offering online poker since 2006. online poker games. Svenska Spel (operates sports betting. the Swedish spend the highest proportion of GDP on online gaming of any European country (0. slot machines and six landbased casinos) and the Swedish horse racing board. non-profit associations have organised games online. despite the restrictive framework. Internet bingo.03% European average). 9 October 2009 183 . there is only one authorised online operator – state-owned monopoly Loterias y Apuestas del Estado (LAE). we expect this to change as more regions regulate online gambling. Although no operators currently hold a regional licence. Given the slow progress of national legislation. two more regions.Barclays Capital | European Leisure: Online Gambling In practice. There are also non-government. Sweden – regulation at tipping point The third largest market in Europe. Svenska Spel and ATG have had online offerings since 2003. The Supreme Administrative Court ruled in 2004 that Sweden’s gambling regulations were compliant with European law. however evolving ECJ case law has forced the government to look into alternative proposals. Regional license holders can only offer online gambling to residents within that region. off-track and online horse-race betting). have announced that they will introduce regional gambling legislation. Since 2002. 2008 Foreign internet operators 10% Non-govt orgainsations 17% Svenska Spel 53% ATG 20% Source: Svenska Spel Annual Report 2008 Due to the high level of gambling spend. We view further regional legislation as the key to regulation in Spain going forward. this will be an attractive proposition for operators. non-profit organisations which organise lotteries and bingo games. ATG (operates on-track. Madrid and Basque Country. lotteries. the Swedish market is attractive to foreign operators. The market is dominated by two state-owned monopolies. Figure 218: Market share.17% of GDP in 2008 versus 0. for the most populated regions. and expect this to drive further growth of the market. have since regulated online gambling to create a regional licence. Rioja and Casstilla y Leon.

and to date. Freedom to advertise should drive growth of both the market share of foreign operators. the regulation of a market that thus far has been vehemently pro-monopoly could lead to a change in attitude of other pro-monopoly countries. The Swedish governments’ decision on future gambling regulation could be a material growth driver for the industry. There are a number of requirements that must be followed to operate in the UK.733. and the size of the overall market. which include measures to promote responsible gambling and help problem gamblers. The UK tax regime is even less appealing compared to that of territories on the white list. Operators licensed in the EEA or white listed jurisdictions can advertise freely in the UK. Currently. 47 Gambling Compliance – A European Online Gambling Study 2009 9 October 2009 184 . The cost of a licence varies dramatically depending on the form of gambling. offshore jurisdictions. the anticipated repatriation of operators has not occurred. These are fairly generic. it is difficult to advertise in the country. Second. there have been no prosecutions for illegal online gambling operations based in the UK. There was a supposed clampdown on illegal online gaming advertising. 47 On top of this. and partial liberalisation of the industry. where a decision is pending. and it has never materialised. newspapers and their editors have been prosecuted for publishing gambling ads. United Kingdom The UK’s gambling regulations were reformed with the Gambling Act 2005. however. but that both of the suggested approaches should be compliant. the resources needed to implement this made it unworkable.500.Barclays Capital | European Leisure: Online Gambling A report in December 2008 outlined two alternative approaches to its gambling regime: further restriction. The report concluded that the current regulations’ compatibility with European law is open to dispute. and advertising cases have been referred to the ECJ. which was implemented in 2007. Sweden has been subject to infringement proceedings over its betting market and Svenska Spel’s exclusive poker licence. The UK allows all forms of online gambling provided by operators from the European Economic Area (EEA) and select ‘white listed’ non-EEA jurisdictions. A single piece of remote gambling equipment in the UK means that the operator must apply for a UK licence from the Gambling Commission. Due to this. we see scope for significant market share gains from foreign operators. there is a 15% gaming duty which is a tax on gaming profits. First. Media and Sport announced a review in April 2009 looking at ways to make the UK more competitive. Svenska Spel’s online poker offering fundamentally changed the Swedish gambling market. and this is viewed by many as the tipping point where legislation became incompatible with European law. Critics claimed that such a high rate of tax was a missed opportunity to repatriate online gaming operators in lower taxed. to an online casino games licence starting at £12. The Gambling Commission and Department for Culture. and now it has the most liberal gambling market in the EU. ranging from a general betting licence starting at £1.

Barclays Capital | European Leisure: Online Gambling The EU Payment Services Directive comes into force in the UK on 1 November 2009 and affects payment service providers. they tend to stick to their party lines more. then it goes to the other house. but each state has at least one representative. If one house passes the bill. They must both agree to pass the exact same bill. or pass it. US Legislative Process US Congress is made up of the Senate and the House of Representatives (HoR). A bill can be introduced in either house (except tax. If they do. If he vetoes it. It will be a criminal offence to provide payment services without authorisation or registration from the Financial Services Authority. Because Representatives are only elected for two years at a time. 9 October 2009 185 . Both Senators and Representatives are elected by public vote and they are generally affiliated with Republican or Democratic parties. Representatives serve two-year terms. regardless of size and Senators serve six-year terms. then it goes to the President who can veto it. with the number of representatives dependent on the population of each state. then Congress can override him by getting a two thirds majority in both houses. which must be introduced by the House of Representatives). The HoR is made up of representatives from each state. Senators are there for a longer term so often don't stick necessarily so rigidly to their respective side. The Senate has two representatives from each state.

71). GBP 1.L. 07-Oct-2009.L. 3-Underweight .L. 07-Oct-2009.76).L. NY 10019 or refer to www. GBP 2.81).The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to 9 October 2009 186 . whether as a result of differing time horizons.L. 07-Oct-2009.PA. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector coverage universe”). On September 20. 07-Oct-2009.com/disclosures or call 1-212-526-1072. 07-Oct-2009. EUR 33. Stock Rating 1-Overweight . 1-Overweight/3-Negative Thomas Cook Group Plc (TCG. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues.73). 1-Overweight/3-Negative Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight. 17th Floor. 2-Equal Weight/3-Negative Bwin Interactive Entertainment (BWIN. 2008.The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. 07-Oct-2009. 1-Overweight/3-Negative William Hill PLC (WMH. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.L.94).07).L. 07-Oct-2009. 3-Underweight/3-Negative Sodexo SA (EXHO.lehman. fundamental analysis. Ed Birkin. and private investment management businesses. 745 Seventh Avenue.21). Julian Easthope and Vicki Lee. 2-Neutral or 3-Negative (see definitions below). amongst others. 2-Equal Weight . 2-Equal Weight/3-Negative InterContinental Hotels Group Plc (IHG. 07-Oct-2009. 2-Equal Weight/3-Negative Mitchells & Butlers Plc (MAB. GBP 1. GBP 0.34). GBP 0. are not registered/qualified as research analysts with FINRA. EUR 37.L. 07-Oct-2009. Primary Stocks 888 Holdings plc (888.VI. and trade ideas. 1-Overweight/3-Negative Materially Mentioned Stocks Accor SA (ACCP. GBP 8. 07-Oct-2009. Barclays Capital produces a variety of research products including. is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. 07-Oct-2009. 1-Overweight/3-Negative Enterprise Inns PLC (ETI. GBP 2. New York.60).Barclays Capital | European Leisure: Online Gambling ANALYST(S) CERTIFICATION(S) We.87).10).52). or otherwise. GBP 1. methodologies. 07-Oct-2009. 07-Oct-2009. 07-Oct-2009. 1-Overweight/3-Negative PartyGaming plc (PRTY. we provide sector views which rate the outlook for the sector coverage universe as 1-Positive.L. GBP 2. Barclays Capital acquired Lehman Brothers' North American investment banking.26). 1-Overweight/3-Negative Compass Group PLC (CPG. 2-Equal Weight/3-Negative Ladbrokes Plc (LAD. A rating system using terms such as buy. In addition to the stock rating. quantitative analysis.L.67). please send a written request to: Barclays Capital Research Compliance. hold and sell is not the equivalent of our rating system.L. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company.26). GBP 1.L. 1-Overweight/3-Negative Whitbread PLC (WTB.PA.93). EUR 40. IMPORTANT DISCLOSURES CONTINUED For current important disclosures regarding companies that are the subject of this research report. GBP 3. 3-Underweight/3-Negative Punch Taverns PLC (PUB. capital markets. GBP 12. public appearances and trading securities held by a research analyst’s account. 07-Oct-2009. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products. 07-Oct-2009. 1-Overweight/3-Negative TUI Travel Plc (TT.The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight/3-Negative Sportingbet plc (SBT.The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. GBP 2. RS-Rating Suspended .L. hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was.

(BBSA. (BCI.PA) Enterprise Inns PLC (ETI.L) Punch Taverns PLC (PUB. for purposes of mandatory regulatory disclosures.L) Sodexo SA (EXHO. New York) Tokyo Barclays Capital Japan Limited (BCJL.L) Ladbrokes Plc (LAD.L) Whitbread PLC (WTB.L) Sportingbet plc (SBT. 40% have been assigned a 1-Overweight rating which. Equity Research has 1258 companies under coverage.L) Distribution of Ratings: Accor SA (ACCP.L) Barclays Capital Inc. for purposes of mandatory regulatory disclosures. Below is the list of companies that constitute the "sector coverage universe": European Leisure 888 Holdings plc (888.L) TUI Travel Plc (TT. 13% have been assigned a 3-Underweight rating which. Sector View 1-Positive .L) PartyGaming plc (PRTY.L) Compass Group PLC (CPG.VI) InterContinental Hotels Group Plc (IHG. São Paulo) Hong Kong Barclays Bank PLC. 44% of companies with this rating are investment banking clients of the Firm.sector coverage universe fundamentals/valuations are steady. London) New York Barclays Capital Inc.Barclays Capital | European Leisure: Online Gambling IMPORTANT DISCLOSURES CONTINUED comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.PA) Thomas Cook Group Plc (TCG. is classified as a Buy rating. is classified as a Hold rating. Tokyo) São Paulo Banco Barclays S. Hong Kong) 9 October 2009 187 . Hong Kong branch (BB. neither improving nor deteriorating.L) Bwin Interactive Entertainment (BWIN. the investment banking division of Barclays Bank PLC (Barclays Capital. 45% have been assigned a 2-Equal Weight rating which. 2-Neutral .sector coverage universe fundamentals/valuations are deteriorating. 3-Negative .sector coverage universe fundamentals/valuations are improving.L) Mitchells & Butlers Plc (MAB.A. 38% of companies with this rating are investment banking clients of the Firm.L) William Hill PLC (WMH. Barclays Capital offices involved in the production of equity research: London Barclays Capital. for purposes of mandatory regulatory disclosures. is classified as a Sell rating. 28% of companies with this rating are investment banking clients of the Firm.

L) GBP 0.07 Jan. outperformance of an existing B2B partner and signing of a material new B2B deal.4 1.07 Jul. Valuation Methodology: Our DCF model using a 11.1% WACC and 2% terminal growth rate.09 Closing Price Link to Barclays Capital Live for interactive charting Barclays Bank PLC and/or an affiliate trade regularly in the shares of 888 Holdings plc.2 1. Risks which May Impede the Achievement of the Price Target: Upside: Improvement in the B2C business. 9 October 2009 188 .6 1.8 0.09 Jul.94 (07-Oct-2009) Rating and Price Target Chart .8 Stock Rating 2-EQUAL WEIGHT Currency=GBP Date Closing Price Rating Sector View 3-NEGATIVE Price Target 1. Downside: Regulatory risk and market share gains from USfacing sites.08 Jul. opening of the US market.GBP (as of 07-Oct-2009) 1.08 Jan.Barclays Capital | European Leisure: Online Gambling IMPORTANT DISCLOSURES CONTINUED 888 Holdings plc (888 LN / 888.0 0.6 Jan.

09 Closing Price Link to Barclays Capital Live for interactive charting Barclays Bank PLC and/or an affiliate trade regularly in the shares of Bwin Interactive Entertainment. 9 October 2009 189 .07 (07-Oct-2009) Rating and Price Target Chart .Barclays Capital | European Leisure: Online Gambling IMPORTANT DISCLOSURES CONTINUED Bwin Interactive Entertainment (BWIN AV / BWIN.VI) EUR 33.09 Jul.07 Jan. Risks which May Impede the Achievement of the Price Target: Downside: Regulatory risk and underperformance of the Gioco Digitale acquisition.EUR (as of 07-Oct-2009) 40 Stock Rating 1-OVERWEIGHT Currency=EUR Date Closing Price Rating Sector View 3-NEGATIVE Price Target 35 30 25 20 15 10 Jan.08 Jul.08 Jan.5% WACC and 2% terminal growth rate. Valuation Methodology: Our DCF model using a 10.07 Jul.

5 2.5 5.08 Jul.5 3. Valuation Methodology: Our DCF model using a 10.0 0.Barclays Capital | European Leisure: Online Gambling IMPORTANT DISCLOSURES CONTINUED PartyGaming plc (PRTY LN / PRTY.5 4.L) GBP 2.0 3.0 4.0 5.09 Closing Price Link to Barclays Capital Live for interactive charting Barclays Bank PLC and/or an affiliate trade regularly in the shares of PartyGaming plc. Upside: opening of the US market and signing of a material B2B deal.5% WACC and 2% terminal growth rate.71 (07-Oct-2009) Rating and Price Target Chart .07 Jul.5 Jan. Risks which May Impede the Achievement of the Price Target: Downside: regulatory risk and market share gains from US-facing sites.07 Jan.5 1. 9 October 2009 190 .GBP (as of 07-Oct-2009) Stock Rating 2-EQUAL WEIGHT Currency=GBP Date Closing Price Rating Sector View 3-NEGATIVE Price Target 6.0 1.09 Jul.0 2.08 Jan.

5 0.6 0.4 0.6% WACC and 2% terminal growth rate. Barclays Bank PLC and/or one of their affiliates beneficially owns 1% or more of any class of common equity securities of Sportingbet plc.7 0.09 Jul.8 0. 9 October 2009 191 .08 Jul.73 (07-Oct-2009) Rating and Price Target Chart .L) GBP 0.08 Jan. Valuation Methodology: Our DCF model using a 12.Barclays Capital | European Leisure: Online Gambling IMPORTANT DISCLOSURES CONTINUED Sportingbet plc (SBT LN / SBT. Barclays Bank PLC and/or an affiliate trade regularly in the shares of Sportingbet plc.07 Jul. Sportingbet plc is or during the past 12 months has been an investment banking client of Barclays Bank PLC and/or one of their affiliates.09 Closing Price Link to Barclays Capital Live for interactive charting Barclays Bank PLC and/or one of their affiliates has received compensation for investment banking services from Sportingbet plc in the past 12 months.3 0.07 Jan.GBP (as of 07-Oct-2009) Stock Rating 1-OVERWEIGHT Currency=GBP Date Closing Price Rating Sector View 3-NEGATIVE Price Target 0. Risks which May Impede the Achievement of the Price Target: Downside: regulatory risk and currency movements.2 Jan.

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