A possible takeover bid for 888 Holdings may pave the way for further consolidation in the fragmented online gaming industry. But investors need to tread carefully.
Online gaming firm 888 Holdings
(LSE: 888)
today confirmed recent press speculation that it is in merger discussions. But the internet poker company, as you would expect, was playing its cards very close to its chest. It said it has had various preliminary discussions with third parties following suspension of its US activities.
Although the embattled gaming outfit did not reveal the identities of its discussion partners, PartyGaming
(LSE: PRTY)
has been touted as a likely merger candidate. PartyGaming, which is three times larger than 888, has been similarly wounded by America's move to outlaw gambling over the Internet. Consequently, it also needs to look to consolidation to defend its weakened position.
On the face of it, a merger between the UK's two biggest online gaming companies makes good strategic sense. PartyGaming is expected to lose around 84% of its turnover as a result of America's move to ban online gambling. Meanwhile, 888 may lose over half its revenues. This merger would result in non-US annual revenues of around £160m. The merged entity could generate operating profits of around £37m, based on 888's lower operating margin of 24%.
But PartyGaming may need to act quickly if it hopes to ward off interest from other potential suitors. As a slightly less US focussed business, 888 may attract interest not only from online gamers but also from traditional casino operators on the lookout for cheap assets. These may include William Hill
(LSE: WMH)
and Ladbrokes
(LSE: LAD)
.
Interestingly, possible consolidation within the fragmented online gaming sector has been on the cards for some time. It stands to reason that main players will want to look at consolidation to cement their prime positions in an industry that is reckoned to have almost two thousand operators.
Marketers generally describe this as the 'shakeout phase', which tends to be characterised by a natural drop-off in usage. However, in this instance the drop-off has been brought about by external factors. Nevertheless it is likely that existing players may resort to price cutting to boost volumes. But this will inevitably be at the expense of margins. So whichever way you look at it, online gaming looks set for a losing streak, and investors may want to sit on their hands for now.
> Learning From The Poker Fiasco | PartyGaming Is Not For Me
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