Shares in PartyGaming have crashed 64% since the company's US poker business was torpedoed by the Senate. However, even at 39p, the shares still look pricey.
It's not often you see a FTSE 100 company cancel a previously announced dividend. In fact, I'd never seen such an announcement until last week's release from PartyGaming
(LSE: PRTY)
.
That announcement just underlines how much things have changed since the US Senate voted for a clampdown on internet gaming. Just before that vote on September 30th, PartyGaming shares closed at 107p. By the end of the next trading day, the shares had slumped to 45p and they closed last night at 39p.
That values the company at £1.56bn, and I still think that's too expensive.
As things stand now, PartyGaming is a non-US gaming business, and that side of the company generated revenue of $150m (£80m) in the first half of this year. Admittedly, non-US revenues grew fast, up 151%, so I'm going to assume that non-US revenues will double in the second half taking total revenue to £240m for the whole year.
PartyGaming's first-half ebitda margin was 57%, so perhaps it can generate ebitda of £137m from its non-US business in 2006. Knock net cash of £50m off the market cap, and you have an enterprise value of £1.51bn, so I reckon "new" PartyGaming trades on an EV/ebitda ratio of somewhere around 11.
That's an attractive rating for a decent growth business, but there are lots of uncertainties here. For starters, some of the cash pile may be needed to close down the US business. Or perhaps PartyGaming will decide to maintain a "fantasy" poker offering in the US where no money changes hands. Such a tactic might pay off in the long-term if laws changed, but it could only be a cost in the near-term.
And with lower volumes, can PartyGaming continue to achieve a 57% margin? Maybe the company's technological and commercial expertise means that's possible, maybe not.
What's more, poker may be all the rage now, but fashions change, so stellar growth rates could slow down pretty quickly.
Then there's the big issue of potential takeovers. Last week's statement talked about "many attractive opportunities" in the sector, but £50m can only buy so much. And if the share price falls further, PartyGaming will find it harder to pull off shares-based deals.
Sure, an attractively priced purchase could deliver synergies and bulk up the "new" PartyGaming business, but the big doubt is whether management can pull off an attractive deal. Even my mother knows that PartyGaming is in crisis, so I don't think that CEO Mitchel Garber has a strong negotiating hand.
Yes, my calculations are "back of an envelope" estimates, but this is a company which has goofed up in a big way. Why would I want to pay this much for a company with this kind of track record, and whose future success seems to rest on pulling off successful corporate deals? PartyGaming is not for me.
More: Learning From The Poker Fiasco
