888's flotation may value the internet
casino at more than £700m. Or less than £550m. Bryce Elder asks: is
it worth a flutter at any price?
When PartyGaming
spoiled the City’s appetite for internet gaming stocks last week, it
looked like bad news for its soon-to-be-floated rival, 888 Holdings.
By how much would the poker site's growth warning knock a hole in
888's valuation this week? The answer, it transpires, is "don't
know".
888, the world’s
largest online casino, said today it will be offering shares to
investors at between 162p to 212p, valuing the group as high as
£714.6 million or as low as £546.1 million. That's a difference of
more than 30 per cent between the top and bottom, which looks less
like an indicative range and more like a stab in the dark.
Yet some may be
surprised the share sale is progressing at all. Before today's
announcement, rumours had circulated that the company's Israeli
owners were threatening to abandon float plans when they were asked
to cut their valuation by one-third.
As it stands,
the mid-price of today's range suggests a value for 888 of £630
million - only 10 per cent less than the £700 million cap talked of
a few weeks before. But it is perhaps worth noting the bottom-end of
the pricing range would put 888's valuation much closer to the
rumoured one-third discount.
Does this
cavern-wide price range suggest that some cajoling was needed to win
over the two families who control more than 90 per cent of 888
shares? Were they attracted by the promise of "up to" £178 million
in return for a quarter of their company, even when the banks tasked
with selling the shares saw a value of as little as £136 million?
The answer to that question will likely remain inside the walls of
HSBC - the offer's sole bookrunner, global co-ordinator, sponsor and
receiver of some pretty hefty commissions.
So is caution
merited? Confidence in internet stocks is still fragile after last
week's warning from PartyGaming, the world's largest poker-site
operator, that new customers are gambling less frequently and with
lower stakes than its regular hardcore of players.
Compared with
its poker-specialist peer, 888 is not as vulnerable to changes in
fashion and law. About 65 per cent of 888's revenues are generated
from online casino games, with the balance from poker. It also has a
lesser reliance on American sales, where many states ban online
gambling, and may not lean quite so much on compulsive players for
profit.
Today's trading
update from 888 would seem to support theories that it is the
safer, more diversified company. In July and August - traditionally
the industry’s slowest months - total net gaming revenues were up
12.9 per cent and 12.5 per cent respectively compared with the
equivalent monthly revenues in the first half. That follows a first
half when 888's revenues grew 14.2 per cent in its casino division,
and an eye-catching 226 per cent for its poker unit.
The company
today also promised to give shareholders around 50 per cent of
earnings in the form of an annual dividend, with the first payment
expected in October 2006. If the flotation gets away at the
mid-price of the indicative range, that pledge would mean a dividend
yield of 4.1 per cent. It would also put the shares on a
price-to-earnings ratio of just over 12 times 2006 earnings, which
is pretty much at the same valuation afforded to the post-warning
Partygaming.
On these kind of
figures, 888's champions should not have too hard a job selling the
company's story to investors. But one glance at Partygaming stock,
still lingering below the flotation price, may create an
understandable cynicism of triple-digit growth rates and 2006
valuation metrics.
Is it any
wonder, then, that the City has no idea how many investors may be
prepared to take a flutter?
