Freakonomics analysis of Party Poker and the new law

[yukoncpa]

Party Poker Puzzle (http://www.freakonomics.com/blog/)
Steven Levitt, author of “ Freakonomics”, chimed in on the apparent stupidity of Dickshit and Co.

A portion of his piece:

Apparently the folks at Sportingbet, another firm that trades on the London Stock Exchange, are smarter than the ones running Party Poker. Last week I got an email from Sportsbook.com, a subsidiary of Sportingbet. It read as follows:

[ericicecream]

Too bad for us they didn't sell Paradise as well.

[yukoncpa]

[ QUOTE ]
Too bad for us they didn't sell Paradise as well.



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You make a great comment. Were investors simply not interested in an arguably successful poker room?
At any rate, Levitt explains quite well, why Party Poker, by far and away the market leader in poker, was in a position to continue to crush the competition and grow it's business by large multiples. Surly, Party Poker’s monopolistic ( I’m using monopolistic in the Warren Buffet manner ) economic model would have appealed to some wealthy group of investors had Party Poker just tried to look for buyers.
This article by Levitt may have missed something, but it looks as if Party Poker, who’s stock went from a high of about 158 to the present low thirties, just screwed their investors.

[adios]

Thanks for the link as it's a good read. The reason Party management would prefer to keep the company public is very simple really. The management at Party wants to keep their cushy, high paying jobs. Hell they'll probably get new stock options to replace any that existed before they closed their doors to U.S. players. Why they wouldn't simply ban players from the nine states is a mystery to me to this day. The only reason I care is that IMO it's monkey see, monkey do. Some other sites following the market leader over the abyss methinks.

[gonebroke]

Apparently the author of this article did not do any research. Sportingbet sold sportsbook.com for 1 dollar. That relieved the company of some debt, but the shareholders get no major benefit out of it.

Also, there was no way a group of investors would offer 5 billion for PartyPoker, especially since the ramifications of the bill being passed were unknown. The extremely high risk would not be worth the gamble. If they got offered $5 billion, they would take it in a heart beat. The CEO would have cleaned up on his stock options.

[Sniper]

What he fails to note is the economic incentives Party has to stay in the non-US business, in the form of continued profits.

Party is not looking to be bought out... Party is looking to acquire other businesses at distressed prices though. They would not be doing this, if they didn't feel that current low valuations make acquisitions attractive.

It is also Party's opinion that revenue from the US, to the sites that stayed in the US market, will fall considerably once the Regulations on financial transactions are put in place.

[adios]

[ QUOTE ]
Apparently the author of this article did not do any research. Sportingbet sold sportsbook.com for 1 dollar. That relieved the company of some debt, but the shareholders get no major benefit out of it.

Also, there was no way a group of investors would offer 5 billion for PartyPoker, especially since the ramifications of the bill being passed were unknown. The extremely high risk would not be worth the gamble. If they got offered $5 billion, they would take it in a heart beat. The CEO would have cleaned up on his stock options.

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Basically I agree with your points. On the $1 buyout and the debt relief, one benefit to shareholders, albeit of a dubious nature, is the de-leveraging of assets. But yes I think that the author of the article should bring this out.

Your point about the selling price is valid. Apparetnly PartyGaming was an obvious short sale before the law was passed. Don't follow that company at all though so not sure. If the price is obviously too high, then it has to be an obvious short sale no?

[MagCFO]

[ QUOTE ]
Apparently the author of this article did not do any research. Sportingbet sold sportsbook.com for 1 dollar. That relieved the company of some debt, but the shareholders get no major benefit out of it.

Also, there was no way a group of investors would offer 5 billion for PartyPoker, especially since the ramifications of the bill being passed were unknown. The extremely high risk would not be worth the gamble. If they got offered $5 billion, they would take it in a heart beat. The CEO would have cleaned up on his stock options.

[/ QUOTE ]

There's a little more to the story they the layman would know here. Sportsbook.com is worth way more than $1. They had $14mil in debt, which is nothing to a company of that size.

What really happened is the minority shareholders got screwed. I believe the company that bought SB for $1 was owned by some of the majority shareholders of sportingbet.

Here's a quote from Calvin Ayre saying he would have paid millions for Sportsbook.com, but negotiations were halted so a deal with some insiders could be done.

http://www.bookmakersreview.com/n/Latest...d_on_the_cheap/ (http://www.bookmakersreview.com/n/Latest_News/23-10-2006_Bodog_says_Sportsbook.com_was_sold_on_the_che ap/)

[MagCFO]

Oh yeah, and one other thing, I don't think we've heard the last of party poker in the US.

That's just my opinion (which i'm in this business, so it's not just the opinion of a $5 SNG player), but I think party is coming up with there strategy as we speak.

The smartest thing they could do is have the majority shareholder, Dikshit and his boys, by the company back and open back up to US operations. I still think that is what will happen. Being a public company is costing them millions per day, and the received virtually no benefit for being public.

[gonebroke]

Here is another reason why PartyGaming did not sell PartyPoker. The UK Government is going to give certain sites certification status deeming them safe to play at. Those without that certification will be deemed as rogue operators. The following is speculation on my part: PartyPoker will get this certification and PokerStars, FullTiltPoker, UltimateBet, Absolute and all sites allowing Americans to play will not. It is in PartyPoker's best interest to have all the sites who continue to serve Americans labeled as "rogue" or "black market" operators.

Here is a comment from an article today as well as a link to it:
"Under UK government plans, the Gambling Commission is to vet sites, giving official approval to those with the best working practices."
http://news.bbc.co.uk/1/hi/uk_politics/6090358.stm

[gonebroke]

[ QUOTE ]

Your point about the selling price is valid. Apparetnly PartyGaming was an obvious short sale before the law was passed. Don't follow that company at all though so not sure. If the price is obviously too high, then it has to be an obvious short sale no?

[/ QUOTE ]

It is easy to say that it was a great short sale after the fact, but assuming the law was never passed, I do not think it would have been wise to short it. While the growth rate of their poker revenues was shrinking, the analysts underestimated the income that would be generated from PartyCasino.com. They were bringing in Net Revenue of 1 million per day from that operation. I think that was an 800% increase in their casino revenue from the year prior.

[adios]

It's just as easy to say that it wasn't worth $5 billion after the fact /images/graemlins/smile.gif.

[adios]

IMO this would lend credence to those that believe that Party made this announcement for the express purposes of bringing the stock price down. I agree that it seems inconceivable that Party would just roll over and forego all that profit.

[Uglyowl]

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I agree that it seems inconceivable that Party would just roll over and forego all that profit.


[/ QUOTE ]

It doesn't shock me that some sites gave up, what does shock me is the speed at which it happened in Party's case.

Law was passed Friday night and those guys were ready to pull out that weekend.

[MagCFO]

[ QUOTE ]
Here is another reason why PartyGaming did not sell PartyPoker. The UK Government is going to give certain sites certification status deeming them safe to play at. Those without that certification will be deemed as rogue operators. The following is speculation on my part: PartyPoker will get this certification and PokerStars, FullTiltPoker, UltimateBet, Absolute and all sites allowing Americans to play will not. It is in PartyPoker's best interest to have all the sites who continue to serve Americans labeled as "rogue" or "black market" operators.

Here is a comment from an article today as well as a link to it:
"Under UK government plans, the Gambling Commission is to vet sites, giving official approval to those with the best working practices."
http://news.bbc.co.uk/1/hi/uk_politics/6090358.stm

[/ QUOTE ]

If you read the article I posted below, you'll see the UK is pretty pissed at the US, so, helping the US enforce their laws doesn't make sense.

Why would the UK want to cut-off Pokerstars because pokerstars allows US players? Since the US market is much bigger, I'm sure PS would say F' you and then the UK wouldn't get anything from PS.

Just my opinion of course.


http://biz.yahoo.com/ap/061027/britain_online_gambling.html?.v=3

[gonebroke]

[ QUOTE ]

If you read the article I posted below, you'll see the UK is pretty pissed at the US, so, helping the US enforce their laws doesn't make sense.

Why would the UK want to cut-off Pokerstars because pokerstars allows US players? Since the US market is much bigger, I'm sure PS would say F' you and then the UK wouldn't get anything from PS.

Just my opinion of course.


[/ QUOTE ]

The UK Govt is going to allow the public companies to move their servers to the UK. They will be offering them a competitive tax rate compared to the countries they are currently working out of, i.e. Gibraltar, Costa Rica, etc. Once these companies move their servers and operations to the UK, the UK will now benefit by receiving tax revenue.

Pokerstars is not a public company and will not move their servers or operations to the UK. Therefore, they will not be contributing to the UK in terms of tax revenue and will not get "certified" by the UK Govt as a "safe" site to play on.

Mitch Garber, CEO of PartyGaming, is already working very closely with the UK Govt regarding this matter.

[Synergistic Explosions]

[ QUOTE ]
The following is speculation on my part: PartyPoker will get this certification and PokerStars, FullTiltPoker, UltimateBet, Absolute and all sites allowing Americans to play will not. It is in PartyPoker's best interest to have all the sites who continue to serve Americans labeled as "rogue" or "black market" operators.

[/ QUOTE ]

Rubbish.

[adios]

[ QUOTE ]
[ QUOTE ]
I agree that it seems inconceivable that Party would just roll over and forego all that profit.


[/ QUOTE ]

It doesn't shock me that some sites gave up, what does shock me is the speed at which it happened in Party's case.

Law was passed Friday night and those guys were ready to pull out that weekend.

[/ QUOTE ]

Yeah that's the point I was trying to make when I mentioned rolling over. The law pasess and within 24-48 hours Party is saying bye-bye, wtf? That's what I call rolling over.

[gonebroke]

[ QUOTE ]
[ QUOTE ]
The following is speculation on my part: PartyPoker will get this certification and PokerStars, FullTiltPoker, UltimateBet, Absolute and all sites allowing Americans to play will not. It is in PartyPoker's best interest to have all the sites who continue to serve Americans labeled as "rogue" or "black market" operators.

[/ QUOTE ]

Rubbish.

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``If it helps to regulate the industry, then I think it's a good idea,'' said John Anderson, Chief Executive Officer at 888 Holdings Plc in a telephone interview today. Regulation, he said, would protect consumers and provide a legal framework for ``the good operators who already follow those rules now.''

The poker sites which have stayed open are causing anger from the poker rooms which complied with US laws and closed immediately. Mitch Garber of Partygaming called their rivals which stayed open Black Market poker rooms.

[gonebroke]

[ QUOTE ]
[ QUOTE ]
The following is speculation on my part: PartyPoker will get this certification and PokerStars, FullTiltPoker, UltimateBet, Absolute and all sites allowing Americans to play will not. It is in PartyPoker's best interest to have all the sites who continue to serve Americans labeled as "rogue" or "black market" operators.

[/ QUOTE ]

Rubbish.

[/ QUOTE ]

You still think it is rubbish?

However, sports minister Richard Caborn told a news conference that the government would not protect UK online gaming executives from extradition requests if they took Internet bets from countries in which they were illegal.

"People have to abide by the laws of particular countries," he said. "We will not acknowledge people who operate illegally."

http://news.yahoo.com/s/nm/20061031/ts_nm/britain_gaming_dc

[adios]

It's not clear what laws are being broken if any. Read Nelson Rose's analysis, a link is provided in one of the stickys. I have my doubts that extraditing UK citizens would be politically popular move in the UK.