Barrons: Only the house wins - Page 8

sbj99 · #71 10-09-2006, 03:50 AM

Party released a statement last week that their are no issues with their credit facility...

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Party said, "We don't see this as an issue."

They did not say that there isn't a clause related to US law, nor did they deny that lenders can call in the loan. Put yourself in the shoes of the lenders here...

edit: and Financial Times is a reliable source:

<<There is, of course, more to do on online gambling, and how much it matters that the banks can call in any loans now that the US has passed such damaging legislation. As we wrote this morning, PartyGaming’s credit facility includes such a clause. >>

sbj99 · #72 10-09-2006, 01:40 PM

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I do not feel like looking into this too closely, but the thing you guys are ignoring is the cash they have made in since June. Let assume business was the same as the first half the year. Operating cash flow would ba another $190M (half the $380 from the first half). Working capital would be reduced by withdrawl (US players). Cash from investing would perhaps be reduced by the acquisition (I do not know the details if they have made an acquisition sinc e6/31, but the article seemed to imply they did - has it closed?) And there will be no dividend, so the $200M from the first half of the year will not be there.

So, if the acquisition didnt close, they would have another $190M positive cash to fund withdrawls, if it did close perhaps only $60M.

That would give them $192 ($132 currect cash + $60M) to fund withdrawls, which is just enough. Further, party has $155M in recievables. I am not sure what these are, but with a contraction in the business, I would generally expect these to be reduced in propotion to the short term liabilities. That would perhaps provide another $100M (a business that is suddenly 80% smaller, is not going to have anywhere near as high working capital (recievables), thus these will be natuarally liquidated). That would give party $290 (or more) vs $192 owed.

The next 10-Q can provide these details more precisely, but I do not see any reason that my assumptions are considerable off. Party isnt exactly a cyclical business, I Would guess there quarterly results are pretty linear - which is what helped with their high valuation.

Bottom line: I glanced at the financials for 5 minutes and while this is clearly horrible for the business, I see no reason for people to not get their money out. Further, if the company is able to act somewhat nimbly (cut overhead in accordance with the reduction in business), they should be able to come of it without a bankruptcy.

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I don't think you went through these numbers carefully.

If they remained business as usual they would generate that $190m by the end of the year, not next week. The cash generated at this point is probably around $100m. The dividend was just cancelled, so that should not have the effect on cash you mentioned at this point.

You left out the tax payables which is $90m. I can't find a closing date for the acquisition, but it seems like it has closed based on the language they used in the press release.

So, if it has closed it leaves them with:

$132m (cash 6/30) + $100m (additional cash generated to date) - $40m (drawn down previous credit facility) - $80m (portion of cash to be paid on close of acquisition).

= $112m net cash

or if they can back out of acquisition

= $192m net cash less breakup fee.

That would almost cover the client deposits and leave them with no cash for the next few months when they'll need some (expenses won't go away as quickly as revenues).

=

adios · #73 10-09-2006, 04:08 PM

Intangible assets are seldom worth much less than their stated value especially good will assets. Cash flow is the key here in paying. I'm not as sanguine as some on here about what Party will do. I think it's entirely possible that they'll send a check when you cash out. Not what I really want.

adios · #74 10-09-2006, 04:13 PM

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Party is not going anywhere... and may continue to be the market leader even after restricting US players from access to real money tables...

Look for Party to try and buyout some of its competition... its not going bankrupt!

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You may be right about this. But it disturbs me that you keep saying it over-and-over without providing any convincing evidence.

By withdrawing from the U.S. market Party is about to lose about 80% of their revenue. That is a devastating blow for virtually any business in any industry, much less a young business in an extremely unstable industry. I don't understand how you can blithely dismiss all doubts without having done a very careful analysis.

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Hi Stellar,

For the first 6 months of 2006 Party's Revenue breaks down geographically as follows:
USA 512.1m
Europe 90.6m
Canada 43.5m
Rest of the world 15.7m
Total revenue 661.9m

On October 20th Party will release its 3rd quarter numbers and we will get an updated look at their non-US progress.

A quick analysis... if party held 50% market share, and loses 80% of its business... it will hold 10% of the market, with up to 40% of the market shifting to its competitors that still accept US players. The generally accepted prior allocation of market share was that Stars held around 10%, with its other main competitors holding roughly around 5% each. So, depending on how Party's US players representing 40% of the market get allocated, at the very least, Party will still be a large player.

If Stars continues to provide service to US players, a large bulk of Party's former players will likely go there, making Stars #1 and Party #2 in the market.

From a cost perspective, the bulk of Party's expenses (Marketing, affiliate costs, bad debt, transaction fees, staffing) scale with player volume... expect Party to remain a profitable company, just on a smaller scale.

Does that quick and dirty analysis satisfy you?

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Not regarding cash flow. I'll try and find something about their financial accounting.

DpR · #75 10-09-2006, 04:40 PM

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I do not feel like looking into this too closely, but the thing you guys are ignoring is the cash they have made in since June. Let assume business was the same as the first half the year. Operating cash flow would ba another $190M (half the $380 from the first half). Working capital would be reduced by withdrawl (US players). Cash from investing would perhaps be reduced by the acquisition (I do not know the details if they have made an acquisition sinc e6/31, but the article seemed to imply they did - has it closed?) And there will be no dividend, so the $200M from the first half of the year will not be there.

So, if the acquisition didnt close, they would have another $190M positive cash to fund withdrawls, if it did close perhaps only $60M.

That would give them $192 ($132 currect cash + $60M) to fund withdrawls, which is just enough. Further, party has $155M in recievables. I am not sure what these are, but with a contraction in the business, I would generally expect these to be reduced in propotion to the short term liabilities. That would perhaps provide another $100M (a business that is suddenly 80% smaller, is not going to have anywhere near as high working capital (recievables), thus these will be natuarally liquidated). That would give party $290 (or more) vs $192 owed.

The next 10-Q can provide these details more precisely, but I do not see any reason that my assumptions are considerable off. Party isnt exactly a cyclical business, I Would guess there quarterly results are pretty linear - which is what helped with their high valuation.

Bottom line: I glanced at the financials for 5 minutes and while this is clearly horrible for the business, I see no reason for people to not get their money out. Further, if the company is able to act somewhat nimbly (cut overhead in accordance with the reduction in business), they should be able to come of it without a bankruptcy.

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I don't think you went through these numbers carefully.

If they remained business as usual they would generate that $190m by the end of the year, not next week. The cash generated at this point is probably around $100m. The dividend was just cancelled, so that should not have the effect on cash you mentioned at this point.

You left out the tax payables which is $90m. I can't find a closing date for the acquisition, but it seems like it has closed based on the language they used in the press release.

So, if it has closed it leaves them with:

$132m (cash 6/30) + $100m (additional cash generated to date) - $40m (drawn down previous credit facility) - $80m (portion of cash to be paid on close of acquisition).

= $112m net cash

or if they can back out of acquisition

= $192m net cash less breakup fee.

That would almost cover the client deposits and leave them with no cash for the next few months when they'll need some (expenses won't go away as quickly as revenues).

=

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Really? I didnt look at the numbers carefully?

OPERATING cash flow (excluding working capital adjsutments) for the first 6 months of the year was $380M. Thus for the third Q of the year we should expect $190M, not $100M. Given the reduction in size of the business, the working capital adjustments should be pretty neutral (recievable should be reduced by a similar % as payables).

Now in cash from investing activities, we will have a reduction based on the acquitions, which you claim is $80M, I assumed $130M. So my assumptioni is conservative.

Cash Flows from Investiong activities should be close to neutral sicne there will be no dividned payment.

So we end with $190 minus CASH OUTS ($190M would be all of them - decrease in payables) PLUS the decrease in recievables ($155M total, maybe reduced by $100M - so + $100M) MINUS the acquisition ($80M as you say) = $20M

So Party would be left with $20M in ADDITION to the $130M they already have on hand. That leaves $150M of extra cash AFTER 100% players cash out.

You bring up teh $90M taxes payable. This is a GAAP number and will not be actually paid off. It will take years for this figure to be reduced to zero and quite possibly could increase in the short term. This not a bill they are about to pay off, it results from the difference in tax accounting and GAAP accounting.

There is no pending cash crisis. My figure could probably be reduced by the $40M revolving credit if it is being pulled and cannot be replaced. Even so, it is not close.

FreakDaddy · #76 10-09-2006, 04:49 PM

Panick - panick... booo... be scared.

Did I get the jist of that post?

Not worried.

adios · #77 10-09-2006, 04:52 PM

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You bring up teh $90M taxes payable. This is a GAAP number and will not be actually paid off. It

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Don't know but is PartyGaming subject to GAAP rules? Also what about actual taxes owed by Party to I assume the British government. I'll have a look into PartyGaming's financial statements soon.

DpR · #78 10-09-2006, 04:58 PM

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You bring up teh $90M taxes payable. This is a GAAP number and will not be actually paid off. It

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Don't know but is PartyGaming subject to GAAP rules? Also what about actual taxes owed by Party to I assume the British government. I'll have a look into PartyGaming's financial statements soon.

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You are right, it is not GAAP, it is IASB figures. I was just being US-centric, damn Americans.

The idea is still the same though, it results from accelerated depreciation and other expenses taken for tax purposes that are not allowed under IASB rules. This figure WILL unwind if business is greatly reduced going forward, however, it will not unwind completely right away.

Party would have already paid its actual tax liability.

adios · #79 10-09-2006, 05:03 PM

....

Megenoita · #80 10-09-2006, 05:12 PM

What I perceived from this article was that the U.S. market is going to disappear, as they can get to any company that would try to serve the U.S. customer base. No one in this thread has addressed this point, and I'd like to hear more about it. It seems as if our government is going to see that all companies pull out. We're just seeing the biggest ones first. The smaller ones will eventually follow (?).