Magazine article The Spectator

The Rake's Progress

Magazine article The Spectator

The Rake's Progress

Article excerpt

Richard Northedge profiles PartyGaming, the online casino, a year after its controversial flotation

Happy birthday, PartyGaming. Or possibly not. A year ago, the City was divided over whether this online poker and casino group's stock would soar or plummet. Ahead of next weekend's anniversary of the flotation, the opposing factions can both claim to have been correct.

Not even at the height of the dotcom boom did companies crash straight into the FTSE 100 as PartyGaming did. And dotcom flotations did not come with 'Don't buy me' stamped across the prospectus. In this case, the offer document famously had 33 pages of risk warnings - but, ironically, the risk was not its gambling operation. PartyGaming acts as agent, not principal: customers play against each other while the company takes a rake from each hand without worrying who wins or who loses.

The risks that made much of the City think PartyGaming was a non-starter were such matters as co-founder Ruth Parasol having made her first fortune from internet porn. Or the mystery of why a company generating just 2 per cent of its revenues in Britain wanted to list in London. Or why it was registered in Gibraltar, having recently relocated from the Dominican Republic; or its breaches of the corporate governance code; or its negative net assets; or even simply the risk that punters might one day tire of computerised card-playing.

Nor was the flotation necessary to raise money: PartyGaming churns out cash faster than the Royal Mint. In the three years before the float, turnover jumped from $30 million to $607 million, with profits soaring from $6 million to $372 million. PartyGaming was a licence to make money: the only snag was that it did not have a licence.

What really worried the sceptics was the combination of two facts: that PartyGaming generated 84 per cent of its income in the United States, and that the group's business was (and still is) deemed illegal there. The US Department of Justice says online gambling contravenes, among other laws, the Illegal Gaming Act, the Wire Act, the Travel Act and the Paraphernalia Act. It has warned broadcasters that they are aiding and abetting illegal gaming by advertising it. Congress is considering a Bill to outlaw the practice and another to bar credit-card companies from processing payments related to it.

That is why PartyGaming is registered in Gibraltar and why it floated in London. It advertises in the US, makes money there and compiles its accounts in dollars, but it ensures that it has no physical assets or presence in the country. Even though Ms Parasol and her husband, the biggest shareholders, are American, the company explains, 'It would be difficult for PartyGaming or for a director to be prosecuted if he or she were not physically present in the US.' In other words, PartyGaming was an economic refugee, seeking asylum among the blue chips of the FTSE 100.

The board was anglicised for the London float by appointing a part-time British chairman (Michael Jackson, founder-chairman of Sage, the software company) who received $3.3 million in his first eight months, and a deputy who was paid $2 million. But even with £35 million of fees on offer, US investment banks gave it a wide berth and the shares could not be offered in America or India - home countries of PartyGaming's founders - or in its Gibraltar home, or in Japan. Dresdner Kleinwort, the bank which did take on the role of 'global bookrunner' for the share offer, thus had to float a £5 billion company with much of the investing globe off-limits. Spread-betters gleefully gambled on the sale price being slashed. …

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