It was a small announcement. Just two paragraphs and if you didn't look very hard or long you may have passed over it while you were reading. One might think something so small would be insignificant. In fact the entire announcement by PartyGaming was only 137 words (of the main text that is, I didn't include the rest in my highlighting). However, if you actually read what was written you might have good reason to pause for thought, if you are prone to that sort of thing. As the subject was the internet gaming casino/ poker room industry and their stock performance I stopped, looked, and read. Then I thought. The announcement stated that the talks between Empire Online and PartyGaming were over (PartyGaming was trying to buy Empire Online). However, not only were the talks over, but Empire Online was now looking to take legal action against PartyGaming for updating and improving their platform and not taking Empire Online with them. How did these two companies get to this state?

Empire Online is a skin for PartyGaming. That means that Empire Online ran a poker room using the PartyGaming software, they marketed to the players, and kept their information, and then gave them a rake-back. For this PartyGaming gave them a portion of the profits from each of these players. Empire Poker (the website for Empire Online) was the largest skin that PartyGaming had, and they were becoming more of a competitor than an ally. In June 2005 PartyGaming announced that they would be getting rid of their skins business in the future. Then a few months later they announced a change in their platform, only the skins would not be updated to the new platform. Finally they announced that they bought out two of their skin operators and were in talks with Empire, their largest skin. Now, Empire Online went public and their stock was doing really well. Even when PartyGaming announced a need for lower expectations Empire was announcing that everything was fine and well with them for awhile.

Finally things weren't so fine with Empire Poker or PartyGaming. On October 13th Empire announced its 2005 net profit would be 10 percent below consensus estimates. This was expected since PartyGaming upgraded their platform and didn't take Empire Poker with them as such their stock went down, but only about 10%. Then on November 3rd PartyGaming announced that they were considering the purchase of Empire Online. This temporarily raised the Empire stock, as would be expected, but apparently not enough traders believed that this would actually happen. At least, not for the price the stock was trading for at the time.

Players at Empire Poker were jumping ship and swimming over to PartyGaming due to the upgraded platform at PartyGaming. With them signing up at the main site and not going through the skin anymore there was less reason for PartyGaming to buy Empire. Consequently PartyGaming didn't have to pay Empire as much, as fewer players were going through their skin to play. It was then that the Empire Online stock began to crash. Empire Online lost 45% of its value in the past two weeks. The share is now a third of its value for the company’s IPO, and a fifth of its peak value. There would be no point in buying Empire Online stock if PartyGaming doesn't actually buy them. They don't have enough of a product to survive on their own, according to The City leaders. (The City refers to the London Stock Exchange and the traders who buy and sell there.) Meanwhile, the buyout talks continued and the speculation grew.

Finally Empire Online had enough and announced that the talks between them and PartyGaming were terminated. After assessing Empire Online's worth PartyGaming came to the conclusion that they should offer approximately 60p per Empire share, valuing Empire at around £176m ($330m). Apparently Empire Online didn't agree with that kind of offer. Instead they countered by ending the talks and stating that intend to take legal action against PartyGaming following the move of PartyPoker.com to a new platform on 8th October 2005. "Having received legal advice, the directors intend to institute and vigorously pursue legal proceedings as soon as possible." PartyGaming confirmed the rumors that the talks were over and that they were indeed being sued by Empire Online "Empire has also said that it intends to take legal action against PartyGaming following the move of PartyPoker.com to a new platform on 8 October 2005. To the extent that any action is forthcoming, PartyGaming is highly confident of a successful outcome."

The weird thing is, I went to the Empire Online website (which one would think would be empireonline.com but isn't – that site goes to some web gossip magazine from England – instead it's ep.com) to see what they have to say about the entire situation. PartyGaming is upfront about everything. Whatever is going on with them is listed in their news area on their homepage (such as this new happening.) However, the latest news on the Empire Online is from February 2005 and has the insightful headline "Cold weather increases, so does gambling". There was simply no mention of their spat with PartyGaming. In fact there was no mention of PartyGaming or Empire Online itself on the Empire Poker website.

I don't know what type of agreement Empire Online had with PartyGaming, but my guess is that if they had a really solid one Empire would have taken the legal route earlier. This seems to me like a last ditch effort to save a sinking ship. The saddest bit is they could have saved the ship if they weren't so greedy. Previous media reports said PartyGaming's initial approach had valued Empire's shares at 135-140p, valuing the company at £400 million. In addition, an earlier approach by Sportingbet had valued Empire at 269p per share, or £790m.

Posted on: November 23, 2005

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