Legal ambush could slash Party Gaming's £5bn jackpot - Sunday 12th of June 2005

Leading American senators plan to attack online casinos by banning credit-card companies from dealing with them — a move that would seriously hinder Party Gaming’s access to most of its online customers as the company prepares a controversial £5.5 billion flotation on the London stock market.



The proposed law is being sponsored by Arizona senator Jon Kyl, a long-time opponent of online gambling, and will be discussed by legislators after the summer recess.  

US authorities remain hostile to online gaming and there have been several attempts to block Americans from participating in the burgeoning arena.

Frank Fahrenkopf, president of the American Gaming Association (AGA) and former chairman of the Republican party, said this bill was the most likely to get approval.

The US has no jurisdiction over offshore companies such as Gibraltar-based Party Gaming; the bill would tackle the industry by blocking banks and credit-card companies from allowing US customers to use their accounts for online bets.

The AGA is a powerful force in Washington and represents American gaming giants such as MGM Mirage and Wynn Resorts. It was instrumental in blocking a similar bill drawn up by Kyl because it carried exemptions for horse-racing and casinos run by American Indians. Fahrenkopf, who has seen an early draft of the bill, said Kyl’s new attack was more broadly worded and carried no exemptions. “We would not oppose it, if it stays the way it is,? he said. The US Department of Justice considers internet gambling to be illegal, but there have been several legal challenges to that position.

Party Gaming, which will mention the legislative threat in its listing prospectus, has told analysts that it is not concerned.

The new bill is being supported by Richard Shelby, the Senate banking committee chairman, who has called  online gambling “uniquely evil?.

Shelby and America’s attorneys-general, the states’ chief law enforcers, are also trying to force credit-card operators to stop doing business with online gambling companies. Pay Pal (owned by Ebay) and Chase have agreed not to allow transactions. The justice department is also cracking down on advertising for online gambling: Esquire magazine was recently forced to pull ads for one poker site, Sports giant ESPN, Yahoo! and Google have stopped accepting such ads for their American sites.

The illegality of online poker in America and the backgrounds of Party Gaming’s four billionaire founders will be scrutinised when the prospectus is published this week. So too will the role of the financial advisers, led by Dresdner Kleinwort Wasserstein. They  stand to make as much as £44m if the £5.5billion float price is reached. DKW, which is helping to raise £2.3 billion from selling a 23% stake, will take the lion’s share of this fee.  Sweden’s Enskilda and Cheuvreux of France have supporting roles. The big American and European investment banks have already turned down the mandate.

Party Gaming’s five non-executives, who include the chairman Michael Jackson, are sharing $5m in one-off bonuses should the float go ahead, a move that is seen as highly unusual. They are expected to use the money to buy stock in the group.

Pirc, which monitors corporate governance, said  such payments were “not best practice?. Jackson, who is also chairman of Sage, a FTSE 100 software group, has come under attack by some of his investors for taking the job. At Party Gaming he will be  paid a £500,000 annual salary.

Party Gaming’s founders, who will retain a 77% stake in the business, include Ruth Parasol, who in the early 1990s was heavily involved in internet pornography. She has since sold her interests in this industry. Parasol and her husband Russ DeLeon list their address as being in Gibraltar but it is not clear whether it is an office or home address.

Despite the regulatory uncertainties surrounding the game, Empire Online is set to become the first online poker group to float in London. It has raised £123m, including £19m of new money, and will have a market value of more than £500m.

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