Internet Gambling Firms Await U.S. Repeal

London's online gambling giants, led by PartyGaming (PYGMF) and (EIHDF), are eyeing a return to the vast and lucrative market that dramatically shut the door on them three and a half years ago: the US.

When American lawmakers banned internet gambling in 2006, they cratered the share prices of companies which had built almost their whole businesses on offering online poker, casinos and sports betting to US customers from their offshore hubs, all funded from equity fundraisings on the London Stock Exchange.

But now there is optimism that the ban might be reversed. The reason? The same cocktail that brought Prohibition to an end during the Great Depression, a realisation that the ban is not working mixed with the lure of tax revenues from a legalised industry.

PartyGaming is in negotiations with bricks-and-mortar casino operators in the US about possible joint ventures, should the laws be relaxed at a federal level or by individual states, and, too, is "staying close" to the American casino chain Harrah's Entertaiment, with which it already has a tie-up in the UK. Other online sites, too, are ready to jump in with partnership deals or under their own brands, should the law change.

It was for this reason that executives across the industry were yesterday glued to a webcast of a sparsely attended hearing in the bowels of Congress, in front of the Senate's Ways and Means Committee. The event gave a hearing to the two lawmakers who are pushing for a reversal of the ban, testing the waters to see if there might be political momentum behind their idea.

Undoubtedly big bucks are at stake. According to research firm H2 Gambling Capital, the scale of offshore gambling in the US is right back where it was in 2006, after falling by a third in the immediate wake of the ban, to an expected $6bn this year. A Congressional study calculated that the government could raise $42bn over 10 years by allowing Americans to gamble online and taxing their winnings, and that creating an onshore internet gambling industry could create 32,000 jobs. Back in London, analysts at Barclays (BCS) were so excited yesterday they predicted that shares of PartyGaming and Bwin (BWIFF) could double.

"We do not believe this is a case where prohibition works," Congressman Barney Frank told the hearing, in support of his proposal to legalise gambling online across state lines. "We are talking about a decision by adults about what they want to do with their money." He was supported by another Congressman pushing similar legislation, Jim McDermott, who said: "We are sending a multi-billion dollar industry offshore and underground. As a result, we are making tax criminals of Americans who can't declare their online winnings to the IRS."

It is clear that the ban signed into law on Friday 13 October, 2006, is not the last word in a game that has had as many reversals of fortune as a turn at the roulette wheel. Even as the industry hopes for the best, no one dare predict the likelihood of a breakthrough. After all, strange things happen in Congress. The 2006 ban came out of a clear blue sky, attached to a completely separate national security bill related to the country's ports, just after midnight on the final day of the legislative session before the Senate broke up to begin campaigning for mid-term elections.

"When the act was signed into law, we stopped taking wagers from the US and effectively gave up 75 per cent of our business in one go," says John Shepherd, corporate communications director at PartyGaming.

Companies like PartyGaming had flocked to list in London and set up operations in offshore centres such as Antigua so as to capture a share of the burgeoning market from the mid-Nineties, but they were always dicing with danger. Although the US law was vague, enforcers at the federal Department of Justice (DoJ) and in the individual states had always been clear that the 1961 Wire Act, aimed at stamping out money laundering by the Mob, prevented wagering over interstate telephone lines, and thus made their businesses illegal.

In 2006, they staged a number of high-profile arrests of executives who passed through the US. The Unlawful Internet Gambling Enforcement Act of 2006 only made the law unequivocal, and added a requirement that any bank or online money-transfer business must block payments to gambling sites. The full law only finally goes into effect on 1 June this year, but UK-listed companies fled the US right away, and PartyGaming has already paid $105m in a settlement with the DoJ to escape prosecution.

To be sure, the ban is not going to slip away quietly, particularly in a country whose puritan roots are still showing. The major offshore businesses that do still do business with American customers, such as privately held Full Tilt Poker, are facing a legal onslaught. Even a clampdown on the remaining offshore centres could benefit the London-listed players, since it would hobble competitors whose US customer base increases the pool of players and so makes their sites comparable more attractive than the law-abiding European ones.

Meanwhile, conservative politicians are demanding enforcement of the law. Alabama senator Spencer Bachus fulminated on ABC News recently that "internet poker is the crack cocaine of gambling and young people are particularly vulnerable. We don't want to put a casino in every dorm room in the country. Compulsive gambling, by many accounts, is a very serious, growing problem."

The fight is on. The Democrat leader in the Senate, Harry Reid, supports repealing the ban on interstate online gambling, and a breakthrough could come even sooner at the state level. Eighteen states are looking at legalising new forms of gambling to increase revenue, now the recession has left budgets out of balance.

The reintroduction of countrywide gambling would be enough to almost double earnings at PartyGaming, which last year acquired the rights to the World Poker Tour brand – famous in the US – and increase them by 58 per cent at Bwin and 888, according to analysts at Barclays Capital, who were taking the prospect seriously enough to publish a 39-page analysis yesterday. Smaller but still significant opportunities are available if laws start to change state by state. "Whatever happens to the market, be it regulation or a crackdown on existing operators," they wrote, "we see the end result as beneficial to European operators. We believe that the status quo in the US looks more and more unlikely."

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