Bwin Party shares jump again as Sportingbet owner 8217 s bid may be trumped

Bwin.Party shares have extended their winning streak into a fourth session as the online gambling company is now seen at the centre of industry wide M&A trend.

The stock has gained more than 30% over the course of two sessions in the wake of a bid from Sportingbet-owner GVC Holdings Plc. last week.

Bwin.Party traded as much as 12% higher on Monday after 888 Holdings Plc. revealed it too was interested in one of the largest listed online gambling firm.

888 Holdings, which operates one similarly named gambling website and several others, said on Monday it saw “significant industrial logic” in combining with Bwin, which put itself up for sale last year.

This heightened the chance of an all-out bidding war between the largest, best-capitalised gambling industry firms seeking to grab market share.

A crop of smaller Internet-based players that had proliferated during the last decade, only to be caught off-guard by several regulatory shocks, has long been expected to provide rich-pickings for their larger rivals or ambitious investment groups.

Bwin.Party remains a shadow of its former self, having failed to ever fully recover from the introduction of the US Unlawful Internet Gambling Enforcement Act in  2006, a piece of legislation that might as well have been aimed directly at Bwin’s former incarnation, PartyGaming Plc.

The upshot from that legislation smashed a central plank of the firm’s strategy: expansion in the US market.

Its PartyPoker brand still seems to be in the top 5 in certain net-based gambling categories, but it vies with the owner of Full Tilt Poker and PokerStars, Amaya Inc., which has rapidly snapped up market share following a $4.9bn deal last year.

That left Bwin open to potentially being picked off by the well-known UK bricks and mortars players or large investment groups.

These dynamics are set against the backdrop of the industry’s exposure to legislation that extended taxation of offshore gambling firms from January this year.

On that basis, the main gambling companies exposed to the UK are very likely to be aiming to increase scale in order to protect margins.

The latest update to the current takeover story is GVC has been backed by Amaya Inc., a Canadian gaming technology group with a US$3.6bn market value.

This potentially raises the stakes over Bwin even further.

Whilst we do not believe the well-known UK based names like Ladbrokes or William Hill are currently in a position to participate in bidding for Bwin, it’s difficult to conclude they will be comfortable standing aside from such an opportunity and eventually, a threat.

The effective value of GVC’s ‘reverse’ offer is not clear, but with Bwin’s market cap edging closer to £1bn, a price as high as £3bn would not be a surprise.

That would rule out virtually all unaligned industry firms, which helps to explain the potential entrance of Amaya into the fray.

Amaya Inc., may currently be the biggest publicly listed online gambling company following its purchase of the owners of PokerStars and Full Tilt Poker in 2014.

However, those purchases saddled it with debt, leaving its leverage 6.6 times its last full-year EBITDA.

It looks to me that as of Amaya’s last quarterly results to the end of March 2015, Amaya was cash-flow negative to about C$9.6M in March.

Whilst the ‘deficit’ may be temporary, it will be a further limitation on its ability to be aggressive in any subsequent corporate activity.

This seems to place the onus more on 888 Holdings.

888 does not appear to have any loans outstanding, according to Thomson Reuters data, and had £94m in free cash flow as of December.