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Sunday, September 18, 2005

raw deals

The fact that its maiden interim results had met market predictions was shunted firmly to one side as investors digested the statement by Party Gaming chief executive Richard Segal that growth prospects were “continuing to moderate”.

What caused the greatest dismay were Segal’s comments about retention rates and yield per player — how long customers remain active and how much money they are spending on the site. In July and August these key measures “continued to decline, albeit at rates that are greater than anticipated, as more casual players are attracted to the player pool”, Segal told the market.

As if that were not bad enough, the company also cited statistics for the online poker market as a whole, which showed growth from the second quarter to the third was up by a mere 4%, compared with a 26% rise in the same period last year.

Given that the third quarter began on July 1, seven days after the firm’s shares began trading, the timing of the float looks fortuitous, to say the least.

In response to the company’s statement, house broker Dresdner Kleinwort Wasserstein cut its forecast for next year’s earnings by 12%.

The market’s reaction was swift and brutal. About £2 billion was wiped off the company’s value on the day of the announcement, with the shares dropping 51Çp to end the day at 105p — a 33% fall. That left the stock well adrift of the 116p float price. Over the week, it did not recover much ground, closing on Friday at 113Äp, valuing the company at £4.5 billion. Investors were livid.

One shareholder said: “For me, the collapse of this stock has been the most shocking thing that’s happened to a stock in the past decade. We went into this with our eyes wide open about the regulatory risks. But never did we think about a revenue risk. I am angry. There were a lot of smashed telephones on Tuesday, put it that way.”

Perhaps the angry shareholders would have done well to read a research note published on July 6 by boutique stockbroker Arbuthnot — the only house to have a sell recommendation on Party Gaming’s shares. The report, headlined “Too late to join the party”, set a target price of 125p. That barrier, unhappily for investors, has been comfortably smashed.

THE news raises a number of serious questions, not least whether the summer slowdown identified by Party Gaming represents a blip or the start of a longer-term trend. Either way, the feeling gnawing away at investors is that they have been cheated. One said: “You should never be vulnerable to a 35% fall in your share price in one day. This shouldn’t ever happen, let alone after 10 weeks.”