From December 2005 to February 2006, the Remote Gambling Index gained 21.2%. Gains were broadly based as the market regained confidence in the sector, though Empire Online was the main riser of the larger players (up 72% and 3% of the index) since it favorably ended its legal dispute with PartyGaming. There have been no changes to the index this quarter. However, for the next edition, 32Red, 888, Excapsa and Playtech will be added, demonstrating the strength of the UK IPO market despite sector jitters.

      Empire’s legal battle with Party revolved around whether the latter had acted in bad faith in separating its platform, thereby denying Empire both a significant upgrade and crucial liquidity. Should full legal proceedings have got underway, they would have added  new meaning to ‘can of  worms ’, so a settlement was certainly in the interest of both parties. The $250m received (c.50p per share) removes considerable uncertainty and underpins the price. The challenge for Empire is now to transform itself from a customer acquisition machine to a fully fledged operator. This isn’t easy as it sounds, though access to ‘turnkey ’ Playtech backend provides a good start.

      PartyGaming remains by far the largest component of the index (41% ) and its rise of 9% primarily shaped the graph. This rise was largely due an encouraging trading statement in December, after the launch of blackjack. Settling of the Empire issue and solid Q4 KPIs also helped to stabilize the price. Post period end, the market has taken the change of management in its stride.

      Sportingbet remains a market bellwether due to its longevity, broad product mix and wide geographical  spread. The stock rose 8.2%, lagging the sector largely since, mainly due to a lack of corporate activity. The company also advised that excess profits for FY2005 would be channeled back into marketing, limiting the potential for upgrades at the earnings line. Nevertheless, sportsbook margins in calendar Q1 were universally strong, which should mean that Sportingbet’s H2 gross win is toward the high end of expectations.
      BETonSPORTS, Sportingbet’s main listed competitor in the US, gained 18.3% during the period. This out performance was driven by three factors. First, the company completed a number of US facing acquisitions, diminishing concerns that it would be left behind in the race to consolidate (though the market’s immediate reaction was less positive). Second, given BoS’s US focus, it is an easy way to play strong margins from that jurisdiction. Finally, a positive trading update underpinned gains.

      BetCorp, which has also listed in the UK, post period end, gained 33% due to a combination of strong trading and news that a UK listing was imminent. It is hoped that exposure to AIM will narrow the rating gap as well as allow the company more aggressively to pursue m & A opportunities. Due to his proprietary ‘middle-ware’ it is in a good position rapidly to integrate acquisitions.

      The pan-European betting operator BetandWin had a very strong quarter, rising 37% to become 13.6 of the index. This strength was largely due to the successful purchase of Ongame (PokerRoom ), combined with strong trading Investors are hoping for a repeat of Sportingbet’s success after the Paradise acquisition.
      The UK terrestrial operators had a strong performance, as stocks recovered from lows caused by poor trading in Q3. Ladbrokes (now de-merged from Hilton) and William Hill were both up 12%, while Paddy Power gained 22.5%/  The correction in Paddy Power was more pronounced since its warning was the most severe: the Irish estate does not have the benefit of broad over-the-counter sports mix, or machines.
      Key drivers for the Index in Q2 will be the ‘regulatory noise’ factor and the potential for M&A, since the busy trading period is over and late summer can be used for initial integration in time for the full commencement of the sports season in September. Most US-facing operators have flagged that they want a European sportsbook, while medium –sized entities can still make meaningful earnings accretive acquisitions by picking off some of the smaller operators whose owners want to cash out. However, there now seems to be a lot of money chasing comparatively few high quality assets. The market is therefore likely to become increasingly cautious on M&A plans.

Interview: Daniel Ahrens

The first and only mutual fund to specialize in the Gaming and Casino Industry launched on the NASDAQ on 31st March 2006. The fund is the brainchild of Daniel Ahrens, the former manager of the $44 million Vice Fund, which registered an 18.7% annualized return over three years during his tenure. Mr. Ahrens, who is also the author of the book “Investing in Vice: The Recession-Proof Portfolio of Booze, bets, bombs and Butts ” (St. Martin’s Press, 2004), plans to pick up where he left off with a new fund that squarely taps into the popularity of gambling.

The new fund will invest at least 80% of its assets in casinos including hotel, resort and cruise ship casinos; gaming manufacturers; pari-mutuel companies; lottery support systems; and electronic/ video game developers, manufactures, and distributors . Anton Kaszubowski, iGaming Business ‘Finance Editor, spoke with Daniel Ahrens about his latest venture

AK:   Why did you become interested in focusing your investment expertise purely on the gaming sector?  Why now?

DA:  I managed the Vice Fund from 2002 -2005. It focused on gaming, as well as tobacco, weapons makers and so on, although gaming was usually the largest weighting. I’m simply aware that gaming has been a great performer and still has great upside potential for growth, in my opinion. I also think it’s a particular area   that some investors are seeking out. I’m surprised that a focused Gaming Fund did not already exist. A few years back, there probably weren’t enough good –sized, publicly traded firms to properly form a gaming mutual fund. There certainly are now.

AK: What are the key investment criteria for the fund?

DA:   The investment criteria aren’t too limiting, as I do have a fairly small universe of stocks to choose from. I’m big believer in this sector as a whole, so I’m not too concerned about the limited choices. I use a research oriented “bottom-up” investment approach to create the Fund’s investment portfolio, focusing on company fundamentals and growth prospects when selecting securities. The Fund emphasizes companies that the Advisor believes are strongly managed and will manage and will generate above-average long-term capital appreciation. In general, I am most interested in those firms that have proven ability to grow their business regardless of the economic environment.

AK: The growth and returns in the gaming sector have consistent outperformed the marker over recent years. How long can this trend continue and why?

DA: Although gaming has already outperformed, I believe strongly that it can continue  for the for the foreseeable future. In very simple terms, It is not a saturated market. Gaming, in all its various forms, only exists in certain locations, and new areas seem to be continually adding or expanding forms of gaming. Years ago, gaming in the United Stated was mostly confined to Las Vegas and Atlantic City. The fact that now that most people have some form of gaming within driving distance (or available on the computer), hasn’t taken business away from Vegas. It’s only added to people’s thirst for gaming. Las Vegas is booming. I really can’t say if or when the growth may end.

AK: In which sub-sectors of the gaming market do you currently see the most interesting growth prospects and why?

DA:   I think it’s easy to see that all forms of internet Gaming have great upside potential, just because of the sheer number of gamblers that can be reached. There’s still a lot to learn in this area though and most of the competitors are young, small corporations. The winners could have tremendous growth. I don’t discount the large casino operators, they have great worldwide growth potential in emerging areas such as Macau. I also have always liked manufactures. Gaming machines, slots in particular, are continuously replaced as people want the latest machines, and as more and more casinos poker are built, there’s automatic business for the manufactures

AK: Will the fund be investing internationally?  If yes, in which markets will you be investing and why?

DA:    Initially, the Fund will only buy stocks on the U.S. markets, although a number of foreign   companies are available on U.S. exchanges. Many US based companies also have significant foreign business.   I certainly have the ability to buy on foreign exchanges, and may London trading soon as I seek out more iGaming opportunities.

 AK: Will you be investing into any online gaming operations, either within the Us or internationally?  What percentage of the fund will be invested online?

DA:   The Fund definitely   will invest in online gaming operations. In the U.S, there aren’t true online gaming companies, but there are poker providers, and again, some foreign gaming technology companies are traded on the U.S exchanges.

AK: As an investor, what is your long terms view of the chances for the prohibition of online gambling in the US?  Do you believe that the US government will move towards regulation and why? If yes, how long will it take?

DA: Consolidation among traditional casino operators will probably continue. The best companies have proven to be very good at running their operations and are confident in their ability to acquire less efficient counterparts. Worldwide consolidation will continue simply because of the proven expertise of companies like mGM Mirage, Harrah’s, Wynn, and Las Vegas Sands, and the great growth prospects in the UK, Europe, Far East and resorts worldwide.