[Louis Cypher]

The Canadian Press
Monday, Oct 02, 2006
Shares in online gambling companies fall as U.S. outlaws online wagering

TORONTO (CP) - Canadian Internet gambling companies were rattled Monday as their stocks took a nosedive in the wake of legislation passed by the U.S. Congress that effectively outlaws online wagering in the United States.

Shares in leading software company CryptoLogic Inc. (TSX:CRY) took the biggest hit, retreating more than 19 per cent, or $4.76, to $19.87 on the Toronto Stock Exchange.

The legislation, part of a port securities bill passed by the House and Senate on Saturday, prohibits the use of credit cards, checks and electronic fund transfers for online gaming.

CryptoLogic said it had been preparing for that eventuality for five years and effective immediately licensees of WagerLogic, the company's licensing subsidiary, will stop taking wagers from U.S.-based players.

Last week, the company announced plans to move its head office from Toronto to Dublin, noting that more than 70 per cent of its licensees' revenue now comes from outside the United States.

The company's chief financial officer Stephen Taylor said in a phone interview that the company will remain "strongly committed to Canada."

"We have a technical staff of in excess of 200 people based in Toronto and so that operation will be staying," he said.

"There will be an impact on our financial results ... and it will take some time before things shake out and get back to more normalized earning levels," Taylor added.

Other Canadian companies involved in the industry found their stock similarly stricken by the news.

Dynasty Gaming Inc. (TSXV:NY) dropped three cents to 50 cents Monday as the company, headquartered in Montreal, said it would sell three non-core subsidiaries and focus on rolling out a play-for-points mah-jong game in China.

Vancouver-based Chartwell Technology Inc. (TSX:CWH) was down 35 cents or 16.3 per cent to $1.80, and ESI Entertainment Systems Inc. (TSX:ESY) fell 40 cents, or 15 per cent, to $2.20 on the TSX.

Shares in software firm Las Vegas From Home.com (TSXV:VH) tumbled four cents or 26 per cent to 11.5 cents on the TSX Venture Exchange, while Internet bingo firm Parlay Entertainment Inc. (TSXV:EI) lost 44 cents, or 29 per cent, to $1.06.

Parlay is one of the Canadian companies with the most exposure because it generates 60 per cent of its revenues from the United States, said Paradigm Capital Inc. analyst Gabriel Leung.

"We believe there could also be a wave of consolidation given the financial infeasibility for some of these companies to exist as standalone companies in the event of a complete loss of U.S. player activity," Leung added in a financial report.

Spencer Churchill, an analyst for Clarus Securities, said he expects to see an impact on Canadian companies, though he doesn't anticipate any major domicile shifts outside of the country.

"Canadian institutional investors are basically going to take a big pass on this base for some time until we see a major shakeout of the revenues (generated from the U.S.) that are basically going to zero for most of these companies that have U.S.-facing operations."

British online gambling companies, including Sportingbet PLC and PartyGaming PLC, also saw their stocks dive on Monday. PartyGaming, the world's biggest online gambling company, said it would pull out of the U.S. if President George W. Bush signs the legislation into law.

The companies hit hardest by the ruling offer betting markets denominated in U.S. dollars, and usually operate from bases in the Caribbean or Central America. Most of the big British and Irish sites, by contrast, keep their operations in Europe and take deposits only off credit cards denominated in pounds and euros.

Sportingbet, which does more than 60 per cent of its business in the U.S., said the impact of the legislation was unclear. However, the company called off talks about a potential bid for World Gaming.

Shares in PartyGaming plunged 60 per cent to 43 pence (81 cents US), and shares in 888 sank 48 per cent to 76 pence ($1.42). Sportingbet shares dropped 67 per cent to 60 pence ($1.12).

The U.S. decision comes as some countries are focusing on legalization and regulation of online gaming.

In the United Kingdom the government has moved to regulate online gambling sites. Italy backed away from its original position against Internet gambling and now plans to make the websites legal as early as 2007.

Australia outlawed most forms of gambling in 2000.