M&A: Empire
Online Takeover Goes Awry
By Brian Cattell
The Deal, 22 November 2005
A second round of takeover talks for British Internet
gambling business Empire Online plc failed Monday, Nov.
21, this time with suitor PartyGaming plc, as the pair
prepared to head to court to settle their differences.
The acrimony dates to Nov. 3, when PartyGaming, the
world’s biggest online-gaming operator, said it
had made a preliminary takeover approach to Empire Online,
a marketing-oriented company that makes some of its
money by delivering customers to PartyGaming’s
site.
By then, Empire Online’s financial performance
gad already begun to be hurt by PartyGaming’s
October decision to prevent its own customers from using
so-called “skin sites” such as Empire. The
smaller company is one of a number of online gambling
providers that use PartyGaming’s poker software
to operate its site. The separation introduced PartyGaming
eliminated the large pool of players Empire could previously
access.
“The situation is a bit of a mess and
suggests a lack of pre-M&A planning on PartyGaming’s
part, “said Simon Rawling, global head of project
management consultancy PIPC. “PartyGaming is obviously
acquisition hungry, but it has scuppered its own deal.
If it was always PartyGaming’s intention to cut
off a large chuck if its user base, then why make the
initial offer to reduce it later? It was either poor
planning or a gamble that didn’t pay off.”
Empire, whose share price had plummeted since it listed
earlier this year, issue a profit warning in October,
saying that its earnings would be 10% below a previous
consensus forecast.
The company said the indicative offer from PartyGaming
earlier this month had envisioned an all-share bid that
would have valued Empire Online at 10% of the value
of the enlarged entity, or about £400 million
($687 million).
However, following a drawn-out due-diligence process
and continued delays in the timetable of the talks,
PartyGaming later came back with an offer that Empire
Online said was “significantly different both
in terms of the price and structure and at a level that
cannot be recommended.”
Gibraltar-based PartyGaming said its revised offer
for Empire was for 60 pence per share, suggesting a
£170 million market value for Empire. It also
took issue with Empire’s version of the collapse
of the talks. PartyGaming said it never made an indicative
offer and was not in a position to make any kind until
it had completed its due diligence.
Empire, meanwhile, said it had been considering legal
action PartyGaming ever since the larger operator’s
decision in October to ringfence its customers from
the skins. It had refrained from legal action while
in takeover talks with oaryGaming but now that those
talks have collapsed has decide to proceed, a source
close to the company said.
The source added that Empire’s case would be
based on the allegation that partyGaming’s change
to its platform violated contract terms.
Partygaming said Empire has yet to contact it about
the legal appeal, but is confident of a successful outcome.
“Before we reorganized the platform, we obviously
looked into what the legal implications would be,”
said a source close to PartyGaming. “And we were
happy that there weren’t any issues.”
The breakdown of the talks marks the second time that
Empire missed out on being acquired. Earlier this year,
another online gaming operator, Sportingbet plc, proposed
a £790 million indicative offer, but the talk
eventually collapsed.
Nonetheless, the company’s shares rose 6.3% to
67.50 pence, as it said it was looking into other possible
commercial agreements.
Deutsche bank AG’s Charles Wilkinson and Dresdner
Kleinwort Wasserstein’s Chris Airey are advising
PartyGaming.
Freshfields Bruckhaus Deringer’s Chris Mort is
its counsel.
Empire’s financial adviser is Numis Securities
Ltd., but it would not identify its counsel.
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