Gambling merger whips shares into frenzy

By Graeme Dickson
Updated: 11:45 EDT, 4 August 2010

The FTSE 100 managed to gain 1.4 per cent between Wednesday's close last week and yesterday's (Tuesday's) finish at 5,396.

It was buoyed by positive US corporate results, upbeat UK banking news, although economic data was mixed.

Highlights and gossip from the week included:

• Last Thursday, science & legal publishing group Reed Elsevier (REL) put on 3.76 per cent to 552p, after it said there had been an improvement in its overall trading performance.

• BT Group (BT.A) gained 3.15 per cent at 144.3p after it reported a 17 per cent rise in pre-tax profits in the first quarter. It also reduced its pension funding deficit to around £6.6 billion. On 31 December 2008 it was £9 billion.

• Online gaming group PartyGaming (PRTY) was the top FTSE 350 performer last Thursday, soaring 20.4 per cent at 309.5p after announcing a merger with Austrian rival bwin.

• Staying in the gambling sector, Rank Group (RNK) jumped 7.69 per cent to 117.6p after upbeat results and broker upgrades.

• There was also talk that GlaxoSmithKline (GSK) might spoil the fun for the Reckitt Benckiser/SSL International deal by making a knock-out offer for SSL (SSL). Albeit the rumour wasn't enough to push the share price higher than 1180p, unchanged on the day.

• Rumours were spreading that Petrofac spin-off Enquest (ENQ), a FTSE 250 North Sea explorer, could be subject to a bid from an unnamed Chinese entity. The stock edged 1.6 per cent higher at 120.9p.

• It was a good day for utility stocks last Friday after EDF sold its UK electricity grid operation to a consortium headed by Hong Kong billionaire Li Ka-Shing for £5.8 billion. United Utilities (UU.) led the pack, up 4.37 per cent at 585p while Severn Trent (SVT) followed close behind with a gain of 2.81 per cent at 1316p.

• Metal heat treatment specialist Bodycote (BOY) was the biggest FTSE 250 riser last Friday, up 4.87 per cent to 237.1p following the company's recent interim results. Takeover talk yet again did the rounds.

• Car dealer Inchcape (INCH) fell 6.5 per cent to 300.8p after investors took note of a large sale by one of its directors.

• Monday was a very strong day for the markets with the FTSE 100 rising by 2.65 per cent at 5397, helped by HSBC (HSBA) reporting a better than expected interim pre-tax profit of $11.1 billion (£6.9 billion) with the stock gaining 5.26 per cent to 680p on the day.

• Intertek (ITRK), the testing and quality assurance business, jumped 6.15 per cent to 1674, after the company upped its full-year revenue forecasts following decent interim results.

• It was a poor day for Xchanging (XCH), which slumped 12.5 per cent to 175p after the business process outsourcing specialist warned that revenue growth for the full year will be slightly lower than previously anticipated.

• Yesterday's biggest FTSE 100 faller came from ARM Holdings (ARM), down almost six per cent to 312.1p following a series of director sales.

• Banking specialist Investec (INVP) slipped 5.72 per cent to 474.7p after it raised £104.5 million through a placing of 22 million shares at 475p each, in order to increase the share capital and to be in a position to exploit opportunities in the credit markets.

• Housebuilder Taylor Wimpey (TW.) leapt 8.73 per cent to 31.1p after it posted a pre-tax profit of £19.6 million at the interim stage, against a loss of £673 million last year.

• Invensys (ISYS) held steady at 273.75p despite persistent talk of a break-up of the group's three key divisions.

Big mover of the week: the inside track

Shares in PartyGaming PLC (PRTY) soared last Thursday after the gambling group said it plans to merge with Austria's bwin Interactive Entertainment AG, one of Europe's largest sports book operators.

The event made PartyGaming the best performing stock of the week in the FTSE 350, up 20.2 per cent since last Wednesday to close yesterday at 309p.

The merged entity, which will be listed on the London Stock Exchange, will be owned by 48.36 per cent and 51.64 per cent by PartyGaming and Bwin shareholders respectively.

Gambling giants: The merge plans sent shares racing on FTSE 350

It will create the world's largest listed online gambling business with net gaming revenues of EUR 682 million (£565 million) and earnings before interest, taxes and amortisation of EUR 196 million (£162.5 million), before synergies, it said.

The company said that the merger is expected to be significantly earnings enhancing, for both companies pre-amortisation.

What is also interesting is that the announcement of the merger might not have come at a better time, especially if the US lifts its ban on online gambling. If successful, it is expected to take effect later this year, with restrictions thrown in.

If you are prepared to wait and take a view that the ban will get lifted, then PartyGaming under its new guise might be worth a look.

Keep your eye on...

Construction, infrastructure and support services business Balfour Beatty (BBY) is due to issue its interims on 11 August.

The £1.7 billion market cap company trades on just 10.27 times historical earnings which is expected to fall to 7.8 times earnings for results ending 1 December 2010. What is more the company has no debt and has in excess of £400 million in cash.

The company's share price has been hit hard by the markets' perception that governments worldwide will be making infrastructure cuts.

This is partially true, but it does not hide the fact that it is sitting on a high-quality order book that is expected to be above £14.1 billion.

The company will also gain full-year contributions from Parsons Brinckerhoff and other acquisitions made over the last few years, which should help improve the bottom line.

My thoughts are that while government cutbacks are a threat, the valuation bestowed on Balfour is simply too harsh even to contemplate going short. On the contrary, if there is an unexpected sell-off in the shares post results, it could turn out to be a buying opportunity.