Richard Segal’s resignation puts PartGaming to intense scrunity
Almost by their very nature, the top jobs at large listed entities tend to be short-held positions. Under the microscope on a daily basis and having to answer to shareholders, bondholders, bankers, employees and the rest, it is perhaps no surprise that blue-chip tenures can often be of the ‘blink and you miss it’ variety.
18 months is a lifetime
Yet, even looked at through the short-termist prism of the markets, the brevity of Segal’s time at the helm is worthy of comment. His 18 months in charge saw him steer the company to flotation and netted him in return a salary of £585,000, (US$1m) the equivalent payoff, and 40 million share options either already cashed in or still waiting to be off-loaded.
A decent tally by any reckoning, and with more in the pipeline (Segal is thought to have renounced a further options package worth nearly £20m), it has caused many to comment there must be more to his departure than the stated ‘family reasons’.
Segal may have told the newspapers they were “barking up the wrong tree” by suggesting he might have been forced out, but it didn’t stop the speculation.
In comparison to the usual reasons for a FTSE chief to fall on their sword, it is events rather than a failure to deliver raw numbers that have contributed to Segal’s premature exit. As with the old Chinese curse, Richard Segal’s time at the helm of PartyGaming has been interesting. In barely nine months of life as a listed entity, the company’s shares have been through the kind of upheavals that it takes other listed companies years to achieve.
As the timeline below suggests, the claims from Segal it was the prospect of having to move lock, stock and barrel to Gibraltar should be taken with a pinch of ‘Rock’ salt.
At heart, Segal’s task at PartyGaming was trickier than most jobs at listed entities due to three specific factors. These are the remaining large shareholdings of founders Ruth Parasol (31.4%), Anurag Dikshit (30.3%) and Vikrant Bhargava (8.6%). Nobody likes a back-seat driver, and industry rumour has it that at Party the three founders are still very much involved in the direction of the business.
It is this factor that makes the top job at Party somewhat unique. Every chief executive must answer to the shareholders. But when the shareholders are also the founders (and in at least one instance sitting in their own office down the hall), it makes the task of being your own man just that little bit harder.
Neither should the volatility of the sector generally be discounted as a contributory factor. As a young industry focused wholly on gambling, the rise of egaming has been a boon to the media, and as its leading representative Party has received more than its fair share of coverage.
Under the spotlight, where even the smallest false move will suffer close examination, a gaffe such as was made back in September when the company dared to hint that growth in poker might be on the wane was always bound to bag the business page headlines.
Wanted: scalp
Segal was never the beneficiary of rave reviews when it came to his performances in analyst meetings and conference calls. But September weighs heavy in the memory and could lie at the heart of the news of his exiting the stage.
“I know some shareholders were absolutely furious about what happened last autumn and it is not beyond the realms that someone might have demanded a high-profile scalp,” says one analyst.
But the volatility has been far from confined to last September. Part of the problem for Segal or indeed his successor is the industry’s youth. Without previous figures to go on, analysts looking at the industry are pretty much shooting in the dark. What they need more than anything is historical year-on-year data – and this simply is not available.
Yet despite the well-documented problems, this is one area where PartyGaming can be seen to be making some progress. In fact, according to the full-year figures that provided the background to Segal’s departure, he leaves the company in rude health.
On the back of continued growth in poker and the introduction of the company’s new blackjack product, total group revenues for the year to the end of December 2005 were up 63% to US$978m. The poker business grew by 55% to US$859m while the casino business, which includes the company’s new blackjack product, was up 144% on the year to US$119m.
Analysts at house broker Dresdner Kleinwort Wasserstein (DrKW) were quick to applaud the performance, saying the full-year results for 2005 were 10% ahead of its own initial pre-IPO forecasts.
“This was achieved through a combination of product expansion, skins management, ex-US expansion and better-than-expected margins,” said DrKW analyst Andrew Lee in a note published on the day the results were announced.
“While poker rates have ended up below pre-IPO expectations, the group has demonstrated its ability to retain customers, maintain attractive costs per acquisition (CPAs) and the benefits of cross-selling despite the fierce competitive landscape.”
Fighting back
But if there are problems ahead for new incumbent Mitch Garber, then it is this competitive landscape that will be high up the agenda. In his note, Lee adds marketing costs fell in the second half, “despite the bears of the group expecting margins to collapse as competition intensified”.
Yet marketing costs for the full year were still 5.2% above those for 2004. Moreover, buried within Party’s results statement is the sign that Party’s pre-eminent position in the poker market is coming under pressure.
As opposed to previously stated figures of closer to 50% of the market, Party’s most recent guesstimate for market share suggests that in terms of poker alone it is losing ground.
“During December 2005, it is estimated PartyPoker (excluding skins) has an average market share, as measured by ring game gross revenue of around 38%.”
According to Party, this remains more than three times larger than its nearest rival, yet it is far below the 50% figure mentioned by the company at the time of its float. “Clearly there are pressure points in the figures,” said one analyst. “There are some CPA pressures and bonus level questions.”
According to industry gossip, when measured purely in terms of concurrent players, Party’s number-one position is far more precarious. In particular, according to recent reckoning, PokerStars might be running Party close in terms of outright numbers of players, both free-to-play and pay, on the site at any one time.
But if falling market share in its key poker market is top of the negatives on the to-do list of the new boss, then the top of the positive column is hinted at by the success of the company’s blackjack product. Far from cannibalising its poker earnings as was previously feared, it would seem instead that blackjack is proving the benefit of the recently introduced single platform and shared purse.
A more pressing issue might emanate from the US where the gambling prohibitionists appear to be gaining some ground. According to Matthew Gerard, analyst at Investec Securities, along with Segal’s departure, this could weigh on the share price in the near-term.
In fact, the share price reacted only mildly to Segal’s departure on the day as the market focused on the figures rather than the personality.
Hard to find
The swift appointment of Mitch Garber will help PartyGaming’s cause as it attempts to convince the City and others of its story in the months to come. The problems the new chief executive faced were even identified by the company’s chairman in the analysts presentation at the time of the results.
Admitting the search for a successor was going to be no easy task, Michael Jackson was honest in his appraisal of the difficulties that lie ahead.
“It is not going to be easy to attract people to Gibraltar,” he said. “(This is) because of the industry we are in, the regulation issues and the location we are based.” Jackson added that he was “sure” the company would find an “adequate solution to the question”. Time will tell whether in Mitch Garber they have found the man who fits the bill.
