Sept 28: Prohibition augments desire
Gambolling with impunity, investment banks go on-line gambling; Is the European Union Savings Tax Directive 2005 a bitter blow to the ultimate butler brigade?
I feel I know Peter Dicks even though I’ve never met him. Dicks is the former non-executive chairman of online gaming company Sportingbet. He was arrested in New York on September 7 for alleged violation of Louisiana state gambling laws. Dicks resigned from Sportingbet on September 14 “to concentrate on personal matters”.
During that week, I went to a London dinner party where every guest but me seemed to be a friend of Dicks. His arrest was the talk of the table. At the weekend, on a yacht in Sardinia, I was chatting with the delightful Vittorio Radice, former chief executive of Selfridges and current chief executive of Italian department chain La Rinascente. When I mentioned Dicks, he exclaimed: “I know Peter. Ten years ago, I bought his house in Hampstead.”
I lead a boring life. I don’t take drugs or drink to excess. And I do not gamble. Because of this lack of interest in the wild side, the birth and growth of the online gaming sector bypassed me. But now with all this background noise about Dicks, my antennae were alerted. I decided to delve deeper. And it’s an addictive topic that combines many strands of today’s bizarre reality.
There’s the America versus the rest of the world theme. In the States, online gambling is considered illegal because of a combination of federal and state legislation. There’s the morality theme – should people be encouraged to gamble in their own homes? What might be the effect on family life? And, finally, the power of the internet trend. Can you control cyberspace?
Today’s pace of change is extraordinary. The phrase beloved of American banking bosses reverberates in my mind: “Get with the program”. Unless you are prepared to adapt, you will atrophy. In 2000, who talked about iPods, BRIC economies or a war on terror. And I would have snorted with derision if someone had predicted that, within five years, online gambling revenues would reach $12 billion.
However, it has happened. And around this honeycomb buzz the financiers. Dresdner Kleinwort has lead managed two online gambling IPOs (for Party Gaming and Sportingbet). HSBC handled the 888.com deal. Institutional investors have bought shares. As of October 21 2005, Fidelity (UK) held 4.06% of Sportingbet and Deutsche Bank 3.2%. MLIM, M&G and New Star Asset Management have also invested in the sector. Others have resisted the temptation. A senior banker with a US firm said: “We decided against it... not from a US angle but from a reputational angle. We felt that the risk/reward was not right.”
He has a point. The sector is volatile. In July, another betting boss, David Carruthers of BetonSports, was arrested in the US. BetonSports’ shares are now suspended and the company is changing its business model. The day Dicks’ arrest was announced, the share price of PartyGaming (the market leader with a market capitalization of approximately £4 billion) fell by 12%. Sportingbet’s shares touched £4.47 in early May 2006. Yesterday, they closed at £1.78. This is a 60% decline in just over four months.
These companies have been heavily dependent on the US consumer. For example, more than 70% of PartyGaming’s revenues for the first half of 2006 were US related. Andrew McIver, who next month takes over as chief executive of Sportingbet, told a Financial Times journalist that the US remained a key market. “It’s the US – or what’s the point? I still hold that view,” he said in a recent interview. Well, the articulate Christian Right would like to temper McIver’s ambition. And Republican senators are sponsoring a bill that would outlaw internet gambling across America (with a few exceptions, such as horse racing).
So not a place then for widows or orphans? Andrew Lee of Dresdner Kleinwort says: “I’m still a massive believer. The industry has continued to grow, as we predicted, and barriers to entry have proved significant.” Tejinder Randhawa of Evolution Securities is more wary: “Some long-only fund managers must be questioning whether investing in the sector makes sense. You don’t know what’s round the next corner.” Other commentators worry that online gaming, which seems to have come from nowhere, might unravel as technology did in 2001. I don’t pretend to have the answer. But I would make two comments. First, to investors: “If something is cheap, it can always get cheaper.” And secondly, to the American authorities: “Prohibition augments desire. Think: Adam, Eve and an apple.” And as for my “friend” Dicks, he will be back in a New York court today for a hearing regarding his potential extradition to Louisiana.
I turn from a new phenomenon (the ubiquitous internet) to an old one (Swiss banking). It is a truism that the rich are getting richer. Forbes recently published a list of the 400 wealthiest Americans. For the first time, everyone on the list is a billionaire. If you have that much money, each day should be a frolic in the sunshine. Surprisingly, though, the very rich have their concerns as well. They worry about what to do with their money. Should they leave it to their children or give it away? And how can their fortune be protected from the bear hug of the state sniffing around for extra revenue? Enter your discerning private banker.
It is widely assumed that the Swiss are the world’s best private bankers. And in Euromoney’s 2006 poll for the best global private bank, UBS was ranked number one and Credit Suisse number four. In the film The Third Man, Harry Lime, a character played by Orson Welles, criticizes Switzerland for enjoying 500 years of peaceful democracy and yet producing nothing more significant than the cuckoo clock. Note to Orson: you forgot chocolate, watches and the big S. S is for secrecy and the Swiss do it well. Or perhaps I should say, did it well. The implementation of the European Union Savings Tax Directive 2005 in Switzerland must have been a bitter blow. This directive imposed on private clients either an exchange of information with their local tax authority or a withholding tax.
I received an icy response when I asked if I could meet one of UBS’s private bankers. “After consulting our private banking unit, we regret that we are unable to provide you with a positive response,” sniffed the media relations spokesperson. But as mentioned above, prohibition increases desire and UBS’s stone-walling made me wonder: “Are they hiding something?”
Peter Wuffli, UBS’s chief executive, is less reticent than his PR peons. In February, commenting on the firm’s 2005 results, he said: “About half Asia’s billionaires now bank with UBS.” And the billionaire business is a profitable niche. In 2005, pre-tax profits from UBS’ wealth management business were over Sfr4.4 billion ($3.5 billion). Net new inflows to the wealth management businesses (excluding the US) were Sfr68.2 billion, up 61% from 2004. One source sighed: “UBS is making so much money from private banking. Everyone wants to join the party.” What do you think?
Saying of the week: “You never get a second chance to make a first impression.” As the recruiting season commences, I commend these words to fresh-faced graduates eagerly seeking a job in investment banking.