Investors not betting on online poker

Two pieces of recent news have thrown the balls in the air when it comes to the listed gambling companies. The US Department of Justice moved to shut down three popular poker websites and 888 Holdings and Ladbrokes called off their takeover talks. We will see that short sellers have already left the table when it comes to Ladbrokers (LSE:LAD), William Hill (LSE:WMH), Sportingbet (LSE:SBT) and Betwin.Partygaming (LSE:BPTY). However, they remain negative on the prospects for Betfair (LSE:BET).

The shares prices of the courting couple duly behaved as expected when Ladbrokes and 888 Holdings failed to reach an agreement about their respective values. Did anyone anticipate the collapse of the talks and short 888 Holdings? There was a doubling of demand to borrow 888 but we are talking an increase from 0.3% of all shares to 0.6% so hardly a meaningful volume of trading.

The subsequent 12% fall in the 888 share price was turned on its head when the DoJ said it would investigate money laundering at US poker companies. Forced to choose alternative websites to play poker given the shutdown of Full Tilt, Poker Stars and Absolute Poker, the US gambler could well turn to people like 888 – or so the argument ran causing a rebound in their share price.

Another firm likely to benefit from an influx of US poker players is the newly merged (but with a crazy name) Betwin.Party Digital Enterntainment. Its shares rose 30% on the news but this did not come at the expense of short sellers who had only borrowed 2% of the company despite news that the German poker market is likely to be unviable due to regulatory changes there.

Shares in Ladbrokes spiked 12% given that they were not risking their money on a takeover in the short term. It remains to be seen whether the company can catch up with its rivals over the medium term in being able to offer multiple gambling opportunities in an online environment to attract a global audience. Ladbrokes has been a popular short position, but it fell from a high of 8% of total shares to 3% during Q4 last year. It has been gently rising since late January and, at 4.5%, is double the FTSE average.

The other bookmaker dominating the UK high street is William Hill. Short interest is higher here, at just under 6% of total shares, having been as high as 10% in September last year.

The far smaller, Sporting Bet shows the least negative sentiment of the bookmaking stocks with 0.37% being borrowed while institutional investors, whose holdings we can proxy from a reading of securities lending inventory, continue to buy more shares. Such long only funds have reached a 52 week high in terms of holdings in Sporting Bet, which is 17% of the company. By contrast, such funds own 22.5% of Ladbrokes and 30% of William Hill.

Betfair Plc is to the bookmaking firms what Amazon is to HMV. It is a peer to peer betting exchange which has no shops and far fewer than the 14,000 employees that the big bookmakers need to pay. But, paradoxically it is the most shorted of them all. Demand to borrow Betfair shares has just reached a fresh high of 6%, since it floated in November and this represents most of the supply. Clearly, plenty believe it floated on too high a multiple. With management changes in its financial spread betting offshoot, LMAX and results no better than ‘in line’ they could be right. Even the fact that it offers online poker is not arresting the share price decline.