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Fitch Ratings-London-30 July 2010: Fitch Ratings says the recent merger between two leading European online gaming companies, Partygaming and bwin, could reshape the online gaming industry by creating a leader across each of the core products of sports betting, casino and poker. This will put more pressure on UK high street bookmakers, and could mark the beginning of the long-anticipated consolidation in the highly fragmented and competitive online gaming industry. "Ladbrokes, William Hill and Coral have long been suffering from the entry of online competitors but have avoided acquisition spending," says Giulio Lombardi, Senior Director in Fitch's European Retail, Leisure Consumer Products Group. "They now face a more urgent need to strengthen their own online units via M&A and of further investments to retain their online customers. This in turn would lead to cash outflows and even greater profit margin erosion than what has been seen so far." Up until now, each of the pure online players has only been strong in either of sports, casino, poker or skill games. Also, these companies have operating profit margins rarely higher than 15%-20% (compared with approximately 30% at traditional high street bookmakers' online units) due to higher advertising and promotion costs required to build their own brand awareness. Fitch calculates that the new entity would enjoy critical mass (measured in terms of gross win) in sports of approximately four times that of either Ladbrokes' ('BB+'/Negative) e-gaming unit or William Hill Online. In casino, games and poker, it would be over three times its main competitors, 888 and William Hill Online. Additionally, due to the synergies expected from the merger, the company would enjoy greater resources that can be invested in attracting new users. Of the three major UK high street betting players, Ladbrokes and Gala Coral ('B'/Stable) are most vulnerable to the impact of the merger. Both have been suffering from a contraction of online gross win and profits. Ladbrokes's margins are expected to further contract and the company might now be tempted into M&A activity. Fitch does not expect Gala Coral to turn acquisitive due to its limited financial flexibility. This will increase pressure on Gala Coral to retain its closely challenged leadership in bingo and to address a weak market share in sports betting. By contrast, William Hill has a more defensible position following the creation in 2008 of William Hill Online, but Fitch expects it will continue to feel the pressure of fierce competition. Although the industry has demonstrated a preference for non-cash mergers, potential adverse impact on leverage may still result. Fitch notes that while William Hill Online was an all-share merger between the company's own online unit and Playtech's business-to-consumer gaming division, William Hill has the option to buy Playtech's stake mostly for cash in 2012 and 2014, which could lead to a major cash disbursement for William Hill. On a slightly more positive note, Fitch notes that European online gaming companies may benefit from an opening of the U.S. market after a vote by the House Financial Services Committee this week in Washington signaled the intention to allow online poker. However, the deregulation of the U.S. online gaming industry is slow and not certain yet. It could benefit local companies like Harrah's Entertainment, Inc rather than foreign operators. As a result, Fitch believes European operators would for the moment continue to give priority to strengthening their competitive profile in their home regions. Contacts: Giulio Lombardi, London, Tel: +44 20 7417 6314; Graham Barker, +44 20 7070 5809 Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. (END) Dow Jones Newswires July 30, 2010 07:14 ET (11:14 GMT)