Analysts at Morgan Stanley have said that PartyGaming could face a potential liability of over £300m should Empire’s pending legal action be successful.
The action was threatened a fortnight ago when Empire announced that it had terminated discussions with PartyGaming regarding a possible takeover. At the time Empire said it had “explored whether legal action might be taken by Empire Online in relation to damage caused to it by the conduct of companies within the PartyGaming group.”
According to the Morgan Stanley research published this week: “On a simplistic basis, we assume that the maximum potential liability is the market capitalisation of Empire that was directly eroded as a result of the platform split, plus reputational damage.”
The note adds that following the announcement of the separation of the ‘skins’ from the Party platform, Empire’s share price moved from 183p to 121p, and then to 86p following the profit warning on October 18. “The total market capitalisation eroded over the 10 days was about £290m.”
Party warned in its prospectus that any breakdown in contractual relations between itself and any of its skins “which cannot be resolved favourably could have a material adverse effect”.
Morgan Stanley notes: “It is clear from this statement that it is a risk that Party takes seriously, and we cannot rule out a material adverse effect from the impending litigation.”
However, legal sources suggested that, though £300m was “as good a place to start as any”, there were problems with establishing a definitive figure.
“The real difficulties are threefold,” said a source who declined to be named. “First, how would you work out what was directly eroded and what was indirectly eroded. Second, the reputational damage might be too remote. Third, there might be some cap in the original agreement. But the big one here is the words ‘directly eroded’.”
The source added that “from a legal perspective, I think (Empire) would be on a hiding to nothing,” saying that Party would “put up such a fight”. “(Party) play the poker game very well. They don’t blink.”
At the time of the announcement from Empire, analysts were sceptical of the legal action being successful.
The comments from Morgan Stanley came in a research note that initiated coverage on PartyGaming with an ‘overweight’ rating and put a price target on the stock of 130p. It comes just a fortnight after HSBC similarly began covering the stock with a price target of 122p.
source : egr magazine
