In September 2013, New York money man Jason Ader, who runs SpringOwl Asset Management, flew to Israel to meet Ruth Parasol, the California-born former billionaire who played a big role in creating the online gambling industry. Parasol founded PartyGaming, which was the biggest online poker company in the world until it left the U.S. market after Congress passed new legislation in 2006.
Parasol had watched her company enter into a non-prosecution deal with U.S. prosecutors and her former partner, Anurag Dikshit, pay a $300 million fine and plead guilty to violating a U.S. law that the Justice Department no longer believes prohibits online poker or casino games. PartyGaming merged with Bwin Interactive, which specialized in online sports betting, to create publicly-traded Bwin.Party Digital Entertainment. But the Gibraltar-based company was flailing and Parasol, who still owned a big chunk of the company’s stock, was looking to sell a block of it, partly because of reasons related to her divorce to Russ DeLeon, who also owned a lot of shares.
Ader met Parasol in her house in the Israeli seaside town of Herzliya and DeLeon was there, too. Parasol wanted to meet the guy who was going to buy a portion of her shares. Parasol hadn’t run a gambling company in years, but Ader, a former Wall Street gaming analyst, was amazed by her knowledge of what was going on in the online gambling industry, particularly the evolution of games on mobile devices. Ader apparently passed Parasol’s test and ended up buying about half of her stake and much of DeLeon’s stock as well for some $100 million, making his firm Bwin.Party’s third-biggest shareholder.
These sorts of symbolic hand-offs have been reshaping the online gambling industry, moving it away from the bold risk-taking entrepreneurs who pioneered the business and putting new players in control, often in a way that represents a clean break from an era where the creators of the online gambling industry were bumping into governments and law enforcement, particularly in the U.S. Just like Michael Milken’s financings had backed Steve Wynn to remake Las Vegas years ago, the transformation of online gambling is being driven by Wall Street and some of the biggest names in finance, firms like Blackstone, BlackRock, Apollo, and Cerberus Capital Management. In the next few weeks, the reshaping of the online gambling industry will hit a new stage as a bidding war sparked by Ader for Bwin.Party comes to its conclusion.
Ader made an impact quickly. His block of Bwin.Party stock came with a board seat, but after he didn’t approve of the direction that Bwin Interactive’s co-founder, Norbert Teufelberger (who was once arrested at a press conference in France), was moving Bwin.Party as CEO, Ader successfully launched an activist campaign to reconstruct the board. He also helped push the board to hire Deutsche Bank to look for a company to buy Bwin.Party. By the summer of 2014, the company was in play.
At the same time that Ader was agitating for a sale at Bwin.Party, the credit division of New York-based Blackstone Group, the biggest private equity firm in the world, was preparing to back David Baazov, the then 33-year-old founder of tiny Amaya, to buy PokerStars, the world’s biggest online poker company. PokerStars, based in the Isle of Man, had been founded by Isai Scheinberg and his son, Mark Scheinberg, but they were ready to sell for the right price—in cash. The duo had run into legal problems after PokerStars continued to offer online poker in the U.S. after Congress passed the 2006 Unlawful Internet Gambling Enforcement Act. They always maintained PokerStars had operated legally in the U.S., but the company ended up paying $731 million to settle with federal prosecutors and still was having trouble returning to U.S. states like New Jersey that had opened up to online poker after the Justice Department reversed its position on the law government lawyers had used to go after it. Isai Scheinberg, who lives in the Isle of Man, had remained under indictment (Mark was never charged) and the Scheinbergs were ready to deal.
With the backing of Blackstone’s credit division (which committed $1 billion) and New York-based BlackRock, the world’s biggest asset manager, Amaya bought PokerStars and its sister company, Full Tilt Poker, in a $4.9 billion cash deal in August of 2014. The deal would not have been possible without Blackstone’s credit division, known on Wall Street as GSO. Amaya was a small company. In fact, when Baazov first delivered to the Scheinbergs a $3 billion commitment letter on Blackstone’s letterhead, the Scheinbergs found it necessary to verify with Blackstone that the letter was authentic. “It was like them telling me, ‘Not to say that you guys forged it, but we got to talk to them directly,’ ”. The deal was also reliant on Baazov getting banks like Deutsche Bank and Barclays to lend against online gambling assets, the first such big loan ever.
The Amaya deal for PokerStars shocked the online gambling industry. One of the biggest impacts was felt by Bwin.Party, which traditionally ran PokerStars’ biggest competitor and saw its stock plunge in the aftermath of the announcement of the deal. The stock fell so sharply in the summer of 2014 that at one point Ader considered trying to find a way for his financial firm to purchase the whole company itself while moving the board to expand its search for the right buyer. “I didn’t like how the process was being handled, I had to push 888 (Holdings) which was a perfect strategic buyer, to get invited,” says Ader.
GVC Holdings, a small and publicly-traded online gambling company that focuses on so-called gray markets where laws are unclear, made a bid in May that was at one point backed by Amaya to buy Bwin.Party. Not long after GVC jumped into the ring, 888 Holdings, a publicly-traded Gibraltar company focused on online poker and casino games and founded by two sets of Israeli brothers, launched its own bid backed by JPMorgan Chase and Barclays, as two big banks once again committed to loan money against online gambling assets.
In July, 888 struck a deal to buy Bwin.Party for about $1.4 billion. The deal would create a serious rival for Amaya and Pokerstars, which currently dominate online poker outside of the U.S. But it’s not a done deal yet. GVC Holdings lost Amaya’s backing but gained new financial commitments from Cerberus Capital Management, billionaire Stephen Feinberg’s New York financial firm. As a result, GVC moved in August and submitted a slightly richer bid for Bwin.Party than the 888 deal, but GVC’s offer is largely a stock deal that would leave Bwin.Party shareholders holding stock in the riskier combined entity. For now, shares of Bwin.Party are up 40% in the last year. On the surface, it seems 888 is more likely to win out.
Wall Street money has not solved all of the online gambling industry’s problems. In the U.S., for example, still only three states—New Jersey, Nevada and Delaware— have regulatory regimes for online gambling and hopes that important states like California might usher in a new golden age of online gambling have so been disappointed. Even Amaya’s PokerStars has been yet unable to get back into New Jersey after just about one year of trying. There had been assumptions that such a reentry would be swift under a new Wall Street-backed ownership structure. Still, with big financial firm backing, the online gambling business looks a lot different today than it did just over a year ago.