Is WPT getting ready to fold 'em?

THE past year dealt WPT Enterprises Inc. a tough hand, but in the parlance of its game, the pioneering TV poker company is holding a couple of strong pocket cards.

A failed flirtation with ESPN led to a drawn-out legal battle with its cable partner, the Travel Channel, and contributed to a $5 million loss last year, including a $1.4 million loss in the fourth quarter, the company announced last week.

Meanwhile, ratings for "The World Poker Tour" are off amid a glut of rival programming, and there are signs that America's infatuation with poker may be cooling. Earlier this month, the firm hired investment bank Thomas Weisel Partners LLC to explore "strategic alternatives," including a sale or merger.

Is WPT Enterprises ready to fold 'em?

Chief Executive Steve Lipscomb insists a possible sale does not imply that the company is losing confidence in the future of poker.

"We're doing fine and we'll continue to do fine," Lipscomb said of his four-year-old company, which last week reported revenues of $18.1 million for 2005, up from $17.6 million in the prior year.

Wall Street seems to agree with him.

Though WPT's stock is down considerably from its highs in the mid teens last summer, all five Wall Street analysts that cover the stock have a "buy" rating. Though it hasn't reached profitability, the company is sitting on $30 million in cash.

Lipscomb and executives from Thomas Weisel declined to comment on any possible transaction.

"They're keeping everything really close to the vest fight now," said David Baine, analyst with Merriman Curhan Ford & Co.

Several factors are at play in any possible sale.

For starters, 66 percent of WPT's shares are owned by Lakes Entertainment, a Minnesota company that develops and manages Indian-owned casinos, and it may need cash. Lakes has a half-dozen casino projects percolating through the federal approval process, and a few are ready to break ground, according to Clinton Morrison, analyst with Minneapolis-based Feltl & Co.

"Lake's business operations suggest it's going to need to invest heavily in its business in the coming year," Morrison said. As new casinos get approved, Lakes could be looking to unload its block of WPT stock for its own liquidity needs. "Anybody looking at them would say that these guys probably have a need to raise some capital at this point," Morris said.

Another consideration is WPT's recent venture into online poker, WPTonline.com. Online gambling is illegal in the U.S., so WPT is limited to marketing to foreign customers. The business unit took in about $850,000 in its first six months of operation--chump change compared to the nearly $8 million in revenues from the Travel Channel for televising the World Poker Tour, or the $4.4 million from product licenses (branded chips, cards, tables, slots, poker sets), and the nearly $3 million from international television licenses.

But it's the online poker market that holds the most promise.

"The television series is their core offering and their established brand," Morrison explained. "But the real crown jewel is taking that brand and leveraging it into online gaming."

Online gambling is estimated to have taken in about $3 billion last year, and the U.S. is the biggest market. But WPT cannot offer online poker to a U.S.audience as long as it's based here. "They might be looking at things and saying, 'we're not maximizing the potential of this because we're a U.S. company," Morrison said. "Maybe they're thinking they need to become part of a foreign entity."

Lipscomb sees WPTonline as the company's fastest growing division. He told attendees at the Reuters Hotels and Casinos Summit in Los Angeles last week that he expects revenues to overtake the World Poker Tour in the coming years.

Seeing the bet

The past year has been a bumpy ride for WPT.

It has the highest-rated show on the Travel Channel, and the most recognized brand--but ESPN is a much bigger network, and therefore has access to more viewers. When WPT announced its spin-off "Professional Poker Tour" series in the summer of 2004, the company hoped to have it broadcast by ESPN.

According to reports, the sports network offered a three-year contract for the Professional Poker Tour, which showcases the winners of the World Poker Tour. The Travel Channel threatened legal action, citing clauses in its WPT contract giving it rights of first refusal for any poker spin-offs.

The ESPN offer quickly disappeared, and WPT sued the Travel Channel and its parent, Discovery Communications Inc., for breach of contract.

The contract disputes were resolved last year, with the Travel Channel securing the rights to both programs through 2008--though the lawsuit hurt WPT's bottom line. In its recent quarterly earnings report, the company said it would have tipped into profitability, but for delays caused by the legal spat.

Both companies say the relationship remains amicable. "It's a matter of record that there was a dispute, but it's been resolved," said Patrick Younge, executive vice president of the Travel Channel. "Steve (Lipscomb) and I talk often, and we disagree often," he said. "But on the Travel Channel, Wednesday night is poker night."

Despite the reconciliation, it's clear that WPT is ready to bolt the first chance it gets.

"We believe by the time the contract (with Travel Channel) expires in 2008, they'll move on to a larger network for a broader audience," Baine said. Lipscomb and Younge declined to comment on contract details or on future plans.

But any producer would want access to a wider audience. "If poker wants to advance and reach a demographic that thinks of itself as sports, rather than just leisure, you have to migrate to ESPN or another network," said David Carter, sports business professor at University of Southern California's Marshall School of Business. Traditional "red-meat sports channels" provide legitimacy to poker as a sport, he explained.

Poker plethora

A few days after WPT announced it was considering its strategic options, it announced the kickoff of its fourth season of the World Poker Tour which will showcase six happy couples who met playing cards and are now "living the poker lifestyle."

What's next, the Extreme Home Makeover: poker edition?

Not likely, Lipscomb said. "The ultimate would be 'the poker chef,'" he said. "Which I can't wait to make."

Even without a cooking show, it appears that TV poker may be overdone. The number of copycat poker television shows is staggering.

WPT Enterprises pioneered poker programming in 2002 by creating the World Poker Tour, hiding a camera under the table to show the "down cards." The Travel Channel was the only network willing to put it on the air and the gamble paid off in a big way. Card sharks became celebrities, real celebrities glommed on, and suddenly ESPN was taking notice. After all, an estimated 50 million Americans play poker, mostly men between their teens and old age.

Today, there is the original "World Poker Tour" on the Travel Channel, and its recent spin-off, the "Professional Poker Tour." Then there's the "World Series of Poker" on ESPN, and "Celebrity Poker" on Bravo. CNBC has "Heads Up Poker," and GSN, formerly the Game Show Network, boasts the "Poker Royale" series and the new "High Stakes Poker."

Bravo is likely to air the recently announced "CEO Poker Championship," in which more than 200 chief executives will play with professionals at the Palms Hotel and Casino in Las Vegas. The Maloof family, which owns the hotel, also owns the Bravo cable network.

There are even broadband TV stations like the recently launched pokerTVnetwork.com, a Las Vegas-based, publicly traded company currently broadcasting the Southern California Poker Tour, taking place this week in Commerce.

Not surprisingly, viewership in the category is down. The top three poker shows experienced drop-offs of 14 percent to 18 percent in the last year, according to Nielsen Media Research.

For the past two years, pundits have been predicting the demise of the poker craze. Last season's decline in ratings was seen as a harbinger by some, but analysts and industry watchers shy away from such proclamations.

"You have to factor in that it went up so sharply to begin with," said James Hibbard, senior reporter with Television Week and competitive poker player. Hibbard pointed out that the genre was not even on TV until the Travel Channel aired a program. "Then it gained and gained and gained--and now it's fallen off some," he said.

In other words, poker still draws plenty of viewers.

With casino card tables booked to the gills and tournaments luring parades of players and viewers, the fad doesn't seem to be fading. Poker is the third most watched game behind football and Nascar, according to Lipscomb.

"It's never going to be an Olympic sport," said Carter of the Marshall School. "But that doesn't mean that people associated with it can't generate huge amounts of revenue with it."

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WPT was "almost bought" once before. Last July, it was reported that professional poker player Doyle Brunson offered up to $700 million in an unsolicited bid for the company, nearly twice the company's market value. The stock shot up to an all-time high of almost $30 per share, but the excitement fizzled when the offer never materialized. The SEC is now investigating Brunson and the Long Beach-based Webmaster that first posted the offer on Brunson's Web site. WPT has not been implicated, and it is cooperating with the investigation.

Analysts say it is unlikely that the company would again involve itself in a red-herring takeover offer.

"They wouldn't release something that could cause speculation in the marketplace without having something on their plate," said David Baine, an analyst with Merriman Curhan Ford & Co.--Hilary Potkewitz

Ratings

WPT's Nielsen TV ratings fell 10%.

Number of households

2004    910,000
2005    820,000

Stock

WPT's share price fell 68%.

Feb. 16, 2005    $18.78
Feb. 16, 2006     $5.99

Note: Table made from bar graph.