PartyGaming Upgraded – Possible Acquisition Target?

Deutsche Bank upgraded PartyGaming (LSE: PRTY) from 'neutral' to 'buy' this week, with the suggestion that PartyGaming could become an attractive target for a US land-based casino looking to enter the online gambling market.

PartyGaming ignited some broker speculation when they announced they had voluntarily initiated talks with the US Department of Justice in response to a request of information. Industry analysts have speculated the move was an attempt by PartyGaming to "clear the air" after rival company 888 Ltd's proposed takeover by Ladbrokes was scuttled after concerns were raised of possible future US DoJ action.

Even though both PartyGaming and 888 withdrew from the US market following the passing of the UIGEA last year, there is still some concern that they may be prosecuted by the US DoJ for even being in the US at all.

Despite general despondency in the online gambling industry, Deutsche Bank is bullish about PartyGaming's prospects, raising their price target for PartyGaming to 45p from 33p; with the hint that further upgrades are possible in the near future.

A broker for Deutsche Bank cited recovered stability and future prospects as the reasoning behind the upgrade: "Having stabilised the business after pulling out of the US, PartyGaming has plenty of strategic initiatives in progress to deliver growth in 2007 and beyond. Much of the uncertainty that had made us more cautious before has now been clarified. We can now see several scenarios which might play out favourably for PartyGaming, providing further upside to our target price."

The research note went on to say events on the horizon that may result in further upgrades for the recovering online gambling stock include possible acquisitions in Russia or China, a possible clamp-down on competitors who remain in the US market, and longer-term prospects of US regulation of the industry.

Deutsche Bank recently took a 4.64% holding in PartyGaming, with some commentators suggesting (somewhat cynically) that the broker's positive research report on PartyGaming may not be entirely objective.

Whatever the reason for Deutsche Bank's positive outlook, PartyGaming (LSE: PRTY) investors welcomed the news as the share price rose slightly following the upgrade. However, some of the gains have been given back in trading today, with the stock currently trading at 39.25p (at time of writing).

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