32Red NEWS ALERT 13/12/2006

Jake Pollard

32Red this morning issued a profits warning caused by poor trading in its Bet Direct division and said it had breached its banking covenants.

The company said that trading at its telephone and internet betting operation had “continued to be difficult over recent months” with “abnormally high numbers of successful favourites in UK horseracing” severely affecting gross win.

The statement continued: “As a direct result of poor trading experienced at Bet Direct, the company anticipates that the combined operating results for 32Red will fall significantly below current forecasts. The lower than anticipated EBITDA performance has resulted in a breach of the company’s EBITDA covenant with the Royal Bank of Scotland (RBOS) with whom 32Red has an outstanding loan of approximately £6m.”

One analyst said the breach of the banking covenant was most likely a “technicality” and that 32Red does have the cash (£5.3m) on the balance sheet to cover the debt with RBOS. However, he added that the breaching of the debt covenant was still a “symptom” of the wider problems 32Red is having with the Bet Direct division. “It’s difficult to make money from telephone betting,” he added.

32Red bought the Bet Direct operation from Sportech in June this year for £12.5m. In a trading update at the end of October, the company said it had seen revenues from Bet Direct of £1.57m in the third quarter. At the time of the Bet Direct acquisition, the company said it would give 32Red more cross-selling opportunities.

One industry source made the obvious comment this morning on the acquisition. “You have to question whether it was worth the £12.5m they bought it for.”

At its last interim statement in October, 32Red saw total revenues rise 48% to £6.2m with its poker and casino operations providing £1.1m of pre-tax profits. Including Bet Direct, pre-tax profits came in it at £0.51m.

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Posted: 13/12/2006