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Gala Coral

When the business history of the “noughties” is written, surely the gold medal representing too much – too much debt, too much leverage, too much “value”- will be handed to Gala Coral. A short while ago, the business was “valued” at a figure in excess of £4bn.

Over the years, it has passed through a series of ownerships, including Prudential Ventures and CSFB leading up to its current owners, a combination of Candover, Cinven and Permira. At each stage, the purchase was funded by increasing the debt payable by the company and the debt was structured with coupons that increased as the years passed, in an attempt to incentivize the management and the owners to “float” the company and therefore pay off all of the debt. So the interest keeps on going up!

It’s a sort of celebrity “pass the parcel” with the value always going up and the last one in, and paying the highest price, was Permira. All of this investment was based on the company have healthy EBITDA (earnings before interest, taxation, depreciation and amortization) and therefore healthy cash flows. This is fine as long as the interest does not spiral out of control because of the way it is structured. The bad news is that it has done just that!! (It will be interesting to note when was the last time Gala Coral made a “Profit before Tax” quite some time I imagine, if ever).

At the moment, all equity owners have written down the value of their equity stakes to zero.

Meanwhile, an unseemly rush has started to see who can gain control of the company at a value that will enable them to make a return (i.e. Profit after Tax)
on their investment.

The current participants include (but are presumably not limited to) the following;

Apollo who appear to be offering £250m in exchange for 50% of the company’s shares. Under this deal it appears that value of the stake of existing shareholders will fall to almost nothing. Apollo is no stranger to the gaming market counting Harrah’s Entertainment in its portfolio.

Blackstone Group who appear to be prepared to invest £300m into the company in exchange for a 75% stake.

A consortium led by The Park Square and ICG who are existing lenders to GC. They have intimated that they are prepared to cancel an existing £540m of existing mezzanine debt in exchange for a 50% stake in the company and possibly to raise more money for the company through the high yield markets or by injecting additional equity “if desired by the company’s senior lenders” (I think that’s a given).

Whilst it was originally expected some announcement would be made by the end of 2009, it now appears that is improbable and an announcement is therefore expected early in the New Year.

Meanwhile, GC’s 2,000 or so bookmakers keep on churning along with the 148 bingo clubs, 27 casinos, telephone betting, online betting and 2 greyhound stadia, in a vain attempt to make enough profit to pay the interest on a debt pile of about £2.7bn.

Watch this space!

Phoenix Gaming

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