Over the last 40 years, leveraged buy-out fund managers have demonstrated that they are good at making money for themselves and their investors. But when one looks beneath the surface of the transactions they engineer, it is apparent these deals can go spectacularly wrong
When winning the Coral auction in December 1998, Morgan Grenfell Private Equity had in fact beaten one key rival financial sponsor: its £390m bid had convincingly exceeded Cinven’s £375m. The third highest bid had come from none other than Candover. Then, in 2002, the latter had been outbid by Charterhouse whereas Cinven had not shown much interest, for the simple fact that between March 1999 and June 2002 it was, alongside buy-out fund manager CVC, the co-owner of William Hill, a business acquired in a secondary buy-out (SBO) from Nomura’s PE arm.
To say that in the past 10 years major PE firms had nursed a passion for the gambling sector would be stating the obvious. Maybe they could relate to the principle according to which, no matter how you cut the numbers, the odds are always stacked in favour of the house. But Candover and Cinven had been on the losing side too often. Coral Eurobet was never going to get away this time. With a combined enterprise value of £4.2bn funded with £2.8bn of loan facilities, Gala Coral would be the UK’s biggest PE-owned business in 2005.
Upon their merger Gala and Coral Eurobet were the country’s largest private company, with £7.4bn in gross revenues. Had it been listed on the London Stock Exchange, its market cap would have made it a constituent of the large-cap FTSE 100 index. And to think that eight years earlier [CEO] John Kelly had taken ownership of Bass’s bingo operation for £235m.
The move was as much defensive as offensive. Three months earlier William Hill had consolidated its number two position by paying more than £500m for the fourth largest bookmaker, Stanley Leisure, and its 624 betting shops. Only Gala and its earnest financial owners had the arsenal capable of neutralising the competition, but also to make the most of the upcoming deregulation. By creating the largest gambling and betting group in the country, they seemed unassailable.
For now, Coral Eurobet’s outgoing senior executives were the real winners: chief executive Vaughn Ashdown had scooped a £40m fortune and finance director Mick Mariscotti had made his own £30m on the tertiary sale. Both Ashdown and Mariscotti were said to have already shared £15m in the 2004 refinancing after having taken home £7m and £5m respectively from the 2002 SBO.
John Kelly and the rest of the Gala Coral management team did not waste time patting themselves on the back. In January 2006 the group closed the acquisition of the County Clubs Bingo chain in Scotland. But despite their best efforts to build a national champion, they were about to face some headwind. The UK government’s plans to create one or even several super-casinos kept being pushed back and the upcoming smoking ban in public places – to take place on 1 July 2007 – promised to be a disaster for a company whose client demographics included many smokers. Following their introduction in neighbouring Ireland and Scotland, smoking bans had devastating commercial effects.
Still, the restriction in England and Wales was yet to come so management’s strategic focus was very much on growth. In its first 12 months of activity (to September 2006), the newly-formed Gala Coral Group’s number of betting shops increased from 1,260 to 1,488, its casinos went from 20 to 32 and its bingo estate rose from 166 to 173 halls following the County Clubs transaction. The following year the number of Coral betting outlets reached nearly 1,600, but the group chose to stabilise its casino and bingo estates, focusing most of management’s efforts on online and international expansion. The platform galabingo.com, launched in February 2006, became the largest online bingo site in the UK.
In the year to 29 September 2007 group turnover was up 7% on the prior year to £1.3bn, while EBITDA exceeded £400m. It is at that point that the group’s destiny tipped over.
Sebastien Canderle is author of The Debt Trap: How leverage impacts private-equity performance, published by Harriman House. This is an excerpt
