Hermes Private Equity wagers future for Riva

Kimberly Romaine
05 May 2009

Tweet
Facebook
LinkedIn
Google plus
Send to

It's all fun and games, until legislation makes you cry

Hermes Private Equity-backed Riva Gaming Group has undergone a restructuring that will see its backers suffer a significant write-down in the value of their investment of £50m in the company it created in April 2006. Lenders RBS, Bank of Ireland and Allied Irish Bank have written off by half the business's £75m debt, including mezzanine from Babson Capital, in exchange for equity.

While the news may be construed as "yet another failure for private equity" it could better be seen as private equity paving the way for a brighter future for a portfolio company. With the equity already under water, the backer could have pursued a fire sale or dissolved the target altogether, which would have incurred vast job losses. Instead, by working with the banks to reduce the debt to a "more manageable level" the company has a future, according to a source. "Having cooperated with the banks, the amount of debt is now drastically reduced, so the business is likely to re-emerge in the future as a more robust company."

Such a business could prove ripe pickings for another private equity investor - many players have suggested that the best opportunities for buyout houses this year and into next will come from restructurings and/or businesses acquired by banks through debt-for-equity swaps.

The development is not news for Hermes' investors, which saw Riva initially written down in 2007, and again in 2008, to zero. The write-downs were a reaction to a "triple whammy" for the firm: the smoking ban, the Gaming Act and the economic downturn. "The changes in the Gambling Act were worse than the worst-case scenario we'd modelled," the source reveals.

Riva is one of 10 companies in Hermes' direct portfolio from its second fund, with many of the others "performing on plan". The first fund returned a gross IRR of 29%, putting it around the top-quartile mark.

Hermes initially invested in Riva three years ago when it bought Mayfair Gaming from Risk Capital Partners in a £27m deal that saw Risk reap a 62% IRR, illustrating the robustness of the gaming market at that time. In 2006 the nine-year-old Riva employed 250 people. Hermes' plans to grow the business through acquisitions saw it bolt-on Thomas Holdings, owner of the Beacon brand, for £75m later in 2006. Enter 2007 and the smoking ban was closely followed by the changes announced in the Gaming Act, which kick-started the destructive chain of events. Early last year, Hermes pumped in an additional £4m towards a restructuring, bringing its total outlay in the business to nearly £50m.

Former Riva chief Simon Hannah, whom Hermes backed in the 2006 deal, has bought seven - more than half - of the Mayfair clubs for a nominal fee. Chairman Bob Scott, also managing director of Coral bookmakers, has stepped down. The remaining entity, consisting of six clubs, is to be replaced by Brian Mattingley, who also had ties to Gala Coral.