Gambling on gaming

Back in the heyday of 2003-2005, the imminent Gambling Act provided hopes of deregulation and liberalisation in the industry - bringing modernised casinos and lax advertising rules to the forefront. In reality, it proved the start of where it all fell apart. Once considered a lucrative investment for private equity firms, gaming companies have essentially become loss-making operations - ironically as a result of the legislation that was meant to bolster them.

"Every way you look, things are going wrong in the industry," says Hagan. "It's a perfect storm in that everything has happened at once. The smoking ban, the increase in gaming duties, and the increased cost of regulation under the 2005 Gambling Act have all contributed to many gaming companies suffering substantial losses."

Hagan goes on to explain that the 2005 Act introduced the much heralded new style "small", "large" and "regional" casinos - one of the reasons buyout houses were so keen to get a slice of the action. However, the late imposition of a statutory limit on numbers of only eight "small" and "large", and the complete scrapping of the regional, led to a proliferation of new casino applications under the 1968 Gaming Act, increasing competition at a time when demand appeared to be diminishing. Adding to this, the geographical areas that were selected for the new casinos were decided with a view to testing social impact rather than the prospects of commercial success.

"Major operators will not be tripping over themselves to invest in many of the chosen locations, particularly the more remote," asserts Hagan.

Another aspect that didn't help matters was the reduction in number of gaming machines to a mere 20 per existing casino applied for under the 1968 Act.

"The gaming industry is facing tough times, and it is difficult to see when this will change. The industry will have to help itself rather than rely on the government, as there is very little prospect of politicians going near gaming legislation again after the process attracted so much negative publicity the first time around. And many in the industry would say this is no bad thing," affirms Hagan.

It would seem that the gaming industry is in for the challenge of a lifetime, especially with the new tax rises imposed by Chancellor Alistair Darling last week, which will see a rise in bingo duty from 15% to 22%. A good investment? I think not ...

Mayfair Gaming

Mayfair Gaming, renamed Riva Gaming Group, was bought by Risk Capital Partners in 2004. The gaming group would remain in its aptly named parent's arms for two years before being bought out for £27m by Hermes Private Equity with debt from RBS (24 April 2006, page 26). Risk was rewarded: it reaped a handsome 2.2x money multiple and an IRR of 62%.

Where are they now?

Last month, Riva underwent a restructuring that saw Hermes make a significant write-down on its investment (see previous page), though the business is thought likely to re-emerge.

Buckingham Bingo

Alchemy Partners gambled £54m on the 2005 buyout of Manchester-based Buckingham Bingo, taking an 80% stake in the business (16 January 2006, page 28). The company operates 12 bingo clubs throughout the North of England. At the time of the deal, Buckingham recorded an impressive turnover of £34m. Barclays stepped in with £50m of senior debt and capex facilities.

Where they are now?

Buckingham Bingo saw more than £69m worth of investment wiped off last year as the group planned to restructure its debt. Ultimately, in April 2008, the business was taken back by Barclays from Alchemy, and placed in the hands of its venture capital arm, Barclays Ventures. Buckingham's parent company, Full House Holdings Ltd., reportedly posted a loss of £88.7m in 2008, consisting of more than £10m in interest payments. At the time of handing Buckingham's keys to the bank, Alchemy chief Jon Moulton was quoted as saying: "If you can find a bingo group doing well, we would like to see it."

Gala Group

Gala Group, which operates in the bingo, casino and online markets, was founded in 1996. In October 2005, Gala Group merged with Coral Eurobet, transforming the company into Gala Coral Group (31 October 2005, page 19). The group focuses on high volume and low stake gambling. It operates almost 2,000 licensed betting offices, 156 bingo clubs, 27 casinos, 2 Greyhound stadia, a UK telephone betting business and an online gambling business.

Gala was originally formed as a management buyout from Bass in 1997 led by PPM Ventures (now Silverfleet; 12 January 1998, page 18). It was subsequently the subject of a £400m secondary buyout in April 2000, led by CSFB Private Equity, with PPM Ventures and Royal Bank Private Equity rolling over a minority stake (10 April 2000, page 27). In 2003, Candover and Cinven acquired Gala for £1.24bn (excluding costs) from the incumbent backers (24 February 2003, page 23). CFSB, RBS, and Merrill Lynch provided debt for the deal.

Many wanted a slice of Gala: the winning bids trumped others from Permira and BC Partners. But Permira found its way in two years later, when it invested £200m to become an equal investor alongside Candover and Cinven, valuing the company at £1.89bn (5 September 2005, cover). Lehman Brothers, RBS, and ICG underwrote the refinancing of the company's debt at that time. Later that same year, Gala acquired Coral Eurobet in a £2.18bn deal (31 October 2005, page 19). Each of the three backers increased their investment in the company to £275m to finance the acquisition. The banking triumvirate from earlier that year provided a debt package to support the transaction. At that time, the enlarged company had an enterprise value of more than £4bn and employed 17,000 people.

Where they are now?

In April 2008, Gala approached its lenders for a covenant reset, injecting equity at the same time. According to Standard & Poor's LCD, the business had been running with headroom of about 10% on its leverage covenant, but in 2009 this was set to tighten to 5-10%. In the meantime, the borrower lowered its 2009 EBITDA target downwards and found additional cost savings. S&P reported a source citing investors' nervousness about further weakness in the bingo-halls business, therefore hoping the target meets this year's expectations. In December 2008, total leverage was reportedly close to 7x. This year, Candover and Permira wrote down its investment in the company to zero.

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