Gaming investments still worth a punt

Emanuel Eftimiu
05 May 2010

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Once considered a happy hunting ground for private equity, some gaming investments have turned sour in the past couple of years as many businesses have had to restructure their debt. That does not mean there are not profitable investments to be had, as Emanuel Eftimiu reports.

The gambling sector has seen its fair share of private equity activity over the past decade. Back in the heyday of 2003-2005, the soon-to-be-passed Gambling Act offered hopes of deregulation and liberalisation in the industry - bringing modernised casinos and relaxed advertising rules to the forefront. In reality though, regulation together with the smoking ban and the increase in gaming duties contributed to many companies suffering substantial losses.

Subsequently, many private equity portfolio companies were not able to service their acquisition debt and were forced to restructure. Mayfair Gaming (later renamed Riva Gaming), Buckingham Bingo, Gala Coral to name a few – all these investments have a common theme: all underwent a restructuring, saw the private equity investors' equity almost wiped out and control handed over to the debt holders.

That said, the sector is still attracting interest as Vitruvian Partners' take-private of Inspired Gaming highlights. The AIM-listed company is certainly familiar with the concept of private equity. Back in 1998, Duke Street Capital backed the £75.5m management buy-in of Inspired Gaming (then called BLMS) from Bass.

This was followed by a secondary buyout in September 2001, when Henderson Private Capital bought the renamed Leisure Link for a total value of £230m. The business eventually floated in May 2006 on AIM under its current name Inspired Gaming at 180 pence per share, equivalent to a market cap of £108m. Four years later, the share price has dropped below 60 pence and analysts suggest that the company would require a capital increase of around £40m to meet its growth ambitions.

Vitruvian's move therefore comes at the right time. The private equity house's offer at 60 pence per share consists of £104.5m of equity, while Ares Capital Europe and Haymarket Financial Luxembourg is supplying about £50m of debt. The size of the funding package is said to include £20m to cover deal costs, while Inspired will be given access to a further £20m of working capital and capital expenditure facilities.

As a gaming software provider the business is certainly set to expand further as online gambling is still enjoying continued growth. Inspired Gaming's key customers include William Hill, Gala Coral and Bourne Leisure, the Butlins and Haven holiday operator. What is more, with a recommended bid at a third to its IPO price, Vitruvian's take-private looks like a good bet.