Gala Coral loses half its value as it talks to lending banks







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Gala Coral loses half its value as it talks to lending banks

07/3/2008

Simon Bowers

Gala Coral, one of Britain's biggest private equity owned employers with 19,000 staff, has halved in value according to an investor in Permira, one of three buyout firms that control the loss-making betting group.

Meanwhile, the highly indebted gambling firm confirmed it has held talks with its lending banks about amending certain covenants on its borrowings. A spokesman would not comment further, but Gala Coral senior debt is being priced down on the secondary debt markets to below 85p in the pound, suggesting growing concern the business could default.

SVG Capital, the quoted fund-of-funds group, holds 87% of its £1.3bn investment portfolio in Permira, with which it has enjoyed much success. Damon Buffini, Permira managing partner, is a non-executive director and the company often describes itself as "a proxy for Permira".

Yesterday Nick Ferguson, SVG chairman, said "mark-to-market" rules required the company to make cuts of more than £20m a piece to the book value for three investments - semiconductor group Freescale, German TV company ProSiebenSat.1 and Gala Coral.

In the case of Gala Coral, the writedown almost halved the value of the investment on SVG's books. Valued at £42.9m at the end of 2006, SVG's interest in Europe's largest betting group fell to £22.8m 12 months later, the company revealed yesterday.

Andrew Williams, SVG executive director, insisted there was "no reason to be worried" about Gala Coral, which is jointly backed by private equity houses Candover, Cinven and Permira. Two-thirds of SVG's writedown in this investment was linked to declines in the share prices of peer group companies, believed to include Rank Group, down 72% for 2007; William Hill, down 21%; and Ladbrokes, down 24%. The rest of the Gala Coral-related writedown, Williams explained, was because "there has been a softening in operations, I think largely because of the smoking ban".

Gala, which operates 1,566 Coral betting shops, 165 bingo halls and 31 casinos, saw earnings blown wildly off course for the year to September 29 2007. As well as the impact of the smoking ban, its fortunes were hit by higher tax rates, the closing of a lucrative loophole in slot machine regulation and declining consumer confidence. It posted annual pre-tax losses of £128m, 11% higher than the previous year.

Williams insisted: "Long-term this has got to be a strong player in this industry. It is the largest betting group in Europe."

But concern about a possible loan default at Gala Coral appears to be growing. Credit research and derivatives firm Markit said traders have been re-marking their books to reflect deteriorating Gala Coral credit quality. Senior debt, which had been priced at about 90p in the pound four weeks ago, has sunk to the low 80s of pence in the pound.

Three months ago Gala Coral chief executive Neil Goulden insisted: "There is no breach in banking covenants, we are not forecasting a breach, and we are comfortable with the level of headroom we have got." He added: "We have no plans to strategically reduce our [bingo] estate." Three weeks later it emerged that Gala Coral was quietly closing five bingo halls.

Gala Coral's private equity backers are believed to have raised their loans to the company to £1.3bn. Interest and debt-related charges for the year to September 29 jumped by 11.2% to £445m, more than wiping out top-line operating profit of £402m, which was just 1.8% higher.

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