Gala Coral: the senior bankers' jackpot

It is well-known that investment funds are players. But sometimes they lose their shirts, as in the case of Candover, Cinven and Permira at Gala Coral.

The three investors have lost the whole of their stake in the restructuring of the British betting and casinos company. The story is a typical one, a classic example of an LBO being turned around but still causing just as much damage.

The story began in 2003, when Candover and Cinven paid 1.9 billion euros to buy the company. At the time, there was no questions about ethics or socially responsible investments, any asset likely to create value was suitable. Being good sports, the two allowed Permira in two years later, and merged Gala with its competitor, Coral Eurobet.

At the time, the banks were generous, and after the deal borrowing amounted to 2.8 billion pounds. There was nothing worrying about this, at the height of the lending euphoria. But in the summer of 2007, the machine seized up: the British government prohibited smoking in betting establishments, and then regulated games more strictly in the Gambling Act. This represented a loss of revenue for the company of 120 million pounds.

Above all, the attitude of the bankers was literally transformed. When the covenants started getting stretched in 2008, the three shareholders agreed to reinject 125 million pounds and obtain 18 months of respite. But in the summer of 2009, it became essential to renegotiate. Gala Coral then had 250 million pounds of cash and was generating 300 million in cash per year, so the management was confident about the renegotiation of a financial restructuring.

But they did not reckon with the stubbornness of the senior bankers, led by RBS, who were particularly ready to do battle since the company was not on the edge of the precipice. The mezzanine lenders, Intermediate Capital Group (ICG) and Park Capital, then proposed to give up their mezzanine loan of 400 million euros in exchange for 50% of the capital, but this temporary solution was rejected by the senior bankers. Others (Blackstone, CVC, Providence, etc.) also offered to take control with new money, but without success.

Treachery then carried the day: when ICG sold its mezzanine loan, it was immediately bought up by Cerberus, Apollo and other funds. They then allied themselves with Park Square, and made a new proposal: to cancel 558 million pounds of mezzanine and reinvest 200 million, for total control.

They won the game at the expense of the three funds, which lost 670 million pounds. But in reality, the real winners in this affair were the senior bankers, who succeeded in obtaining cash, improving their remuneration and the quality of their receivables, thanks to the company's liquidity and its attractiveness. This was a real - and difficult - lesson in negotiation, in which, in a position of strength, everything comes to he who waits.