UPDATE 2-Buyout firms lose control of Gala Coral

Mon Jun 21, 2010 12:48pm EDT

* Candover, Cinven and Permira lose equity in Gala Coral

* Mezzanine debt holders take control, set to name new board

(Adds details, comments from chairman, Permira)

By Simon Meads

LONDON, June 21 (Reuters) - Gala Coral's creditors took over the British gambling business on Monday to end one of Europe's longest-running restructurings and wrest control from the firm's private equity backers.

Mezzanine debt holders who bought into the group earlier this year ousted private equity backers Candover (CDI.L), Cinven [CINV.UL] and Permira [PERM.UL], making Gala one of the largest and most high-profile buyout failures.

The new deal will see mezzanine holders, led by Apollo Management [APOLO.UL], Cerberus [CBS.UL], Park Square and York Capital Management, convert their 558 million pounds ($828 million) holding to equity and inject a further 200 million pounds to pay down senior debt, Gala said.

High street bookmakers have been hit harder than expected by the downturn, as gamblers reined in spending.

All parties, including senior creditors, management and the existing private equity shareholders agreed to the deal which will see the private equity firms lose their investments.

"Everyone believes it is the best offer on the table and everyone agrees it is the best thing for the company," Gala Executive Chairman Neil Goulden told Reuters in an interview.

Apollo, which alongside Cerberus and York Capital earned a powerful place at the negotiating table earlier this year by buying the junior debt at a discount, will own a 25 percent stake in the business and is a "welcome addition to the shareholder list", Goulden said.

NEW STRUCTURE

Like many private equity buyouts bought or refinanced during the boom in cheap credit, Gala Coral struggled under the weight of its debt as the recession bit.

Gala Coral rival William Hill (WMH.L) last year reported a 7 percent decline in 2009 operating profit while Ladbrokes (LAD.L) reported a 28 percent slide in full-year pretax profit. [ID:LDE61N2LH] [ID:LDE61G26C].

Goulden said Gala is outperforming its rivals with profit down in the single digits for 2009.

The restructuring deal will see net debt fall by over 700 million pounds to 1.9 billion pounds and senior secured debt shrink to some 1.5 million pounds, less than five times Gala's last 12 months earnings of 310 million pounds.

The three private equity firms had roughly equal stakes in the business though Candover and Cinven recouped much of their initial investments thanks to recapitalisations in 2005 and Permira's investment.

Permira loses all its equity investment of about 370 million pounds, a source familiar with the situation said. Candover and Cinven will lose around 150 million pounds each, a separate source said.

"This is a disappointing outcome but the fund as a whole continues to perform very strongly," Permira said.

The money for Gala came out of Permira's third fund, which also counts insurer and roadside recovery firm Acromas and Birdseye Iglo among its investments. Investors in that fund have already pocketed 30 percent more money than they put in, the first source said.

Gala Coral expects to unveil a new board later this week, Goulden said. The board will include Goulden and also Gala's existing chief executive Dominic Harrison and chief financial officer Gary Hughes, and four new industry experts nominated by the new shareholders.

Candover was unavailable for comment, while Cinven declined to comment. (Reporting by Simon Meads; Editing by Dan Lalor and Erica Billingham) ($1 = 0.6743 pound)

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