Morgan Grenfell Wins Race for Coral

Morgan Grenfell Private Equity (MGPE) pipped at least five rival private equity houses to the post just before Christmas, when the firm bought betting shop operator Coral from Ladbroke Group for GBP390 million (euro 568 million).

Unsuccessful contenders in the auction for Coral included Cinven, which reportedly bid some GBP375 million; a rival buy-in consortium headed by former Coral managing director Michael Snapes and supported by HSBC Private Equity and PPM Ventures; and the Tote, the state-owned bookmaking business that was the initial favourite in the Coral stakes, whose GBP375 million offer was backed by Electra Fleming and Candover.

Ranking as Britain’s third largest bookmaker, Coral operates 827 licensed betting offices, a number of on-course betting facilities, a telephone betting business and two greyhound tracks. The company turned over GBP879 million in the year to 30 September 1998 and made operating profits of GBP17 million in the six months to June.

Ladbroke, the UK’s largest bookmaker, paid GBP363 million to acquire Coral from Bass in 1997, but was forced to sell the business when the then Trade and Industry Secretary Peter Mandelson upheld the Monopolies & Mergers Commission’s recommendations that the takeover be blocked.

MGPE put together a funding package totalling GBP430 million, including working capital and fees, for the buy-in. Deutsche Bank, MGPE’s parent, underwrote some two thirds of the equity component of the structure alongside the Morgan Grenfell Equity Partners fund. As in the case of the Vianova Resins buyout last autumn, Deutsche Bank intends to transfer a substantial proportion of its equity exposure to MGPE’s next fund, which is due for launch early this year. Lehman Brothers, which advised MGPE on the acquisition, underwrote the debt element of the financing, which includes a mezzanine bridge of some GBP80 million.

Exact details of the buy-in funding structure have not yet been released, but MGPE confirms that it hopes to refinance part of the consideration with a high-yield bond, market conditions permitting.

MGPE has introduced a new CEO, Bob Scott, to augment Coral’s existing management. Bob Scott began his career with William Hill, Britain’s Number Two bookmakers, before joining the Debenhams department store chain. From Debenhams, Scott moved to Mecca Bingo, where he introduced innovations to the layout and facilities offered by the group’s bingo clubs that dramatically boosted their performance and competitive position.

Bob Scott’s experience brings Coral a fresh retail perspective, allied to his in-depth knowledge of the gaming and leisure sectors, something MGPE believes will be a significant advantage in a sector where managers are typically lifelong “company men”.

Graham Hutton, MGPE’s CEO, commented “Coral is a high quality asset with a strong position in the UK, operating in a progressive and innovative way, bringing a more consumer-friendly approach to this industry. We intend to continue to invest in the business and develop the franchise”.

Coral is currently less well represented in the North West of the UK than in the South and East. MGPE plans to exploit this potential for growth either by opening additional outlets or through add-on acquisitions of regional betting shop chains.

Flotation appears to be MGPE’s most likely eventual exit route from its investment in Coral because – as Ladbroke’s experience shows – the most obvious potential trade bidders for the company are ruled out by the current regulatory environment.