The merger of UK-based bookmakers Ladbrokes and Gala Coral has closed, offering Coral’s private equity owners an alternative exit route with elements of both a trade sale and an IPO.
The deal proceeded as a reverse takeover of Ladbrokes, a listed company, by Coral, privately owned by Goldman Sachs, Cerberus and Apollo, who all received publicly listed stock in the enlarged Ladbrokes Coral group.
According to Davis Polk & Wardwell partner Will Pearce, who advised the financial advisors, joint sponsors and bookrunners to Ladbrokes, the transaction timetable was extended to accommodate the antitrust review process conducted by the Competition and Markets Authority (CMA).
“This is one of a number of deals I’ve worked on recently where the timetable has been dictated by the need for antitrust clearance,” he said. “This could be a reflection of the smaller number, but larger size of M&A transactions in the news over the last 12 months.”
A shareholder presentation from July last year shows the merging parties had initially foreseen the deal closing in mid-2016.
“We knew it would take a long time, but that’s the longest I’ve ever seen on a corporate transaction between exchanging and completing, and it’s almost entirely because of merger control,” said Ashurst partner Simon Beddows, who acted for Gala Coral.
How it works
Coral’s owners had initially invested in the group’s mezzanine debt and gained overall control after a debt-for-equity swap in 2010.
They received new Ladbrokes shares, representing 48.25% of the issued share capital of the newly combined group, which will trade as Ladbrokes Coral. Existing Ladbrokes shareholders own the remaining 51.75%.
Ladbrokes also avoided the trading suspension of its shares in London as is common practice when a reverse takeover is announced, by providing the UK Listing Authority with extensive financial information in the joint announcement.
- Ladbrokes and Gala Coral, two of Britain’s largest bookmakers, have completed a merger amid rapid consolidation in the sector;
- The deal timetable had to be extended to accommodate the lengthy antitrust review process – a growing trend in M&A;
- The transaction proceeded as a reverse takeover of Ladbrokes, a listed company;
- It’s an example of an alternative exit route for private equity houses outside the traditional trade sale or IPO options – it’s more like a combination of the two;
- Antitrust remedies included the sale of 359 shops to competitors. Despite the prolonged timetable, these were not as rigorous as expected.
According to Pearce, Gala Coral investors have exchanged shares in a private company for those in a public company, without the market uncertainty of an IPO process or the related limitations on size of sell-down and post-IPO lock-up one might expect to see in an IPO.
The merging parties agreed that Coral would be delivered with net debt of £865 million, and that this would be tested in April this year, along with Ladbrokes’, via a completion accounts process.
"There's been a real penchant for reverse takeovers over the last 18 months"
From April a locked box mechanism was applied to the Coral group so value couldn’t be extracted after that date.
“We don’t see many deals having both completion accounts and a locked box, and it’s certainly not common to have completion accounts prepared more than six months before completion actually takes place,” said Victoria MacDuff, partner at Slaughter and May in London, who advised Ladbrokes.
The firms also had to face off shareholder activism from Dermot Desmond, a high net worth individual who owns a three percent stake in Ladbrokes. He was vocal about his rejection of the deal, wrote a letter to fellow shareholders last year and also set up a website, saynotocoral.com.
He also complained to the Takeover Panel, claiming that certain contracts with online service provider Playtech in the deal circular were material and entered into as a result of the merger, so should have been published. Once the panel ruled that that was not the case, he appealed the decision at two later stages – which is highly unusual – but was again unsuccessful.
2015 was the busiest year for gambling sector consolidation in a decade as the industry is hit with higher taxes and more rigorous regulation while gamblers move online. Paddy Power and Betfair completed a merger earlier this year, and the UK’s biggest bookmaker (until the Ladbrokes/Coral combination) William Hill has been looking for a transformational merger for months now, having abandoned a number of deals.
“There’s been a real penchant for reverse takeovers over the last 18 months,” said Beddows. “Tough market conditions, particularly in gaming, are making companies think a lot about improving profitability.”
- Although Ladbrokes is a public company, being a reverse takeover this was effectively a private deal;
- The documentation did include a one percent break fee provision in the event that Ladbrokes was bid for during the takeover process.
- These were mostly standard, but key was the lengthy antitrust process with the CMA.
- A syndicate of relationship banks provided a £1.35 billion merger financing facility made up of three tranches – one £600 million one-year credit facility, and two five-year revolving credit facilities of £400 million and £350 million;
- The newly combined group has issued a £400 million bond to refinance the debt from the facility agreement;
- The combined entity has also made £55.5 million after the CMA ordered it to sell 359 shops, which will also be used to repay the debt.
- There was a material adverse clause process in place whereby Ladbrokes and Coral set out their Ebitda before issuing the joint announcement.
- The CMA cleared the merger following a phase 2 investigation on October 26;
- Clearance was conditional on a number of remedies. The combined entity must sell a total of 359 shops – 185 of Ladbrokes’; 174 of Coral’s – to competitors Betfred and Stan James.
The July 2015 merger announcement can be found here, and the CMA’s approval notice can be found here.
The £2.3 billion combination of Ladbrokes and Gala Coral closed on November 2. Slaughter and May advised Ladbrokes on corporate matters, and Ashurst advised Gala Coral. Gibson Dunn & Crutcher acted for Gala Coral on competition, and King & Wood Mallesons for Ladbrokes.
Davis Polk advised Greenhill and UBS as the financial advisors, joint sponsors and joint book runners to Ladbrokes on its merger with certain key businesses of Gala Coral Group completed in October 2016 and on the related £115 million placing of new shares completed in July 2015.
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