As I already said last week, ‘corporate finance’ covers many loads and one of the aspects of corporate finance I am going to talk about today is ‘acquisition’. This week’s article is called ‘Gala Coral gamble on debt-equity deal’.
Gala Coral, one of Britain’s largest bingo chains and owner of, amongst other things, betting shops and casino’s is doing what many companies are doing now to survive. In total, Gala Coral has to pay off a debt of £ 2.6 billion. In order to do this, the private equity owners of the company will give up up to half of their interest in Gala Coral to some of their lenders, namely investment firms, in order for them to drop a large part of the loans. If the lenders agree, £ 540 million will be dropped.
The fact that Gala Coral is in this bad position has a lot to do with the recession and the fact that people aren’t allowed to smoke in public places anymore, but one of the main reasons is the fact that the state charges high taxes on gaming. There aren’t any agreements with the lenders yet, but nevertheless, the company wants to free some money to invest in the business. Gala Coral has already had to close six bingo halls this year. As they say in the article, for a lot of companies, it has been the choice between this and closing their business.
I chose this article, because it deals with some of the aspects of corporate finance, for instance the finance of their business in general. Like last week, this article illustrates how a company can get in trouble after borrowing a lot of money, but now, we can see that not only the economic crisis is at the base of it, but that also other factors can get a company in a financial crisis. For instance the fact that people aren’t allowed to smoke in public places, like casinos, anymore can lead to a loss of clientele.
Another reason that I wanted to point out this article to you, is because they illustrate a special way to get out of debts. Handing over a part of your stake in the company to the lenders seems to me a drastic way to get out of your debts, but if it means that the company can keep its doors open, then I do understand the fact that many companies take on this option. This is also why in my introduction, I said I was going to talk about ‘acquisitions’, an important part of corporate finance. By receiving shares of a company in exchange for dropping some of the debt, the investment firms are actually buying their way into the company. It’s not a full acquisition, because there are still other equity owners, but they now own part of the company.
This article can be reread on: http://www.guardian.co.uk/business/2009/oct/04/gala-coral-gamble-debt-equity
By Lien Vanneder
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What I like about your blog this week is that you refer to what you said last week. Making a connection between the different contributions on the blog is an interesting way of discussing the selected articles. That is a good idea that I’ll bear in mind for my next blog.
BeantwoordenVerwijderenAs to the comment on the article you selected I agree with you that the financial crisis is indeed not the only reason why companies get in financial trouble. Of course, the crisis is an extra burden for the companies, but they are faced with other challenges as well, like the example you give about the casinos who lose clients because of the fact that people aren’t allowed to smoke anymore in public places.
Greet Annelies