Permira turns sights on gaming growth in China

The global buyout group, whose name means "surprisingly different", has made its first investment in China taking a non-control stake in Galaxy, a casino operator, to fund an ambitious programme of property development and expansion.

Permira, one of the world’s largest private equity firms, is buying an approximate 20 percent equity stake in Galaxy, a casino and hotel operator in Macau, for a total consideration of HK$6.5 billion ($840 million), or HK$8.42 a share.

Galaxy will also raise an additional HK$1.3 billion through an institutional placement of new shares at HK8.42 a share. Shares of Galaxy and K. Wah, a construction company with a stake in Galaxy, were suspended on 5 October and 8 October, respectively, pending the announcement of a “notifiable transaction involving the issue of new shares”.

It is Permira’s first investment in China and an unusual non-control stake. At the deal’s completion founding shareholder, Dr Che-woo Lui and members of the Lui family will retain approximately a 52 percent controlling interest in Galaxy.

The injection of funds will also deleverage the business, strengthening Galaxy’s capital structure with a reduction in debt of approximately HK$2.6 billion, and a net annual interest benefit of approximately HK$250 million. Galaxy’s total outstanding debt will reduce from $9.2 billion to $6.5 billion, down by 29 percent.

The transaction highlights a shift in investment emphasis among the biggest firms as the mega deals have become impossible to finance, while the banks clear the backlog of leveraged loans agreed before the summer.

Charles Sherwood, a partner at Permira, said recently buyout firms would need to be more creative now the “magnifying glass” of leverage had been removed.

The deal provides the foundations for the future development of the 2,500 room, suite and villa Cotai Mega Resort, which once complete, will feature the world’s second largest casino.

Galaxy also has a further 10 million square feet of approved gross floor area for future expansion. Permira partners Martin Clarke and Guido Paolo Gamucci are joining the Galaxy board to support the growth of the business.

Galaxy operates a number of casinos in Macau including its flagship StarWorld. For the half year ended 30 June 2007, Galaxy recorded revenues of HK$6.3 billion and an EBITDA of HK$737 million, representing year-on-year increases of 385 percent and 300 percent, respectively.

Macau is a special administrative region of the People’s Republic of China and is the world’s largest gaming market. Gaming revenues in 2006 were in excess of HK$50 billion. During the first half of 2007, Macau’s gaming revenues increased to HK$36.8 billion, a year-on-year increase of 51.8 percent, exceeding those of the Las Vegas Strip.

In 2006, Macau attracted 22 million visitors, more than half from mainland China, and it is expected that visitors will increase to over 27 million in 2007.

Permira has expertise in the international gaming sector through its investments in Gala Coral, Europe’s largest gaming company, and in Sisal, the second largest lotto operator in Italy.