GGK

Debt warning on acquisition proposal for lottery-to-bingo equipment group

by Dan Coatsworth

The reverse takeover by lottery-to-bingo equipment group Gamingking (GGK:AIM) of unquoted amusement machine specialist Orb Holdings will significantly increase its debt and severely dilute existing shareholders. The considerable financial risks and deteriorating leisure sector conditions mean investors should sell ahead of the takeover.

Gamingking argues the combined group, to be called Sceptre Leisure, will become the second largest player in its field, placing entertainment machines in pubs and working men's clubs and creating opportunities to increase revenue and pay down down borrowings.

The acquisition will increase Gamingking’s debt from £480,000 to £19 million, due to Orb’s large financial liabilities. Orb twice broke its banking covenants in July on gearing and debt. The acquisition target says it has now secured adequate lines of working capital with banks and hire companies to support trading for the next 12 to 18 months.

Gamingking has already gained more than the 50% shareholder support required for the deal to proceed on 30 September. It will pay for the acquisition with new shares equal to 85% of its enlarged share capital. The stock was suspended on 4 August at 0.925p while the deal was fleshed out, resuming trade on Tuesday (2 September) at 1.525p, a 65% increase.

A key risk to the enlarged business is that 44% of its revenue will come from just five customers. Around 10% of its contracts are also only verbal agreements, which Gamingking claims to be standard practice in its industry. Orb acquired rival operator Crown Leisure in October 2007 but has still to settle the transaction. It will have to pay an estimated £400,000 over the next two to three weeks, roughly the same as its cash balance at its financial year-end in April.

Gamingking is rolling out lottery ticket vending machines across the UK. The instant win pull-tab tickets pay up to £5,000 top prize with 20% of ticket sales going to charity. It currently has machines in 120 pubs but plans to sell into the 6,500 pubs that currently rent amusement machines from Orb. It also wants to place its gaming equipment into these sites to run bingo games under its Kelly’s Eye brand.

Shares says: The risks far outweigh the rewards. Sell