PPF Group seeks investment opportunities involving companies that need restructuring but lack strong financial backing or competent management. PPF is primarily interested in investment transactions worth 100 million euros and more. These conditions were met by Sazka , particularly during the time when the company was managed by Aleš Hušák and began to face insolvency (2010-2011).
PPF became one of Sazka’s major financial creditors, and later had to team up with other creditors to prevent not only a targeted destruction of Sazka’s brand, but also its hostile takeover by a group operating a rival lottery. Although Sazka was subject to receivership proceedings during that critical period in the spring and summer of 2011, PPF and KKCG subsequently succeeded in acquiring the firm by outbidding other interested parties in an auction process organised by the official receiver. Within just one year, the new owners restored trust in Sazka’s established brand, increased its market share to original levels of over 90%, and made it profitable. In the autumn of 2012, PPF agreed to sell its 50% share in Sazka, which had by then appreciated in value thanks to a significant return on its investment, to KKCG. Conversely, in the autumn of 2013, PPF bought from KKCG a share in Lindus Services Limited to gain control over the O2 Arena, a multipurpose events facility located in Prague’s Libeň District.
Sazka before March 2011: An attractive investment opportunity for PPF
PPF Group seeks investment opportunities involving companies that need restructuring, but lack strong financial backing or competent management. PPF is primarily interested in investment transactions worth 100 million euros and more. Sazka met these conditions over an extended period, particularly in recent years when it began to face insolvency.
From 1956, when the government founded a state-owned betting and lottery enterprise, the Sazka and Sportka brands became synonymous with betting and lottery games in what was then Czechoslovakia. With the advent of a competitive environment in the 1990s, it was thanks to the already wide awareness of its brand and an extensive distribution network that Sazka was able to preserve its dominant position on the market. The popularity of its lotteries, with Sportka being the favourite, contributed to Sazka’s dominant 90% share of the domestic market for betting and lottery games until 2010.
Thus, Sazka and its brand continued to retain high potential on the one hand, but on the other hand it was no secret that the company’s operating costs were excessively high and resources were being wasted. Supervision of the management by Sazka’s owners, the sports associations and organisations, was practically non-existent. Furthermore, the investment into building a multipurpose arena in Prague’s Libeň District proved to be a grave strategic mistake. Not only were the construction costs excessive, at a projection of over seven billion crowns, but the facility did not have the potential to generate sufficient rental revenues to make the project profitable. As a result, Sazka’s contributions to sports associations and organisations were declining from 2005 to 2008 despite growing their betting and lottery revenues, as evidenced by Sazka’s published corporate data.
PPF monitored Sazka’s increasing difficulty in paying its debts, which became evident in 2009. A year later, in December 2010, Sazka finally admitted to having financial problems. At that point, there xisted an attractive brand and a strong distribution network, while at the same time insolvency was looming. All of this translated into an interesting opportunity to appreciate our investment, prompting PPF Group to invest and buy Sazka’s debts owed to Radovan Vítek. Worth billions of crowns, the transaction was completed in March 2011. PPF stated its intention to restructure Sazka and to consolidate its finances with a view to restoring the firm’s development, including building support for sports.
Facing insolvency, Hušák filed a motion for insolvency proceedings on 25 March 2011, forcing PPF to alter its original plans in view of the new situation. PPF Group became one of the five members of the creditors’ preliminary committee.
Summary of Phase One:
- Sazka: An attractive brand and a strong distribution network yet badly run operationally and facing insolvency. In this position, Sazka has clear investment potential for PPF.
- PPF intends to restructure Sazka and consolidate its finances to restore its profitability, including support for sports.
- However, Hušák files a motion for insolvency proceedings.
March 2011 – May 2011: The struggle for Sazka
Sazka’s revenues were already plunging in 2009-2010. Then, the first quarter of 2011 saw a dramatic drop in the popularity of Sazka’s betting and lotteries, sales plummeted by tens of per cent. Due to the insolvency, Sazka was no longer able to pay out prizes, with one winner of a jackpot of over 100 million crowns waiting more than two months to receive the prize money. Nervous tobacconists, whose 6,600 shops made up the backbone of the sales network for Sportka and other games, were reluctant to pay out winnings over 1,000 crowns as they feared they would never receive the reimbursement from Sazka. At the same time, Sazka’s competitor Fortuna, a member of the Penta Group, was preparing a lottery similar to Sportka.
In April, tensions within Sazka further intensified. Fortuna lured away some of Sazka’s key employees, who saw the non-competition clauses in their employment contracts cancelled by their own CEO, Hušák. “Frankly, there’s no question that Sazka’s situation is playing into our hands,” Fortuna’s CEO, Jiří Bunda, told media, explaining: “Our strategy now is to go after Sazka’s profitable points of sale.” He stated that Fortuna’s search for lucrative retail outlets was a response to Sazka’s situation at that time rather than the actions of its parent company, Penta, which had teamed up with E-Invest to offer assistance to Sazka’s management. “Initially, our strategy was to differentiate ourselves from Sazka. However, recent developments in the market indicate that the best approach is to make our games similar to Sazka’s,” Bunda said on 6 May 2011 (HN, LN).
Another blow to Sazka was the Finance Ministry’s threat of revoking its licence due to the company’s failure to honour obligations to winners.
While all this was going on, Penta joined forces with Hušák and Ulčák’s E-Invest in an attempt to use the situation to grant Sazka a loan of approximately 2.5 billion through Gladiolus, but made the offer conditional on what in effect would amount to Sazka’s takeover by the three people. Since the transaction would have jeopardised the billions invested by creditors in Sazka’s loans and bonds, the creditors’ committee rejected the proposal. Simultaneously, Sazka’s management and certain shareholders were creating fictitious accounts receivable with a view to taking control over the creditors’ committee.
The hostile actions the management took that were to Fortuna’s benefit and to Sazka’s detriment were not the only factor that exacerbated Sazka’s misery; Sazka shareholders’ lack of ability and willingness to negotiate a reorganisation with creditors prompted the latter to send Sazka into receivership on 27 May 2011. During these proceedings, the right to dispose of Sazka’s assets and actual control over the company was transferred to the official receiver.
Summary of Phase Two:
- Betting with Sazka withering. Penta Group’s member Fortuna admits that Sazka’s agony helps its own business.
- Competitors (Penta and E-Invest) team up with the Sazka management to offer a loan with a view to circumventing the insolvency law and taking full control over Sazka.
- The Finance Ministry threatens to revoke Sazka’s licence.
- Shareholders are unable to negotiate reorganisation with creditors.
- Receivership is the last chance to save Sazka’s brand and business. The creditors’ petition is accepted, and an official receiver takes control over the company.
June 2011 – July 2011: Save Sazka!
Having decided not to sit back and watch the disintegration of Sazka’s lottery business, PPF joined forces with another major creditor, KKCG, in an effort to save Sazka’s brand and business.
- PPF launched “Save Sazka”, a massive campaign through which PPF communicated its interest in Sazka’s recovery, and offered guarantees to distributors who were fleeing to competitors in panic.
- PPF granted Sazka an operating loan of up to CZK 500 million to enable the firm to remain operational.
Sazka hit rock bottom in May when its sales dropped to one-fifth of its usual monthly level. But as early as June the results of the rescue programme began to bear fruit, as evidenced by a statement from Jiří Bunda, the CEO of Sazka’s biggest competitor, Fortuna of the Penta Group on 7 June: “Sazka’s crisis is good for Fortuna’s business. From the moment Sazka was declared insolvent, Fortuna’s shares initially surged by nearly 25%. Last week, when Fortuna announced its intention to buy Sazka’s core business for two to two and a half billion crowns, our shares skyrocketed as high as 150 crowns per share. However, the situation turned around yesterday as Sazka announced that its revenues had begun to grow again following the receipt of a loan and the payment of debts. Fortuna felt the change immediately, as its shares on the stock exchange dropped by nearly seven per cent.”
Hušák’s allies decided to turn on him by having Pavel Kořan, Chairman of ČSTV [Czech Sports Association], remove Hušák from Sazka’s management and bodies. In July 2011, Hušák countered this move by withdrawing his appeal against the decision on Sazka’s receivership, but Gladiolus (Penta, E-Invest) insisted on lodging their appeal.
The High Court upheld the previous decision on Sazka’s receivership on 20 July 2011. The decision was therefore final, paving the way for the sale of Sazka’s assets.
Summary of Phase Three:
- PPF launches the ‘Save Sazka’ campaign to restore public interest in Sportka and Sazka’s other games and to maintain the trust of the distribution network, tobacconists in particular.
- PPF grants Sazka an operating loan of up to CZK 500 million, enabling the firm to pay out winnings in full once again.
- The High Court upholds the previous decision on receivership, making it possible to start selling off Sazka’s assets.
August 2011 – September 2012: PPF’s entry into the lottery business
As the decision regarding Sazka’s receivership was final, this allowed the official receiver to begin selling the company’s assets. The Sazka brand was saved and its key lottery business remained operational, and therefore there was a chance that the company could recover.
In September, PPF Group and KKCG Group acquired, Sazka’s lottery business for CZK 3.81 billion, outbidding two other would-be buyers in a competitive bid, taking a 50% stake each. The public bidding process organised for this purpose by the official receiver was approved by a judge and the aim was to protect creditors’ interests to the maximum extent possible. The official receiver’s actions reflected his effort to sell the company as swiftly as possible because a long drawn out process would count against Sazka, particularly due to the new lottery launched by Fortuna. His objective was to prevent fictitious bidders from bidding with the sole intention of stalling the tendering process. The official receiver therefore set a high non-refundable deposit to be paid by the winning bidder (CZK 0.5 billion) and a fine (CZK 1.5 billion) for the eventuality that the transaction would be rejected by the Office for the Protection of Competition.
Then in September, Česká spořitelna bank changed its statement originally given in the creditors’ committee from ‘Approval’ to ’Strong disapproval’, regarding both the conditions and the outcome of the tendering process. The reversal was despite the fact that Česká spořitelna had representatives on the creditors’ committee and had previously agreed with all the decisions made up until that point, including the conditions of the tendering process when it was announced. It was then established that one of Česká spořitelna’s key accounts was Fortuna, which had a clear interest in the collapse of Sazka’s business. However, by that time it had become clear that there was hope for both the Sazka brand and the business. With a strong new owner, Sazka’s previous position as the market leader could be restored.
As a result, unsurprisingly, court rulings confirmed that the entire process was in accordance with insolvency law and other relevant laws. The principal objective – protecting creditors’ receivables and maximising their satisfaction – has been accomplished, due to the fact that Sazka was preserved as a viable business venture. With hindsight, it is clear that the official receiver’s plan succeeded and that the speedy sale of Sazka to the highest bidder, combined with strict transaction criteria, helped creditors to recoup some of their money while enabling the investment needed to restore the Sazka brand and its games.
All this success notwithstanding, the sad fact remains that the struggle for Sazka left sportspeople on the losing side. Sports associations, Sazka’s original owners, had been unable to manage Sazka’s leadership, their officials failed in negotiating restructuring with creditors, and massive debts ultimately deprived them of their assets. That being said, the future success of the ‘new’ Sazka may provide the sports community with renewed hope. The better Sazka’s performance is, the more money it will contribute to benefit public spending (20% of the difference between revenues and paid out prize money).
Summary of Phase Four:
- PPF and KKCG outbid others to buy Sazka’s lottery business for CZK 3.81 billion. Creditors prevented Sazka’s liquidation and were at least partly successful.
- The plan to save Sazka’s brand and business succeeded, as Sazka markedly improved its performance during the autumn to retain its leading market position.
- The sports community has come out on the losing side, unfortunately, as sports associations’ officials have allowed Sazka to go bust. Sazka’s favourable performance at least gives hope that some support for sports will be preserved. The lottery tax, 20% of revenues, is income for the national budget and the government can also use it for the benefit of sports.
January 2012 – December 2012: Appreciation of the stake and its sale to KKCG
In January 2012, the Czech media came to the conclusion that the year-long struggle to save Sazka had been successful. “Sazka survived the fall and is now gaining strength. The competitors missed their chance,” HN noted on 13 January 2012, providing market data documenting the trend: “During the last draw, Sazka’s clients spent 32.5 million crowns on tickets for the most popular lottery, Sportka. As to the competitors, sales of Fortuna’s Loto, similar to Sportka, and Tipsport’s Tip6ka amounted to less than 2.5 million and some 654,000 crowns, respectively. (…) While Sazka’s lottery revenues have been growing steadily since the summer, Tip6ka has stagnated. On its part, Loto, which was the best performing lottery in the autumn, is now losing ground.”
Over the course of 2012, the owners managed to restore trust, both among the public and throughout the distribution network, in a restructured and yet traditional Sazka. A number of strategic and operations-related measures taken following the losses in the critical year 2011 brought the company back into the black in 2012. Through this, Sazka gained new prospects for its future development. In the autumn of 2012, PPF Group agreed to sell its 50% stake to KKCG Group. The net gain from the sale amounted to 209 million euros.
Martin Štefunko, a member of PPF’s senior management, commented on the transaction in October 2012: “From PPF’s perspective, this was the right investment decision. In the course of one year, we have succeeded in restoring trust in Sazka, which once again controls over 90% of the lottery market, thereby delivering a great return on PPF’s investment. We are confident that Sazka will continue to prosper under KKCG’s management in the future.”
November 2013: PPF’s commitment to develop O2 Arena
As part of the transaction of the sale of Sazka, PPF bought from KKCG the remaining 50% stake in Lindus Services Limited, the company that controls Bestsport Arena, a.s., the operator of a live entertainment arena in Prague-Libeň, the development costs of which were among the principal factors behind Sazka’s insolvency.
Operating as O2 Arena, the multipurpose events facility is one of the most modern venues in Europe, featuring a seating capacity of up to 18,000. Every year, O2 Arena hosts dozens of top-level sports and entertainment events visited by hundreds of thousands of spectators.