Great Canadian Gaming (GC.TO) – Increased Bid – 10% Upside

Current Price: C$37.24

Offer Price: C$41.00 (expected)

Upside: 10%

Expiration Date: TBD

Information Circular

This idea was shared by Edwdo.

 

Great Canadian Gaming is subject to an acquisition by the prominent PE fund Apollo at C$39/share in cash. However, major shareholders with a combined ownership of 38% have opposed the merger and intend to vote against it. The meeting date is set for the 23rd of December, while approval from 2/3rds of the votes cast will be needed. Last week, rumors came out that Apollo might increase its offer in order to get the support from shareholders, however, the amended offer will likely stay in the range of up to C$41/share. The upward adjustment seems possible as Apollo is a credible buyer with plenty of experience in the gaming sector and the initial offer itself is opportunistic. The definitive agreement has already been signed. The price seems low (6.1x 2019 adj. EBITDA) and definitely has headroom for improvement. It is likely that Apollo will not let this opportunity slip away easily and we will see at least one bump to the offer price.

The main risk is that shareholders reject the acquisition and Appolo does not offer a higher bid.

Downside to pre-announcement price (C$24/share) is quite large. In contrast to US peers, most of GC properties are still closed and GC share was ligering significantly below the pre-covid levels of C$43/share. Assuming the re-opening in H1'21 and recovery of Canadian gaming sector in-line with US peers, the company seems cheap and is likely to trade above C$24/share in case the transaction breaks.

 

Some more details in favor of the trade

  • There is substantial opposition to the current proposal and in order to proceed, the buyer will have to increase the price. CI GAM (owns 14%), BloomberSen (owns 14%), and Burgundy Asset Management (9.5%), and even certain minority holders have all expressed their dissatisfaction and stated that they will not support the proposal. Two major proxy firms ISS and Glass Lewis have also recommended voting against the proposal stating that the offer is opportunistic and the company has sufficient financial strength to recover after the pandemic.
  • The offer comes at 6.1x 2019 adj. EBITDA, while US-listed peers now trade around 10x 2019 adj. EBITDA. For the major part, this gap exists because GC still has most of its properties closed - only 6 out of 26 casinos are open and just at 20-25% capacity, whereas US peers have already re-opened most of their properties and in Q3 have reported a very rapid recovery generating 81% (vs 13% for GC) of the last year's revenues (Casino revenues are in line or higher than last year, while the deficit comes mostly from food/room segments, etc.). This shows that the value of the assets/properties of Casino operators have not been impaired much by the pandemic and as stated by ISS: "the company could return to historical valuation levels as the operating environment normalizes over time". So assuming quick recovery (as seen at the US peers), the offer price looks cheap.
  • An increase to C$41/share (as rumored) would still be in the (C$38-C$41/share) range stated in Apollo's preliminary proposal back in August. The buyer could increase the price at least to this level. C$41/share would also make much more sense in light of the recent GC buybacks. During 2019 the company has repurchased over C$180m of shares at an average price of C$42/share. Also earlier this year GC announced a tender offer for 20% of outstanding shares in the range of C$39-C$46/share (the offer was canceled due COVID outbreak). So an acquisition bid at C$41/share is more likely to win shareholders' approval.
  • GC looks like a high-quality acquisition for Apollo and the buyer is unlikely to back away. GC operates 26 gaming venues and has a monopoly in several Canadian cities (Toronto, New Brunswick, Nova Scotia). It does have a concentrated shareholder base, however, it's not like the buyer did not know that before making an offer. The current proposal also came at the lower level of the initially indicated range (C$38-C$41), which left space for an improved ooffer. Apollo itself is a major PE fund (over US$400bn AUM) and financing is not an issue here. It has a history of gaming investments and has recently been looking for more bargains in the sector. Earlier this month the buyer has agreed to acquire an Italian gaming machine manufacturer for US$1.15b, while in November it lost a bidding war for William Hill (UK bookmaker) to Ceasars.

 

Cons/risks

  • Apollo can decide not to increase the offer price in which case the acquisition will get voted down in the upcoming meeting.
  • If the price increase doesn't satisfy the shareholders, the acquisition can still fail. Some reports indicate that certain shareholders want to see not less than C$70/share, which most probably is beyond Apollo's range (it's a financial investor).
  • During 2018 GC conducted a strategic review process. From July'18 to September'18 27 bidders were contacted, including both strategic and financial suitors. 9 potential bidders, including Apollo, entered due diligence and some bidders asked for supplemental data. As a result, no offers were made, while the company reports that certain potential buyers have stated that "Great Canadian ran the risk of having a cost structure that was too high relative to the expected revenue growth, and as a result, future profitability could be adversely affected". This doesn't add confidence to the current situation. However, it is worth noting that GC was trading at around C$50/share during 2018 and any offers would have had to be made at a premium to this price.

 

Great Canadian Gaming

The Company operates 26 gaming, entertainment, and hospitality facilities in Ontario, British Columbia, New Brunswick, and Nova Scotia. The Company operates 11 casinos and two racetracks in Ontario, 10 gaming facilities in British Columbia, including two racetracks, and three gaming facilities in Atlantic Canada.

3 COMMENTS

  1. Theodore

    Curious what your thoughts are on GC.TO right now? Looks like a good opportunity for merger arbitrage given that they have already secured the line share of the votes and want to get this done quickly and already have most of the process completed. May be a ~3% return in a month or two tops?

    1. Dunkincoffee

      Press release said deal wouldn’t close till Q2, assuming May/June, would be a reasonable, but not great, IRR.

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