By Samuli Karjalainen, Jonathan Fuchs, Chiara Fulvi, Eden Yang and Lolade Aluko (London School of Economics)
Overview of the deal
Acquirer: Apollo Global Management
Target: Great Canadian Gaming Corporation
Implied Equity Value: $3.3Bn
Total Transaction Size: $3.3Bn (all outstanding shares acquired)
Closed date: TBD
Target advisor: Scotiabank
GCG, on November 10, announced that it has entered into a definitive agreement to be acquired by Apollo Global Management; the acquisition would lead to the transfer of all outstanding shares of the company, and would lead to an implied price per share, as per the agreement, of $39, in a total value of $3.3B. The acquisition would happen at a 59% premium to the 30-day VWAP (value-weighted average price) of the company’s equity. This could be a signal for strong competition for the acquisition by other industry players and or towards significant goodwill values derived from past operations. Since GCG is a leader in the gaming and entertainment industry, the acquirer sees opportunities to work with the experienced team to drive exponential growth in novel geographic markets.
“We are pleased that this transaction represents a great opportunity for our shareholders, while continuing to support the success of the business longer term” - (Rod Baker, CEO Great Canadian Gaming)
Company Details: Acquirer – Apollo Global Management, LLC
“Apollo Global Management, LLC, is an alternative investment manager in private equity, credit, and real estate”. The Company is in the business of raising, investing, and managing funds on behalf of pension and endowment funds as well as other clients such as institutional investors.
Founded in 1990, headquartered in NYC, US
CEO: Leon Black
Number of employees: 1600+
Market Cap: $20.01bn, as of November 24, 2020
EV: $22.43
LTM Revenue: $1.16B USD (2018)
LTM EBITDA: $0.265B (2018)
LTM EV/Revenue: 19.33
LTM EV/EBITDA: 84.64
Company Details: Target - Great Canadian Gaming Corporation
Great Canadian Gaming Corporation (GCG) is a Canadian gaming, entertainment, and hospitality company. It operates 25 physical locations including 500 hotel rooms, hundreds of table games, and more than 16,000 slot machines across Ontario, British Columbia, New Brunswick, and Nova Scotia. Central to its mission is a strong commitment to social responsibility.
Founded in 1982, headquartered in BC, Canada
CEO: Rod Baker
Number of employees: 9400
Market Cap: $2.08B, as of November 24, 2020
EV: $3.99B
LTM Revenue: $0.736B
LTM EBITDA: 0.18
LTM EV/Revenue: 5.42
LTM EV/EBITDA: 21.96
Projections and Assumptions
Short-term consequences
The casino and gaming industry has been one of the hardest-hit by the current pandemic. Amidst recovery, Ontario has progressively eased COVID-19 restrictions, with its Stage 3 reopening plan allowing most businesses to be open while still restricting table games at casinos. On September 28, GCG reopened 11 properties that have had their operations suspended since March 16, only to put up the shutters at Casino Ajax and Great Blue Casino once again to curb virus resurgence in the province. Despite the prolonged pandemic, Apollo’s acquisition is well-timed given the high efficacy rates of vaccines (Pfizer and Moderna). Apollo stands to gain from a vaccine-driven recovery as businesses reopen and travel resumes, as reflected by its share price more than doubling from its 52-week low in March. Under its PROUD program, GCG contributes part of its revenue to fund charitable causes, which goes in line with ESG diligence that is at the core of Apollo’s investment business. Given Apollo’s long track record in the gaming industry, other Canadian institutions are likely to co-invest in the transaction, boosting general investor sentiments. According to market reports, the global market for casinos is expected to decline by 10.8% this year due to the closure of brick-and-mortar entertainment facilities and national lockdowns. Nonetheless, the industry is projected to reach $159.3B by 2027 with a CAGR of 3.7%. As casinos explore the option of online operations and even cryptocurrency gambling, Apollo stands to gain from the new normal post-pandemic.
Long-term Upsides
GCG has been a leader in gaming in the greater Canada region; through the acquisition, Apollo can ensure greater geographical access and potentially open up a new market, especially in a COVID-stricken national economy with diversification benefits. As per Alex van Hoek, a partner at the acquiring firm Apollo: "Great Canadian is a leader in the gaming and entertainment industry and, based on our experience and knowledge of the space, we see opportunities to work with their talented team to drive additional growth and value. With an industry-leading portfolio of assets and established presence in the best geographic markets across Canada, we are excited to help bring an enhanced experience to more guests across Canada." Canada’s gaming industry is at $3.6 billion as of now and showing considerable annual growth with potential for greater future demands. On the other hand, the deal also ensures that the expertise of Apollo can be shared with Great Canadian Gaming, which being at an EV/EBIDTA value of around 20, can leverage the management expertise of a firm having the same ratio at more than 80.
In terms of value to the shareholders, this transaction unlocks significant benefits as it has been issued at a premium to the market price. As had been detailed out earlier, the deal occurred at a 40%+ premium to the prevailing market price; by avoiding underbidding, the company ensures that the shareholders do not sell off the equity in the open market before the deal. This would make sure that there is not a significant price surge right before the acquisition, which would lead to excess cash flows out of the combined company, and thus lead to a lower long term NPV. This also ensures that the synergies accruing as a result of the transaction are shared optimally, and there are no significant issues with regard to asymmetric information.
Risks and Uncertainties
GCG manages seven casinos owned by British Columbia Lottery Corporation (BCLC), which also regulates the industry in the region. Within the region, GCG has been the focus of several anti-money laundering probes since 2017. In 2018, GCG’s revenues fell when BCLC tightened gambling regulations, introducing third-party audits and mandatory reporting on casino buy-ins over C$10k.
The British Columbia Attorney General announced that by 2021, an independent gambling regulatory office will handle gambling oversight, absolving BCLC of that responsibility. The presence of a new regulator poses risks to GCG’s ability to run its operations and could harm GCG’s revenues, if stricter reporting obligations, external auditing, and source-of-funds restrictions are placed on the region’s gambling industry.
On the other side, Apollo Global Management has opened an internal investigation on its CEO and largest shareholder Leon Black, who is rumoured to have had financial connections to Jeffrey Epstein after his 2008 conviction. Apollo investors have expressed concerns about Apollo’s prospects if Black stays, and Apollo’s share price fell 8.5% upon the news of Leon Black’s alleged involvement with Epstein. The ongoing investigation poses moderate risks to the future of Apollo’s senior management. This investigation, coupled with Apollo’s 12.2% decrease in earnings over the past 5 years and recent 27.1% dividend cut, signals uncertainties concerning Apollo’s ability to attract new investors.
These investigations pose risks to GCG’s and Apollo’s current business and management structures. Therefore, moderate restructuring of both companies may be imminent to reduce regulatory exposure and financial uncertainty.