Great Canadian Gaming Corporation

Case Study:

Great Canadian
Gaming Corporation

Investment Philosophy

Investment Selection

Investment Case Studies

Company Description

December 2017

Great Canadian Gaming Corporation (GC) operates gaming, entertainment and hospitality facilities in British Columbia, Ontario, New Brunswick, Nova Scotia, and Washington State. The Company operates 22 gaming properties, consisting of 14 casinos, four horse racetrack casinos, three community gaming centres and one commercial bingo hall. GC’s casinos earn revenue as patrons play slot machines and table games, wine and dine at restaurants and purchase tickets to various entertainment events that are held within their concert halls.

At the time of Bridgeport’s initial investment, GC generated a significant portion of its annual revenue from two casinos in British Columbia, the River Rock Casino in Richmond and the Hard Rock Casino in Vancouver. In recent years however, GC has been able to reduce its geographic exposure to British Columbia by acquiring gaming assets in Atlantic Canada and Ontario.

Bridgeport classifies GC as a mid-capitalization company in the Canadian equity market. The company generates over $220 million in operating earnings and has a current market capitalization of approximately $2 billion.

Investment Rationale

Bridgeport first acquired shares of GC in June 2011 and presently holds GC shares in the Bridgeport Small & Mid Cap Equity Fund. In recent months, Bridgeport has trimmed its holdings of GC shares as a result of a material increase in the company’s valuation and certain execution risks we see around future growth initiatives.

Our original thesis for investing in GC was as follows:

Favorable Regulatory Environment:

Canadian casino industry regulations are strict. GC’s gaming facilities in Canada and the US are operated pursuant to licenses issued by state and provincial gaming commissions. For many decades, gaming commissions have severely limited the issuance of new gaming licenses — there have even been some years when provincial gaming commissions have placed a moratorium on new licenses. GC and other incumbent casino operators have benefitted greatly from this strict regulatory regime as it effectively limits competition and creates barriers to entry. In Canada, a casino license is truly a prized asset.

The current regulatory framework in many provinces is also beneficial to GC from a capital expenditures perspective. Because gaming revenues are highly taxed and the government is the principal owner of slot machines, table games and other gaming assets, the majority of GC’s gaming-related capital expenditures are eligible for reimbursement by provincial governments. As a result of this capital-light arrangement with the government, GC has been able to generate a significant amount of free cash flow and high returns on capital.

Experienced and Aligned Executive Team:

In 2011, prominent Canadian businessmen Neil Baker and Rod Baker (Neil’s son) amassed a 12% stake in GC. During 2011, Neil was appointed to GC’s board alongside Rod, who had been on the board since 2010 and was the interim CEO at the time. Given that the family had a significant amount of their net worth tied up in GC shares, the Bakers had a vested interest in driving value for shareholders. This caught our eye as we favour companies where management has significant ownership, creating a strong alignment of interests with outside shareholders like us.

Compelling Valuation:

When Bridgeport first invested in 2011, GC was a highly profitable company, generating earnings before interest, taxes and depreciation (EBITDA) of approximately $130 million on annual revenue of over $380 million in its previous fiscal year. We purchased our initial share position in the company at an attractive price which equated to less than 7x trailing EBITDA.

Geographic Expansion Opportunities:

At the time of our investment, GC was heavily exposed to British Columbia’s gaming market, specifically Richmond and Vancouver. While these cities have attractive demographic characteristics (young, affluent cities with dense populations), we recognized that GC’s operating performance would be materially impaired if the provincial regulatory framework changed or the economic situation in these local areas worsened.

We believed that GC would benefit from improved geographic diversification, which would lead to more stable revenues and potentially a higher valuation in the equity market. At the time, GC was generating strong cash flows and had a solid balance sheet which afforded them the ability to pursue diversification.

Financial Performance

Since Bridgeport made its investment in 2011, GC has increased its revenue by 58% from $380 million to $600 million and it’s EBITDA by 69% from $130 million to $220 million. The company achieved these results through organic growth at its various casinos and through its acquisition of Casino New Brunswick. More recently, GC has successfully won bids to operate gaming assets in the Ontario market, which has also driven growth.

In 2015, GC acquired Casino New Brunswick, which broadened its exposure in Atlantic Canada. Later that year, GC was selected by the Ontario Lottery and Gaming Corporation to rejuvenate, expand and operate certain gaming assets in Ontario, which included assets in the cities of Peterborough, Belleville and Kingston (as well as surrounding areas). GC continued its diversification efforts in 2017 and was selected by the OLG to take over two bundles of gaming assets in the Greater Toronto Area. The first bundle will involve a partnership with Brookfield Business Partners LP and Clairvest Group Inc., while the second bundle is a partnership that is solely with Clairvest. These transactions are expected to be a large growth driver for the company going forward. We believe that GC’s diversification initiatives have driven the substantial re-rating in the company’s valuation. The company now trades at over 10x trailing EBITDA.

The company has also improved its financial positions by using free cash flow generated at its casinos to pay down debt and repurchase its common shares at accretive prices. Since June of 2011, GC has reduced its shares outstanding by over 25% and reduced its net debt to EBITDA ratio from 2.6x to 1.1x.

Investment Performance

GC’s shares have increased in value by 348% since we invested as compared to a 45% increase in the TSX Composite over the same period. The stock’s strong performance has been driven by increased earnings, debt repayment, accretive share repurchases and an expansion of the company’s valuation multiple from 7x to 10x EBITDA.

Disclaimer: The information contained in our Investment Commentaries has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. These Investment Commentaries are not to be construed as an offer, solicitation or recommendation to buy or sell any of the securities herein named. We may or may not continue to hold any of the securities mentioned. Bridgeport Asset Management Inc., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities named in this report. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. E.&O.E.