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.
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.