Great Canadian Gaming Corp. recently struck a deal with the Ontario government to run a string of casinos, an arrangement investors initially celebrated and some critics said was too good to be true, accusing the private-sector player of taking advantage of the province.
What if the critics are only partly right, and Great Canadian just signed an agreement that’s going to be a huge win for Ontario taxpayers while exposing the casino operator to a potentially ruinous losing streak? As industry watchers devote more attention to the 22-year-long partnership between the gaming company and the province, a growing number of investors are betting that Great Canadian’s hot hand is about to go cold.
The company has been a market darling since early May, when it published financial results that included the first glimpse into the take from newly acquired properties in the Toronto area, including the Woodbine and Great Blue Heron casinos. The numbers were nothing short of spectacular.
Analysts expected quarterly revenue would be $148-million; the company actually raked in $230.5-million from its 28 casinos and racetracks. Profit jumped 64 per cent over the same period a year ago, and chief executive Rod Baker pointed to his Ontario facilities as the major source of growth. Within days, the company’s stock price rocketed from $30 to $55 levels, as analysts scrambled to increase their financial projections. It closed Friday at $48.36.
Great Canadian’s good fortune led to accusations that Ontario’s former Liberal government underpriced the Toronto-area casinos last August when it awarded a 22-year licence to operate the facilities to Great Canadian and two partners, Brookfield Business Partners LP and Clairvest Group Inc.
That’s when analysts and investors began digging deeper into the deal with the Ontario Lottery and Gaming Corp. They quickly focused on what’s known as a “revenue threshold” agreement, a contract that guarantees the province a floor level of payments from the casinos along with a share of any extra cash.
Details of the revenue agreement are confidential. Great Canadian spokesman Chuck Keeling said on Friday the company “provided all required and appropriate public disclosures, and our policy is not to comment or communicate with analysts outside of our quarterly conference calls.”
The general framework of the casino operators’ deal with the province is set out in public documents: Ontario gets all the future gaming revenue up to a predetermined threshold, which rises over time, then 30 per cent of additional cash that comes from gamblers. The Financial Accountability Office of Ontario, a non-partisan agency, estimates that leasing the casinos and the subsequent expansion of the sites will mean $34.5-billion in revenue for the province over 22 years.
Great Canadian and its partners get 70 per cent of the cash they generate above that rising revenue threshold and 100 per cent of anything they make running hotels, concert halls and convention space around the casinos. Not surprisingly, there are plans for massive real estate developments around the facilities.
In the absence of detailed disclosure of the contract, analysts are starting to sound a cautious note. David McFadgen at Cormark Securities Inc. said in a recent report: “A major risk to Great Canadian shares is the likelihood the [Toronto] bundle revenue threshold increases materially, and, if so, this could materially alter the economics.”
Mr. McFadgen slapped a headline on his report that said Something Doesn’t Make Sense, and with the stock at $55, the Cormark analyst put a $47 target price on Great Canadian.
Short-sellers, who attempt to make money by betting that the price of a security will decline, also zeroed in on Great Canadian. After the company released financial results in May and the stock price soared, the number of shares short sold on the Toronto Stock Exchange jumped 35 per cent to more than a million.
One short-seller, writing anonymously last week on the Seeking Alpha website, said the company’s Toronto-area casinos, acquired at a well-attended auction, are worth far less than analysts and investors believe. If revenues fail to meet expectations, the short-seller argued Great Canadian could be forced to make significant payments to the province, rather than pulling in cash from poker and blackjack tables.
After its recent run, Great Canadian’s stock price reflects the fortunes of a company that’s going to keep reaping the benefits of a big bet on Toronto-area casinos – at the expense of the province. Skeptics warn that as the government contract plays out, Ontario taxpayers will end up holding the winning hand.
Andrew Willis