Gateway Casinos & Entertainment Ltd.’s plan to go public by merging with a U.S. special-acquisition corporation will provide the company with much-needed cash while diluting the ownership stake of its major shareholder as it seeks to generate returns.
Burnaby, B.C.-based Gateway, which is controlled by Toronto private-equity firm Catalyst Capital Group Inc., said it will combine with Leisure Acquisition Corp. in a reverse takeover that replaces a previous plan for an initial public offering. If the deal closes, the result will be a listing for Gateway on the New York Stock Exchange.
The companies said the transaction would create an entity with an enterprise value of $1.46-billion, and it was not immediately clear how that compares with expectations Gateway and Catalyst had under their IPO plan. Gateway operates 25 casinos in British Columbia, Alberta and Ontario and has a large debt load.
Catalyst, led by financier Newton Glassman, has sought various ways to cash in on its investment in Gateway for nearly eight years, including multiple attempts to take the company public or sell it privately. A public listing could allow Catalyst’s funds to gradually garner cash returns, particularly if the shares rise.
The deal comes at a busy time for Catalyst, which has had trouble in recent years cashing out of some key holdings on targeted time frames. The company is currently in a battle for control of Hudson’s Bay Co. against a group led by the storied retailer’s executive chairman. Catalyst has the largest minority position in HBC and has fought to block a management buyout.
Leisure was created by a group of gambling-industry specialists in 2017 to make such a deal. It has assets of US$207-million, gained primarily through raising cash in an IPO, according to a regulatory filing. The stock trades on Nasdaq and previously closed at US$10.34. Leisure Acquisition director Marc Falcone will become Gateway’s chief executive, replacing Tony Santo, who will retire, the companies said in a statement.
The transaction is similar to one announced last week by U.S. online betting firm DraftKings. It is combining with Diamond Eagle Acquisition Corp. and SBTech in a US$3.3-billion deal that will also see it go public. Gateway reversed course on its IPO plan following some high-profile cancellations of new listings, including the We Co. (the parent of WeWork) in the United States and GFL Environmental Inc. in Canada.
Under the deal, Leisure’s shares will be converted one-for-one into shares in Gateway’s parent company, GTWY Holdings Ltd. Leisure warrants will be exercisable into GTWY shares for US$11.50 each.
HG Vora Capital Management LLC, a New York hedge fund that concentrates on the casino and hospitality industries, has agreed to buy US$30-million of the shares in a private placement.
Catalyst will remain the largest shareholder in the combined company. The company’s cash will consist of Leisure’s assets, the HG Vora injection and any excess funds in Gateway’s accounts when the deal closes. It will go toward repaying GTWY’s US$153-million holding-company loan and also paying down some of Gateway’s US$438-million term loan. It will also fund any cash payments to Gateway’s current owners, the companies said.
As of Sept. 30, 2018, Gateway had total debt of $908-million and about $1-billion of assets. The high debt load has meant a weak credit rating: It has a B rating from Standard and Poor’s, well below investment grade.
Catalyst’s aim to realize some gain from its Gateway holding goes back to at least 2012. In its previous attempt, it had filed documents to launch an IPO in late 2018, hoping to sell about US$100-million in stock. Several factors conspired against the plan, including negative investor sentiment for IPOs last year.
Now as a combined company, Gateway is counting on a sharp improvement on financial results. It said it expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $195-million on revenue of $865-million in 2020, and EBITDA of $215-million on revenue of $929-million in 2021.
In 2017, its last reported full-year results, Gateway had EBITDA of $144-million on revenue of $479-million, although since then it has been awarded the service contracts to operate several casinos in Ontario by the province’s gambling regulator.
Its holdings in Ontario were expected to generate more than half of revenues by this year, Moody’s Investors Service said last year. Gateway is making capital investments to upgrade the facilities in many of those properties.
In late October, Catalyst completed a privatization of its struggling majority-owned alternative lender Callidus Capital Corp., when Callidus’s second-largest shareholder, Braslyn Ltd., bought out the minority for 75 cents a share. It had gone public in 2014 for $14.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.
Jeffrey Jones