The potential buyer of Gateway Casinos & Entertainment Ltd., one of Canada’s largest gambling companies, walked away from the $1.5-billion takeover on Thursday, the latest in a series of deals to fail during the pandemic.
New York-based Leisure Acquisition Corp. announced in a regulatory filing that it “elected to terminate” the Gateway acquisition announced in December. The deal would have seen Gateway, controlled by financier Newton Glassman’s private equity fund Catalyst Capital Group Inc., list on a stock exchange and pay down $215-million of its $1.15-billion in debt.
Burnaby, B.C-based Gateway owns 25 properties in British Columbia and Ontario, along with two casinos in Edmonton that are up for sale. Catalyst acquired Gateway in 2010 and borrowed money to expand the business, acquiring a number of Ontario casinos from the provincial government. Gateway closed all its properties in March because of the novel coronavirus pandemic.
Gateway began reopening restaurants in early July, with the blessing of provincial governments. B.C. and Ontario authorities have not indicated when casinos will be allowed to welcome back gamblers. Gateway casinos contain 12,800 slot machines and 365 table games.
“It is unfortunate that the Leisure Acquisition shareholder vote in March, at the peak of the global COVID pandemic, negatively influenced their ability to complete a transaction that was favorable to all the parties involved,” said Tanya Gabara, spokesperson for Gateway. “Regardless, Gateway is an exceptional franchise and has been successful in building its business across Canada, creating long-term value for its various stakeholders.”
The failed deal with Leisure Acquisition leaves Gateway with significant debts to repay at a time when its properties are generating minimal revenue. In March, rating agency Moody’s downgraded Gateway’s credit rating – it is considered a junk bond - and said in a report that Gateway has $150-million of debt due in April, 2022. Moody’s noted that the cash from the Leisure Acquisition transaction was “earmarked to pay down the $150 million term loan, and in the absence of the deal, default risk will increase substantially.”
Leisure Acquisition, which is run by several veteran U.S. gambling executives, declined to comment Thursday on the reasons for terminating the Gateway transaction, which was originally scheduled to close in April, a deadline that was extended twice. In a regulatory filing in June, Leisure Acquisition said it planned to search for another business to acquire if its deal with Gateway failed to close by July 15.
Leisure Acquisition is what’s known as a special-purpose acquisition corporation, or SPAC, backed by a team of experienced casino operators. The company was created in 2017 with US$207-million of capital and went hunting for a partner. The rules that govern SPACs stipulate that if Leisure Acquisition fails to take over a business by a predetermined date, the company must return its cash to shareholders.
As part of the process that extended deadlines on the Gateway takeover, Leisure Acquisition allowed its investors to withdraw their money each time they gave the SPAC more time to close a deal. The bulk of shareholders have taken advantage of that opportunity; Leisure Acquisition currently only has US$13.2-million of capital left to buy a business, according to filings.
For Catalyst, the failed deal with Leisure Acquisition marks the latest in a series of unsuccessful attempts to cash in on its decade-long investment in the casino industry. The Toronto-based private equity fund first tried to sell Gateway through an initial public offering, or IPO, in 2012, then pulled the deal. Catalyst filed for a second Gateway IPO in 2018, then shifted gears a year later, announcing plans to combine forces with Nasdaq-listed Leisure Acquisition. Catalyst oversees approximately $4-billion on behalf of institutional investors such as pension plans and wealthy individuals.
In recent weeks, potential buyers in other sectors abandoned a number of takeovers announced prior to the pandemic. The list of spurned companies features businesses similar to casinos in that they require large numbers of people to be in small spaces, with failed bids for theatre chain Cineplex Inc., retailer Victoria’s Secret and mall owner Taubman Centers Inc.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.