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B.C. and Ontario offer better economic conditions and opportunity for expansion than Alberta, where Gateway operates Starlight Casino Edmonton and Grand Villa Casino Edmonton.

Rafal Gerszak/The Globe and Mail

Gateway Casinos & Entertainment Inc. has put its Alberta casinos up for sale as it prepares to go public in a reverse takeover of a U.S.-based special-purpose acquisition corporation, the company said on Tuesday.

Gateway, which plans to merge with Leisure Acquisition Corp., said the two Edmonton properties do not fit with its main casino operations in British Columbia and Ontario. The company has 25 properties in B.C. and Ontario. It is currently majority-owned by private-equity fund Catalyst Capital Group Inc.

By merging with Leisure Acquisition, Burnaby, B.C.-based Gateway gets a long-sought public listing as well as capital to reduce its sizable debt and to make payments to its current owners. Gateway hired SunTrust Bank to advise on the potential sale of its two casinos in Edmonton, according to a recent Catalyst letter to investors.

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Gabriel de Alba, managing director at Catalyst and Gateway’s executive chairman, said B.C. and Ontario offer better economic conditions and opportunity for expansion than Alberta, where Gateway operates Starlight Casino Edmonton and Grand Villa Casino Edmonton.

“That’s why we want to focus our efforts on those two markets – focus our capital and focus the management team where we can generate better returns, and that’s why we have a process to divest the locations in Alberta," Mr. de Alba said during an investor conference call to discuss the deal with Leisure Acquisition.

The merger and public listing will follow a series of attempts since 2012 by Catalyst to take the company public or sell it to another industry player. Leisure Acquisition, which went public in early 2018, had its eye on Gateway from the time of its offering, said Daniel Silvers, the special acquisition vehicle’s chairman and incoming Gateway vice-chairman.

The companies said the transaction would create an entity with an implied equity value of $576-million and debt of $939-million.

Under the deal, Leisure’s shares will be converted one-for-one into shares in Gateway’s parent company, GTWY Holdings Ltd. Leisure stock sold for US$10.44 on Nasdaq Tuesday. Its warrants will be exercisable into GTWY shares for US$11.50 each. HG Vora Capital Management LLC, a New York-based hedge fund focused on the gambling industry, has agreed to buy US$30-million of the shares in a private placement.

The combined company’s cash will consist of Leisure’s assets and the HG Vora injection – a total of $287-million – as well as 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.

The deal will help Gateway’s credit picture, Moody’s Investors Service said this week. Moody’s currently rates the company’s credit at B3, well below investment grade. “GTWY’s subsequent conversion into a public entity will also favor stronger corporate governance and potentially more conservative financial policies," the rating agency said in a statement.

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After the merger, Toronto-based Catalyst will own about 30 per cent of the combined entity, Tannenbam Capital Partners 11 per cent, public shareholders 41 per cent, Leisure Acquisition managers and directors 3.5 per cent, and HG Vora 15 per cent, according to the company’s investor presentation.

The deal is expected to close in the second quarter following regulatory approvals and shareholder votes.

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