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Great Canadian Gaming Corp. expects the cost of running its newly acquired casinos in Ontario to rise faster than potential revenues – a risk it says will be transferred to Apollo Global Management Inc. if shareholders approve the New York private equity giant’s takeover bid.

Several of Great Canadian’s largest shareholders have opposed the takeover, which would see Apollo pay $39 a share for the B.C.-based casino operator. They argue that the bid is too cheap, especially considering the monopoly position Great Canadian has with its Greater Toronto Area casinos.

In a draft circular filed with the B.C. Supreme Court Wednesday, Great Canadian’s board laid out its argument for why the deal should be approved.

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At the heart of its pitch to investors is a concern about the properties in Ontario it acquired from the Ontario Lottery and Gaming Corp. in 2018. These include Casino Woodbine, Pickering Casino and Great Blue Heron Casino, which are all still under construction and have had their completion deadlines extended by the pandemic.

A deal with Apollo would transfer “the execution risk associated with the company’s Ontario properties to the purchaser,” the circular said.

COVID-19 shuttered casinos across the country, severely damaging Great Canadian’s revenue, which fell 87 per cent year-over-year in the third quarter. The pandemic also forced the company to re-examine its assumptions about return on investment for projects still being built.

“The construction projects [in Ontario]… have a total construction budget of approximately $1.48-billion, 54 per cent of which must still be spent through 2022,” Great Canadian Great Canadian noted in the circular.

“Operating these facilities will also significantly increase operating costs given the size of these facilities and their staffing requirements. There is no certainty that the company will be able to achieve a sufficient return on the remaining capital expenditures if revenues post-completion of the construction do not achieve prepandemic estimates,” the company said.

While revenue projections are weakening, the company said costs of running the casinos “are certain to increase significantly (both disproportionately to and faster than revenues).”

This is not the first time Great Canadian’s board has tried to sell the company. Directors began looking for a buyer in 2018, when they formed a special committee to examine “strategic alternatives.” Nine potential suitors, including Apollo, expressed interest in learning more about the deal. In the end, no transaction went ahead.

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“The company received feedback from certain participants in the global solicitation process that the company, after completing its planned gaming development projects in Ontario, ran the risk of having a cost structure that was too high relative to the expected revenue growth, and that as a result future profitability could be adversely affected,” the circular says.

Last June, another unnamed company expressed interest in buying Great Canadian, but pulled back after several weeks. Apollo then made its unsolicited bid on Aug. 28. Great Canadian opted not to restart a full-blown sales process in response to the Apollo bid, a decision that has been a sore point with shareholders who oppose the deal.

Great Canadian’s board now believes there is “a very low likelihood of any other party being interested in acquiring the company at this time at a price competitive to the range proposed by Apollo.”

Shareholders are expected to vote on the proposal at a meeting in December. Several major shareholders, including BloombergSen and Burgundy Asset Management, have publicly come out against the deal, saying that the company could miss out on postpandemic growth if it sells now.

With reports from Jeff Jones

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