Great Canadian Gaming Corp. and Brookfield Business Partners LP have landed a lucrative contract to operate casinos in the Greater Toronto Area that could see the partners spend as much as $1-billion to redevelop and expand the city's gambling facilities.
The privatization deal announced on Tuesday by Ontario Lottery and Gaming Corp. would allow the partners to redevelop three sites, including Woodbine Racetrack, and add a potential fourth casino at a new site in the city, all subject to municipal approval.
With an effective monopoly on gambling in the GTA for at least the next 22 years, the companies are planning an ambitious $1-billion expansion over the next several years, Cyrus Madon, chief executive of Brookfield Business Partners, said in a conference call with investors on Tuesday.
"I think that gives you some indication of the … scope of the opportunity," Mr. Madon said.
Great Canadian Gaming's stock leaped 18 per cent in Tuesday's trading; the shares had undergone an unusually long trading halt surrounding the deal's announcement.
After moving up by close to 5 per cent last week, the company's shares were frozen just after the close of trading on Thursday. The Investment Industry Regulatory Organization of Canada didn't lift the halt until Tuesday morning.
Great Canadian Gaming declined to comment on the reasons behind the regulatory action, but emphasized that "it wasn't due to any regulatory breach," said Chuck Keeling, a vice-president at the company. A spokesman at IIROC declined to elaborate on the halt or whether it is investigating any recent trading activity in the company.
OLG's announcement ends a long bidding process that drew the interest of large foreign casino operators seeking to expand into the GTA gambling market.
The final bidders being considered included Malaysia's Genting Group and U.S.-based Caesars Entertainment.
"This is the jewel in the modernization program with OLG. We assumed we'd be going up against formidable competition," Mr. Keeling said.
The prize asset in the mix is Woodbine Racetrack, located near Toronto Pearson International Airport. Woodbine is expected to undergo a transformation into a full casino and entertainment complex.
Great Canadian Gaming and Brookfield will also take over the OLG Slots at Ajax Downs in Ajax, and the Great Blue Heron Casino located on reserve lands of the Mississaugas of Scugog Island First Nation, just east of Port Perry.
The three sites have a total of more than 4,000 slot machines and 60 gambling tables. Last year, they collectively generated more than $1-billion in gross gambling revenue.
"When we have the opportunity to present our vision, our plans for the GTA market, they will be very bold," Mr. Keeling said. Expect amenities including hotels, retail, entertainment venues and conference centres, he said.
The company's investors will be keen to hear the numbers behind the project. "It would be nice to know how much they paid up front," said Aubrey Hearn, senior portfolio manager of Sentry Investments, which owns shares of Great Canadian Gaming.
The strength of its balance sheet should allow it to fund the deal itself without much in the way of new debt, Mr. Hearn said.
Generating cash has not typically been much of a problem for the company. Abundant free cash flow has seen the company aggressively buy back its own stock. Still, the share price performance has been unimpressive this year.
"The knock against it has always been growth," said Jason Mann, chief investment officer of Edgehill Partners, which is also a Great Canadian Gaming shareholder. "There aren't a lot of opportunities to grow in this market. This is the answer to that."
Just how much of a boost to future earnings the deal will provide is still unclear. But Brookfield's Mr. Madon shed some light on expected returns, indicating they should fall "very comfortably" within the company's 15- to 20-per-cent target range.
The market's initial re-evaluation of Great Canadian Gaming's prospects pushed the stock up by 18 per cent on Tuesday, ending the day at $30.
That jump essentially closed the gap between the stock's previous trading price and the target maintained by analysts covering the company.
"We wouldn't sell it here," Mr. Hearn said, arguing the stock is still relatively cheap. "We thought it was worth $31 before any of this. Now we're thinking mid-$30s."
With a file from reporter Christina Pellegrini