In January, 2018, the Ontario Gaming GTA LP, a partnership between the Great Canadian Gaming Corporation and Brookfield Business Partners, completed the purchase of a bundle of casino operations from the Ontario Lottery & Gaming Corporation, including Casino Woodbine, Casino Ajax and Great Blue Heron Casino. The deal is part of the OLG’s sale of almost half of its casinos and slots over the last three years.
On May 9, it was disclosed that the OGGTA purchased the bundle for $158-million, which is less than one times the annualized earnings before interest, taxes, depreciation and amortization (EBITDA) of the bundle, based on first-quarter results. That’s an acquisition multiple much lower than many expected. Reminiscent of the privatization of Highway 407, the sale involves a massive transfer of wealth from the Government of Ontario, and ultimately all Ontarians, to the private sector. This is yet another example of the government’s inability to receive maximum value for its assets, limiting its capacity to service its soaring debt and pay for essential social services.
The core problem with the sale is that the Great Canadian-Brookfield partnership purchased the casino bundle for approximately one times EBITDA – a paltry amount. The casinos that were sold were performing well, profitably generating a gross gaming revenue of more than $1-billion in 2016. As Great Canadian’s management put it, the casinos “were already producing some pretty exceptional results.” Clearly the final sale price does not reflect the strength of the bundle.
Furthermore, the sale price does not adequately reflect the fact that the deal grants the OGGTA at least two decades of exclusive rights to operate these casinos in the GTA, one of the fastest-growing cities in North America. Nor does it reflect the provisions that give the gaming partnership the opportunity to redevelop and massively expand the Woodbine and Ajax sites, further increasing the bundle’s earning potential.
The bundle should have been sold at a multiple far in excess of one times EBITDA. In North America, casino and gaming assets trade publicly for an enterprise value of eight to 13 times EBITDA. Within two days of Great Canadian’s financial disclosures of the deal’s terms its stock price jumped by 36 per cent, adding some $840-million of market value to the company, which one could argue implicitly values the acquired bundle at $1.7-billion, or an enterprise value of eight times EBITDA. Since the OLG only received $158-million for the bundle, it suggests that the government has left as much as a staggering $1.5-billion on the table.
The government might argue that the value of the casino bundle was determined through a competitive process. But just because the bids were received through such a process does not mean that the bids had to be accepted. As evidenced by stock market reactions, the accepted bid was clearly below market value.
The government might also argue that the fire sale price reflects a desperate financial need to sell off its assets. It is true that OLG’s revenue has been flat in recent years due to increased competition from online gambling and U.S. casinos. But it is not clear how this justifies the final sale price. The public would have been better served by OLG either holding on to the casinos, given how well they were performing, or by selling them to a bidder whose offer reflected their real value.
Lastly, the government might suggest that the low sale price saves public money by having the OGGTA pay for the modernization of the casinos rather than the taxpayer. But this is short-term thinking. Great Canadian’s management team recently acknowledged that given the financial strength and attractive credit profile of the bundle it is likely that cash generated from and debt secured against the asset will fund “at least the vast majority” of the modernization costs. In effect, the government has denied the public considerable revenue had they paid for the low-risk investment themselves.
While there appears to be no obvious economic rationale for the government’s decision to sell the bundle at such a low price, there might be a political one. As former Ontario premier Mike Harris did with the sale of the 407, Kathleen Wynne may use the deal to suggest that the government is taking concrete measures to rein in the provincial debt. But if true, the money received will be little more than a drop in a multibillion-dollar debt bucket, raising further questions about the reasons for the sale.
The deal also raises troubling questions about the government’s ability to privatize public assets effectively. This is significant given current discussions surrounding the privatization of the LCBO, Ontario Power Generation and eHealth Ontario. Privatization is not necessarily a bad thing, but the government’s poor track record has convinced many that it is largely inconsistent with the public’s interests, regardless of who is in power.
Continued poor-decision making by the Ontario Liberals, especially when it comes to protecting taxpayer dollars, only serves to fuel anti-government, anti-establishment views in the province. The repeated failure of our government to extract maximum value for its assets undermines public trust in our governing institutions and political leaders, something which is crucial for a healthy and functioning democracy.
David Zarnett has a PhD in Political Science from the University of Toronto