Gateway and Leisure have entered into a definitive agreement for a business combination
31 Dec 2019
Gateway has also announced that, shortly following completion of the Transaction, Marc J. Falcone, currently a Director of Leisure, will become President and Chief Executive Officer of Gateway. Upon Mr. Falcone's appointment becoming effective, Tony Santo, Gateway's current CEO, will retire from the company. Mr. Santo will continue as an adviser to the Board of Directors and Mr. Falcone for three months following his retirement in order to assist with an orderly transition.
With 25 properties across British Columbia and Ontario – up from 10 in 2015 – Gateway has significantly expanded its footprint, while diversifying and expanding its product offering to include well-known proprietary casino and restaurant brands. Over the last six years, Gateway's multi-pronged strategic initiatives have driven (i) improved guest experiences, (ii) strong revenue growth, (iii) consistent Adjusted EBITDA i growth, and (iv) industry-leading free cash flow conversion.ii Gateway has and continues to successfully execute on its growth initiatives to drive year-over-year improvement with year-to-date (through September 30, 2019) growth in Adjusted EBITDA of 10.8% to US$103.7 million (C$137.9 million).iii
With the ongoing support and sponsorship of Catalyst, Leisure and its principals, and HG Vora, Gateway is well-positioned to continue to achieve attractive returns for its shareholders. The Company's projected organic revenue and Adjusted EBITDA growth pipeline reflects a number of rebranding and renovation initiatives across its portfolio along with three new development opportunities and four property relocations expected to open over the next three years. The execution of these growth initiatives will be implemented with a sustained focus on Gateway's operational excellence. Gateway management provided Leisure with forward-looking projections as part of its due diligence. 2020 Projected Adjusted EBITDA is expected to be US$148.6 million (C$195.0 million).iv 2020 Projected Adjusted EBITDA to Free Cash Flow Conversion is expected to be 90.8%.v
Transaction Highlights:
--US$1.1 billion (C$1.5 billion) pro forma transaction enterprise valuation for the combined company implies a transaction multiple of 7.5x 2020P Adjusted EBITDA.vi
--Anchored by US$30 million equity commitment at US$10.00 per unit, from HG Vora, an experienced gaming investor.
--Marc J. Falcone to lead Gateway as Chief Executive Officer.
--Gabriel de Alba will continue in his role as Executive Chairman.
--Upon closing of the Transaction, A. Lorne Weil, Daniel B. Silvers and Marc J. Falcone, Leisure's Executive Chairman, Chief Executive Officer and Director, respectively, are expected to join Gateway's Board of Directors. Lyle Hall, Olga Ilich and Dr. Michael Percy also are expected to join upon closing of the Transaction. Additional independent directors are expected to be appointed at or following the completion of the Transaction such that Gateway Board of Directors may be comprised of up to 9 members.
Management Commentary:
Gabriel de Alba, Managing Director and Partner of Catalyst and Executive Chairman of Gateway, stated, "With its strong corporate and property operating teams, diversified growth initiatives, and industry-leading operating model, Gateway has built tremendous momentum and established a solid foundation for ongoing growth. We are proud of the team and their many accomplishments over the last six years which include doubling our locations and adjusted EBITDA, increasing our slot machines by nearly three-times, increasing our table games by over two-times and adding 56 new F&B outlets across British Columbia and Ontario. The disciplined execution of our near- and long-term strategies has created significant value and returns over the years for all of the Company's shareholders. We are thankful to Tony for his leadership of Gateway and his key role going forward."
"As we seek to execute against our many growth initiatives and deliver additional shareholder value, we are excited to partner with Leisure and appreciative of the confidence in our future as demonstrated by HG Vora's investment commitment. We welcome Marc to Gateway and look forward to his leadership as our incoming CEO. Lorne, Dan and Marc's respective industry experience and extensive relationships, combined with access to public capital markets, will favorably position the Company to accelerate its strategies to deliver strong, profitable growth and increased free cash flow. Just as importantly, this transaction will provide Gateway with the foundation for a very promising future as a leading, diversified gaming and entertainment platform throughout North America. The entire Gateway team looks forward to working with the team at Leisure to create value for shareholders over the long-term," Mr. de Alba concluded.
Leisure's Executive Chairman A. Lorne Weil and Chief Executive Officer Daniel B. Silvers commented, "Early in our lifecycle, we identified Gateway as an attractive opportunity to leverage our team's deep experience and skills in the leisure and gaming sector. We are excited to partner with the Gateway team, led by Marc, to accelerate Gateway's growth through the many high-return initiatives already in place as well as by pursuing potential future accretive transactions across North America. Gateway is recognized across the industry for its operational expertise and focus on providing great gaming, entertainment and food and beverage experiences, world-class guest service and financial discipline. We look forward to being partners with Gabriel, Marc and the entire Gateway team as we enter what we expect will be the Company's next phase of growth."
"I am excited to enter this new role as CEO of Gateway," commented Marc J. Falcone, Director of Leisure and incoming CEO of Gateway. Mr. Falcone concluded, "I am grateful for the confidence placed in me by Gabriel, HG Vora and the leadership of Leisure. I believe the Canadian gaming market offers unparalleled growth opportunities and Gateway has always been a platform that I found to be highly-compelling. I look forward to creating significant shareholder value alongside the rest of the Gateway management team."
Gateway Business Highlights:
--Diversified portfolio of 25 gaming and entertainment destinations in British Columbia and Ontario, featuring over 12,800 slot machines, 365 table games and 72 food and beverage outlets.
--Leading market position in both British Columbia and Ontario. Gateway operates over 40% of all slot machines and table games in British Columbia and is the exclusive service provider in the North, Southwest and Central Ontario Bundles (as defined in the contracts with the Ontario Lottery and Gaming Corporation).
--Operator of four principal casino brands, each focused on providing distinctive entertainment experiences and value to their guests: Grand Villa, Starlight, Cascades and Playtime. Gateway also offers four well-known, proprietary F&B brands: Atlas Steak + Fish, Match Eatery & Public House, Chow Lucky Noodle Bar and The Buffet.
--Significant capital investment made by Gateway over the last three years is projected to yield strong Adjusted EBITDA growth in 2020 and beyond. As part of its expansion plan, over the next three years Gateway expects to open three new casinos in Ontario, relocate two casinos in Ontario and relocate two casinos in British Columbia, all in attractive and underpenetrated new markets. Pursuant to Gateway's current organic growth plan, the Company expects to add more than 1,900 slot machines, nearly 100 table games and 15 branded F&B outlets to its operating base.
Key Transaction Terms:
At the closing of the Transaction, Leisure will merge with a new wholly-owned subsidiary of GTWY. In connection with the merger, outstanding shares of Leisure will be converted in the business combination into the right to receive shares of GTWY at a fixed exchange rate of one-to-one. All outstanding public warrants to purchase Leisure shares will be converted automatically into warrants to purchase shares of GTWY at an exercise price of US$11.50 per share. GTWY will be the publicly traded company with its shares expected to be listed on the NYSE under the ticker "GTWY."
The combined company's sources of available cash are expected to be comprised of: (i) cash in Leisure's trust account (subject to any redemptions), (ii) proceeds from a private placement whereby HG Vora has agreed to purchase 3 million Units of GTWY for US$10.00 per Unit and (iii) any excess cash on the respective balance sheets of Leisure and Gateway at the closing date.
The combined company's available cash is expected to be used to: (i) pay transaction fees and expenses, (ii) repay all or a portion of GTWY's existing approximately US$154 million holding co. loanvii, (iii) repay a portion of Gateway's existing operating company term loan, (iv) fund any cash consideration to the existing shareholders of GTWY, and (v) for general corporate purposes of the combined company.
Insiders of Leisure and HG Vora have agreed with respect to any private placement warrants purchased by the Sponsors (or their designees) and HG Vora at the time of Leisure's IPO (the "Sponsor Warrants") to amend the terms of the Sponsor Warrants such that the Sponsor Warrants will be comprised of: (a) 2,775,000 warrants with a strike price of US$11.50 which will be exercisable for five years from the closing date of the initial business combination, (b) 2,775,000 warrants with a strike price of US$12.50 which will be exercisable for five years from the closing date of the initial business combination and (c) 2,775,000 warrants with a strike price of US$15.00 which will be exercisable for seven years from the closing date of Transaction.
Existing GTWY shareholders are expected to remain, altogether, the largest shareholders of the combined company. In addition to the upfront consideration, the existing shareholders of GTWY will have the ability to receive an earn-out payment of up to 4.743 million common shares of GTWY to be delivered in the form of warrants, subject to vesting conditions (as described below), with a nominal strike price. Warrants for 1.898 million common shares will become exercisable if, after the closing date of the Transaction, the last reported sales price of GTWY's common stock equals or exceeds US$12.50 per share for any 20 trading days within a 30 trading-day period commencing at least 150 days after the closing date of the Transaction through and including the second anniversary of the closing date of the Transaction. Warrants for 2.846 million additional common shares will become exercisable if, after the closing date of the Transaction, the last reported sales price of GTWY's common stock equals or exceeds US$15.00 per share for any 20 trading days within a 30 trading-day period commencing at least 150 days after the closing date of the Transaction through and including the third anniversary of the closing date of the Transaction.
Furthermore, the existing shareholders of GTWY will receive newly-issued warrants in the following tranches: (i) 6,325,110 warrants with a strike price of US$11.50 which will be exercisable for five years from the closing date of the Transaction, (ii) 6,325,111 warrants with a strike price of US$12.50 which will be exercisable for five years from the closing date of the Transaction and (iii) 6,325,111 warrants with a strike price of US$15.00 which will be exercisable for seven years from the closing date of the Transaction.
The Company will also issue 1.281 million options to certain members of management in the same proportion and equivalent term and conditions as the earn-out payment and the warrants being issued to existing shareholders of GTWY.
Financial Projections:
In conjunction with Leisure's evaluation of the Transaction, on 19 December 2019 Gateway provided Leisure with the following projections (for the respective years ending 31 December):
(US/C $ in millions)viii
______________________________| 2020 | 2021 |________________
Revenue (US$) ______________| $659.3 | $707.8 |______________
Adjusted EBITDA (US$) ______| $148.6 | $163.9 |______________
Revenue (C$) _______________| $865.1 | $928.7 |______________
Adjusted EBITDA (C$) _______| $195.0 | $215.0 |______________
The pro forma enterprise valuation of the combined company (before Transaction fees and expenses), assuming an illustrative price of US$10.00 per share, equates to 7.5x and 6.8x 2020P and 2021P Adjusted EBITDA, respectively.
Timing and Approvals:
The Transaction has been unanimously approved by the Boards of Directors of both Leisure and GTWY, and is expected to close in the second quarter of 2020, subject to approval by Leisure's shareholders, required regulatory approvals, contractual approvals and registrations from Crown agencies, including, but not limited to approvals from Ontario Lottery and Gaming Corporation, and other customary closing conditions. The appointment of Marc J. Falcone as CEO of Gateway is subject to applicable gaming registration requirements.
Morgan Stanley & Co. LLC. acted as M&A advisor to Gateway. Latham & Watkins LLP and Bennett Jones LLP acted as legal counsel to Gateway. Credit Suisse acted as M&A advisor to Leisure. Proskauer Rose LLP and Miller Thomson LLP acted as legal counsel to Leisure.
Investor Conference Call Information:
Gateway and Leisure will jointly host an investor conference call to discuss the business combination on 7 January 2020 following the market close. Details of the conference call and simultaneous webcast will be provided on 6 January 2020.