Why did Breach Inlet Capital, an investment firm focused on underfollowed and misunderstood small cap equities, deliver a letter recently to the Board of Directors of Great Canadian Gaming?
The reason is clear. It intends to vote against the offer of Apollo to buy it for $39 a share. The long-time shareholder addressed the Board with several issues with a focus on this low-value price.
After all, GC has a monopoly on the casino market in the Greater Toronto Area, and there remains considerable untapped potential in Vancouver among other regions. The letter enumerated the market share in these areas and the healthy condition of its many casinos. Plus, GC has strong government relationships.
The value of Apollo’s offer must be in line with the statistics. In fact, $39 per share is below the price where GC repurchased substantial stock. In 2018 and 2019, GC bought back ~$350mm of stock and paid up to $51 per share. Plus, in February of this year, GC announced a $500mm tender at up to $46 per share.
Breach Inlet says that it is highly unlikely that COVID or any other factors have materially impacted GC’s long-term earnings power. Several US regional casinos grew 3Q20 EBITDA between 5% and 19% year-over-year, which supports this viewpoint. Breach maintains that the lowball offer is meant to scare shareholders into acceptance by claiming that costs in Toronto are likely to rise faster than revenues.
Further evidence comes from recent closing prices and future predictions of increases up to $45/share, reflecting what is happening in the U.S. Thus Breach says that GC would be selling “at the bottom” in a depressed year with a recovery in sight.
Other bids are welcome to prove this point. GC’s Board appears to have rushed to take the first offer on the table and its interests do not align with those of the shareholders.
The letter states that “this is a terrible and ridiculous deal”.
In the end, with sound execution and an improved macroeconomic backdrop, Breach believes that GC could be worth ~$140 per share within two years.
“We are unlikely to vote ‘FOR’ a transaction until GC’s long-term intrinsic value is
more accurately reflected in the price offered by Apollo or another potential suitor.”