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Betting on the future: The rise of the gaming industry

Author(s): Eric M. Levy, Ilkim Hincer

Dec 9, 2015

In 2015, the Ontario government’s ambitious plan to modernize the delivery of gambling entertainment options was reinvigorated after overcoming a number of challenges and delays. This Modernization Plan is yet another example – along with the Hydro One IPO and the restructuring of beer retail sales channels in the province – of Ontario’s desire to optimize assets and raise money for priorities such as transit and infrastructure. The revitalization of the gaming industry is opening up opportunities for expansion and growth across the province.

The Lead-up to Modernization

By many measures, Ontario Lottery and Gaming Corporation (OLG), the Crown corporation responsible for the conduct and management of commercial gaming in Ontario, is one of the biggest gaming organizations in North America. With over 30 gaming sites and 10,000 lottery points of sale, OLG’s revenues total nearly $7 billion annually, with contributions of approximately $2 billion of net profits to the province to support government priorities like healthcare, education and infrastructure. In addition, host municipalities receive just under $100 million in the aggregate from gaming revenues every year.

Recognizing the need to increase net profits to the province and optimize the delivery of land-based gaming, the government began its ambitious modernization initiative in 2012. At that time, OLG’s land-based gaming offering included over 23,000 slots and 500 table games. Nearly all gaming venues were owned and operated by OLG, with day-to-day operational services being provided by private sector operators for only a handful of facilities. OLG employed just under 18,000 people across Ontario. The cost of all of these properties and employees was borne by the public purse. With minor exceptions, all capital improvements also fully relied on public funding.

Conceding that this model was not sustainable in the long term, OLG undertook a strategic business review, consultations with stakeholders and comparative analyses of gaming in multiple jurisdictions. After obtaining government approval, OLG launched its Modernization Plan. From the very beginning, one of the primary drivers behind the modernization was to lessen the burden of capital costs on the public purse and maximize the opportunity for private sector investment. Another key driver was the recognition that private sector expertise can and should be leveraged better, not only to spur development and investment but also to provide enhanced, customer-focused operational services within a heavily regulated model. With forecasted new private sector capital investment of $3 billion expected to stimulate economic activity, the original projections were that all modernization initiatives combined would result in additional annual net profit to the province of $1.3 billion by 2017, along with over 2,300 net new gaming jobs and over 4,000 service sector jobs in related fields such as hospitality.

The province’s vision has always been to have new or redeveloped “casino gaming” facilities in Ontario, with the capital and operational risks borne by the private sector as opposed to the public, with a streamlined OLG providing operational “conduct and management” oversight. A parallel initiative to modernize the charitable bingo gaming sector by converting participating existing bingo halls to electronic bingo centres was also expected to generate more than $475 million for charitable organizations over its implementation period.

Challenges and Roadblocks

Despite the best of intentions, the implementation of the modernization initiative has faced delays. The reasons for the delays include

  • backlash to the province’s decision to cancel the program to fund the horse racing industry by means of slot machines at racetracks

  • the subsequent decision to continue funding the horse racing industry and integrate horse racing with gaming

  • the development of a new host community funding formula

  • decisions by some municipalities to reject new facilities or the relocation of existing facilities

  • leadership change, including the OLG’s CEO and the Board of Directors

  • change in the Ontario government’s leadership, including the Premier and Minister of Finance

  • the OLG’s procurement process taking longer than originally anticipated

Overcoming Delays to Modernization

In 2015, gaming modernization picked up momentum with a number of key developments:

  • the appointment of Stephen Rigby, the former National Security Advisor to the Prime Minister of Canada, as the new President and CEO of OLG

  • the closing of seven RFPQs, including for the Greater Toronto Area, as part of the procurement process to increase private sector involvement

  • the approval by Toronto City Council, after many heated debates and lengthy consultations, of the expansion of gaming at Woodbine Racetrack with a view to developing an integrated casino entertainment complex

  • Ontario’s renewed commitment to integrating horse racing with casino gaming

  • the awarding of the first Gaming Bundle (the Ontario “East” Bundle, consisting of Belleville, Peterborough and Thousand Islands sites) to Great Canadian Gaming Corporation, nearly three years after commencement of the procurement process

Although the original implementation plan and projections have been revised because of the evolving nature of modernization, the initiative continues to draw considerable interest from world-class gaming operators, developers and financiers. With the upswing in activity over the last year, and the anticipated release of multiple RFPs in the coming weeks and months, the province is poised to transition to a more modern oversight model that is based on a renewed partnership with the private sector. The overall goal is to spur economic activity, develop sustainable, modern and efficient operations, and provide Ontarians and visitors to Ontario with innovative entertainment options in a socially responsible way that will optimize funding for good causes.

The Global M&A Picture

While OLG has been focusing on modernization, the global gaming industry has been experiencing a wave of mergers and acquisitions, triggered in large part by the significant growth of mobile and online platforms, the introduction of new taxation measures and the increased regulation that followed suit. The requirement to meet more onerous regulatory requirements, as well as the increased need to promote products in a competitive landscape, has increased compliance-related costs and operating expenses for industry players. The economies of scale under such circumstances have resulted in increased M&A activity.

The number and scale of transactions in 2015 made it the biggest year yet for M&A in this sector. We witnessed three proposed mega-deals: the £2.3 billion tie-up between Ladbrokes and Gala Coral in July 2015, a £6 billion merger between Betfair and Paddy Power in August 2015, and GVC’s £1.1 billion acquisition of in September 2015.

These deals came on the heels of the mega M&A transaction in Canada that took place in the summer of 2014, when Montreal-based Amaya Inc. (Amaya), represented by Osler, purchased privately held Oldford Group, then owner and operator of PokerStars and Full Tilt, for US$4.9 billion (the Oldford Group Acquisition). Prior to and following the completion of the Oldford Group Acquisition, Amaya went on a divestiture spree by unloading its land-based gaming assets and other non-core assets. These divestitures contributed to the initial public offering of three new issuers: The Intertain Group Ltd. (TSX: IT), NYX Gaming Group Ltd. (TSXV: NYX) and Innova Gaming Group Inc. (TSX: IGG). As a result of these transactions and others in the market, Canada is quickly being recognized as one of the world-leading jurisdictions for gaming companies.

Our European counterparts saw a great deal of action as well, including the acquisition of IGT for £3.591 billion by Gtech in July 2014, followed by the purchase of Bally Technologies for £3.04 billion by Scientific Games in November 2014.

It is worth noting that some of the world’s largest and most well-known private equity firms participated in financing the recent M&A activity, fuelling expectations that M&A activity in the Canadian and global gaming industry will continue to grow in 2016. Combined with the anticipated awarding by OLG of multiple Gaming Bundles, and all of the concomitant transitional, operational and development activity, the gaming industry in Canada is poised for significant activity in 2016.

Note: In 2015, Osler launched its Gaming Specialty Group.