July 4, 2018 by

Why would Ontario Sell 3 Provincial Casinos for Far Less than Market Value?

The provincial government of Ontario has come under serious criticism for the sale of some of its land based casinos for far less than they were worth. The latter point is the assessment of industry and business observers who say that the casinos were sold for little more than a single year’s revenues.


The sale was completed in January of this year but the ramifications of it are just now becoming known to the public. In an effort to raise money for its massive debt, the provincial government is selling about half of its casinos. That in itself would be fine for most people but everyone would like the government to get a fair market price for the casinos.

The most cynical of the criticisms has it that the provincial authorities couldn’t even mange the smooth transfer of casino bonuses from one account to another.

OLG or OMG?

Ontario Lottery and Gaming Corporation, (OLG) which is not a private company but rather a public governmental enterprise sold Casino Woodbine, Casino Ajax, and the Great Blue Heron casino to a partnership of two large corporations. The purchase price of $159 million was made public only in May, four months after the sale was completed. The sale price is less than the value of all of the casinos’ earnings before taxes, depreciation, amortization, and interest on outstanding loans. In other words, valuable publicly held properties were sold at a virtual loss.

Bi-Partisan Criticism

The critics come from both the political left, which prefers the government to hold onto property rather than turn it over to private hands, and the political right which is ideologically in favor of privatization of government properties but which sees fair business practices as the absolute minimum necessary for a properly functioning private economy.

A sale for far less than these properties was worth, feeds the kind of discord that already exists between the left and the right on political and economic issues.

Citizens Lose

In essence, the sale for such a small purchase price means that the citizens of Ontario, through the officials of the OLG, transferred citizens’ wealth as it existed in the hands of the provincial government to private hands and in return the citizens received very little compensation.

Some are saying that the low sale price and the delay in informing the public of it might mean that the debt burden of the provincial government may be much higher than previously thought or disclosed.

Critics are also saying that the casinos were profitable when they were owned and run by the government so there seems to have been no reason to sell them at such a low price.

Details Paint an Even Worse Picture

In the details of the deal it was also were revealed that the buying partnership was granted twenty years exclusivity in the Greater Toronto area (GTA) meaning that there will be no competition to these privately owned casinos for twenty years. The deal also allows the partnership to increase the size of the Ajax and Woodbine casinos making them even more profitable.

Toronto is one of the fastest growing urban areas in North America despite being located in the “frozen north”. The people of the GTA and nearby cities and towns who have been happily gaming at the government run casinos for years will now be faced with a gaming at casinos owned by a monopoly casino corporation, travelling farther out to play at other land based casinos, gaming only online, or stopping to play casino games at all.

People like playing casino games and they like going to casinos to do so. This deal puts such people and all Ontario citizens who don’t gamble at casinos but who understand basic business economics in a very foul mood.

How Property is Valuated

Property normally sells for a multiple of annual earnings. Housing sells for multiples several times larger than annual incomes and casino properties, because their earning potential is greater year by year, usually sell for a multiple of 8-15 times annual earnings in the year of the sale.

The stock value of the leading corporation in the partnership rose 36% after the sale price was revealed. That added more than $800 million to its corporate value. It seems clear that the people who managed the sale for the people of Ontario did not know what they were doing.

The Government’s Position

The government has made the argument that it desperately needs the money. However, the government has not explained why it so desperately needed the money that it sold valuable assets for far less than they were worth.

The government has argued that bids for the casinos were done in secret and that there was no negotiation on the final sale price. This argument claims that the sale reflected fair market value. The massive and immediate rise in the market value of the leading company involved in the partnership puts paid to this argument.

The partnership has told the business community that it will be able to fund the expansion it plans of the Ajax and Woodbine casinos from revenues of the casinos as they are. In other words, the provincial government could have expanded theses casinos from revenues as well.

Politics

There is also a political aspect to the sale. The ruling party, the Liberals, would like the public to see them as being proactive in working feverishly to save the province from defaulting on its massive debt. This may come to be seen as a political ploy given the amount of money the province apparently left on the table.

There are already calls to keep the Liberals out of talks to privatize Ontario Power Generation and eHealth Ontario. The fear is that the people who run the government have no clear idea of how businesses should be run and should not be involved any more in the move to privatize government businesses.