Cedar Fair (NYSE: FUN ) is trying to get its point across. And by point, I am referring to Cedar Point -- its flagship park -- as well as the rest of its regional amusement parks. According to this morning's New York Post, a pair of unnamed sources claim that the company has contracted with Bear Stearns (NYSE: BSC ) to smoke out a buyer.
Wait a minute. Isn't this the same Cedar Fair that recently extended CEO Dick Kinzel's contract and took on a ton of debt to acquire CBS' (NYSE: CBS ) Paramount Parks chain last summer?
Uh-oh. If the story leans true, Cedar Fair is admitting that it just didn't have the chops to take on the paramount Paramount challenge. After all, the Paramount properties were acquired at the end of June of last year. We're now just days into the first quarter in which we can compare the company on an apple-to-apples -- or coasters-to-coasters, if you will -- basis. If the digestion process is coming along splendidly, Cedar Fair wouldn't be trying to woo a buyer in the middle of the season. It would have waited until a blowout third-quarter report before strutting down the private equity catwalk.
Strictly a private matter
Yes, if anyone's purchasing Cedar Fair, it'll probably be a private buyer. Six Flags (NYSE: SIX ) just shed a few parks of its own. Anheuser-Busch (NYSE: BUD ) has shown no signs of expanding its Sea World and Busch Gardens empires. Disney (NYSE: DIS ) has little reason to downgrade to the regional world of seasonal parks.
Private equity is where the bidders would be, if they can afford it. Cedar Fair's balance sheet is thin on greenbacks and brimming with $1.9 billion in debt. Tack on the company's $1.6 billion market cap, and you're looking for a capital outlay of at least $3.5 billion for the company.
Cedar Fair expects to generate between $950 million and $1 billion in revenue this year. Adjusted EBITDA is projected to clock in between $320 million and $340 million. Paying 10 times EBITDA isn't cheap, especially for a company that has been stagnant organically.
We're still early in the 2007 operating season, but attendance has dipped slightly on a same-park basis. Attendance has been flat over the past couple of years. Guests are spending a little more money once they get through the turnstiles, but the burdens of a post-Paramount Cedar Fair are weighing heavy on the publicly traded Cedar Fair:
- Pressure to keep the fat 6.7% yield going, even after watching its debtload more than triple.
- The incessant quarterly scrutiny of a company that has now struggled with its two latest acquisitions -- Paramount and Geauga Lake.
- Unitholders like me who quibble about the small stuff like the elimination of investor in-park discounts.
One click, and you're out in the parking lot
The problem with any exit strategy is that the public is still watching. Why does Cedar Fair want out? Why now? If it's rushing to the exit because the gray storm clouds are moving in, it won't be alone. Others will rush for the turnstiles, filling up the parking lot in the process.
Cedar Fair won't command top dollar that way. The ideal out would have been to turn Paramount Parks around -- propping the acquired chain's margins up to Cedar Fair's standards (and not the other way around) -- and walk away in a few years at much higher levels.
Leaving now is just bad timing. The Post also indicates that suitors are being solicited "on the condition that the company's management team remains in place." That's a pretty bold request, especially when the allure of buying Cedar Fair is to try to mix things up to kick it out of its near-term stagnancy funk.
Private equity may be agreeable to Cedar Fair's conditions, though it will likely cost it in forgoing healthier premiums. There is also a limited pool of companies that have an interest in regional amusement parks and the financial means to bankroll what may be a deal in the $4 billion range. Blackstone (NYSE: BX ) is a natural. It acquired the Legoland parks two years ago. It also owns several European attractions, as well as a stake in the Universal Orlando resort in Florida.
However, now that private equity firms are going public, they may be even more sensitive about overpaying for future acquisitions.
Selfishly, I hope that Cedar Fair doesn't cash out. As a coaster-loving investor who treks out to Cedar Point every couple of years, it just won't feel the same. Investors who bought in after Cedar Fair was recommended in the Motley Fool Income Investor newsletter service will miss the steady trading and chunky quarterly distributions. However, if Cedar Fair sees the storm clouds coming in -- and it's hard to interpret the company's actions otherwise if this is true -- I can't blame anyone for rushing to the parking lot to ride the storm out in a different vehicle.
Disney is a recommendation for Motley Fool Stock Advisor subscribers. Anheuser-Busch has made the cut for Inside Value readers. Cedar Fair is an Income Investor selection. Take one or all of the newsletters for a free 30-day ride.
Longtime Fool contributor Rick Munarriz enjoys taking his family on coaster treks over the summer. He owns shares in Disney and units in Cedar Fair. He is part of the Motley Fool Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy steers clear of the Tilt-a-Whirl.