If there's a suitor to be found for Cedar Fair (NYSE: FUN ) , it's likely to come in the form of a private-equity firm. They're the ones with the deep patience and deeper pockets to finance a $3.5 billion to $4 billion reclamation project.
No, Cedar Fair isn't even officially on the market, but the company's silence after Monday's New York Post story speaks volumes. If it isn't quietly shopping itself or jumping to squash the published reports, it may just have to deal with gentlemen callers lining up outside its Lake Erie porch.
I'll tell you who I would love to see come out on top. You're going to think I'm nuttier than carny-cranked peanut brittle, but I believe that Disney (NYSE: DIS ) would be the ideal buyer. I'll give you my reasons, but first let me go over why Cedar Fair's current valuation is likely to scare away many of those suitors who are fumbling for breath mints outside.
What your units are worth
We don't know who -- if anyone -- will step up to make Cedar Fair an offer it can't refuse. It's not likely to be for much more than today's going price. Let history and EBITDA be your guides in tempering that enthusiasm.
Cedar Fair has nearly $1.9 billion in debt. It commands a market cap of $1.6 billion. The company is projecting $320 million to $340 million in EBITDA. So wolfing down the regional amusement park operator at today's prices -- a $3.5 billion outlay of capital -- would imply a purchase at 10.3 to 10.9 times EBITDA.
That's certainly not an investment for those who get queasy, as Cedar Point's Top Thrill Dragster coaster peaks at 420 feet up in the sky. We can see how some of the more recent deals have been priced for more perspective.
- Cedar Fair paid 9.1 times EBITDA for the Paramount Parks chain last year.
- Six Flags sold a few of its smaller parks in a $312 million transaction earlier this year that valued the properties at 10.4 times last year's EBITDA.
Cedar Fair seems to be priced in that ballpark, right? No, not exactly. The parks that have been sold have been working on depressed operating margins. Cedar Fair runs a much tighter ship, making it harder for new owners to squeeze more out of the incoming greenery.
We're also talking about a company that would dread going out without much of a premium. With the units trading near the $30 mark, a buyout at $35 would translate into a buyout as rich as 11.9 times the low end of this year's EBITDA target. Let's not even get started on the 12.7 EBITDA multiple that a $40 takeout would require. It just ain't gonna happen, my friend.
Private equity isn't that fond of heights. Firms like attractive prices on companies they feel will fetch more down the road. Tack on the somewhat incredulous claim in the Post's story -- that Cedar Fair's top brass is requesting to keep running the company -- and it's easy to imagine most offers coming in for less than the current price.
Pay $3.5 billion only to be told what to do by a company that has been stagnant in recent years after its ill-advised shopping spree? It just isn't going to happen.
It's at this point where Cedar Fair's best hope may be for someone to cue up the "Mickey Mouse" March song.
Disney doesn't do regional amusement parks. It favors gargantuan year-round destinations. Cedar Fair and Paramount Parks combine for 12 amusement parks and a half-dozen waterparks that draw nearly 25 million guests annually. In Florida alone, Disney's four gated attractions were visited by 45 million visitors last year.
Why would Disney play small ball, especially if geographical expansion into smaller markets can dilute its brand and dry up demand for its existing tourist-hungry magnets?
It's an important question, one to which I have several answers.
- Disney's got its eye on playing small ball already. Back in February, Disney hosted an investor conference in Florida where it presented concept art of outreach attractions in new markets. From urban entertainment centers to themed resorts to indoor waterparks, Disney is thinking about expansion on a smaller scale. Cedar Fair would give it established canvases to work its magic on several dispersed markets.
- Music-driven entertainment is back at Disney. High School Musical is hot. Hannah Montana has the top-selling CD in the country this past week. Cedar Fair's properties would serve as great promotional platforms and pave obvious trails for limited summer tours.
- Cedar Fair is pretty dry on character-powered intellectual capital, so it has to pay to license characters like the Peanuts gang or the stars of Viacom's (NYSE: VIA ) Nickelodeon. Disney's deep bench would shave licensing costs and boost merchandising margins in a way that no private equity firm could improve upon. It's not all Mickey and Winnie the Pooh, here. Muppets, Pirates of the Caribbean, and Nightmare Before Christmas are Disney franchises that appeal to older audiences, too.
- One of Cedar Fair's best moves was building resorts on the Cedar Point peninsula. It's a model that Disney has perfected, and Disney has the financial fortitude to expand Cedar Fair's other parks into resort properties.
- Cedar Fair's Castaway Bay lodge with an indoor waterpark is a proven vehicle if Disney wants to take on Great Wolf Resorts (Nasdaq: WOLF ) in that niche.
- Giving regional amusement parks a more family friendly spin is something that Six Flags (NYSE: SIX ) is presently doing. If Six Flags is too successful, it may attract families that would have been headed for one of Disney's parks. Taking a similar approach within Cedar Fair may force Six Flags to try a different tact to stand out.
- Disney will still be able to resell any of the properties that don't fit into its master plan. If Knott's Berry Farm is too close for Disneyland comfort, it should be an easy park to sell. Paramount's Canadian park supposedly was a hotly contested property when Cedar Fair swallowed the chain whole. In short, Disney can always cash out of specific properties, or even the entire waterpark chain, if it wanted to.
- Cedar Fair has been a technological laggard, whereas Disney is on the forefront of digital in-park photography, line reservation systems, and creating interactive websites. The upgrades would be lucrative and easy to implement.
Will Disney bite? It's awfully tempting, yet unlikely to happen. However, Cedar Fair's rich valuation is going to make it a hard sell outside of a company like Disney that would have a clear path to improving margins and drumming up more revenue.
If the breezy porch is empty of penny-pinching private equity firms, there's no harm in getting hit on by a mouse.
Longtime Fool contributor Rick Munarriz enjoys taking his family on coaster treks over the summer. He does own shares in Disney and units in Cedar Fair. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.