If you're an investor in Anheuser-Busch InBev (NYSE: BUD), you hope the proposed sale of its theme-parks division to Blackstone Group (NYSE: BX) will close as fast as possible.
Not only will the deal reduce Anheuser-Busch InBev's debt by between $2.3 billion and $2.7 billion, it also will shed some assets that could be held hostage to the uncertainty of consumers' discretionary spending in a shaky economy.
If you're a Blackstone investor, you hope top management sees a better future than that being forecast by some theme-park companies, including Blackstone's own partnership in the Universal Orlando complex with NBC Universal, a unit of General Electric (NYSE: GE).
Although Blackstone expressed optimism when the Anheuser-Busch InBev deal was announced Oct. 7, other theme-park companies have used the word "challenging" to describe the climate for parks, wondering when more visitors will come back and if they will spend more.
On the table
With the announcement, Anheuser-Busch InBev placed another "noncore" asset into its outbox, agreeing to sell its 10-park Busch Entertainment division, which includes the Busch Gardens and SeaWorld parks. Blackstone will pay $2.3 billion in cash and up to $400 million for what Anheuser-Busch InBev called "a right to participate in Blackstone's return on its initial investment." The deal may close by mid-2010.
Blackstone, a publicly traded limited partnership, is a growing force in the entertainment business. In addition to its 50% stake in Universal Orlando, the private equity firm is the majority owner of the U.K.-based Merlin Entertainments Group, which has bought several theme-park companies in recent years. Although most of Merlin's properties are in Europe, it has some U.S. and Asian properties, including the Madame Tussaud's wax museum franchise and Legoland.
It's hard to get a fix on the health of what Blackstone is buying. Since InBev's acquisition of Anheuser-Busch last November, the merged company hasn't provided details about its theme-parks division. Blackstone and Anheuser-Busch InBev didn't say how much -- if any -- debt would be assumed by the Blackstone unit acquiring the properties.
Blackstone's Merlin Entertainments reports that the number of visitors rose 8% and revenue rose 18% in 2008 versus 2007, excluding the impact of a May 2007 acquisition. If the acquisition were included, visits grew 28% and revenue climbed 37%.
Warning: debt ahead
The results haven't been so good for Blackstone's investment in Universal Orlando. Attendance for 2009's first half was down 16% versus the year-ago period, while operating revenue fell 16%.
By midyear, the joint venture had just more than $1 billion in debt, half of which comes due in April. Unless this debt and other debt due in May is paid in full or refinanced on time, a senior credit facility of $500-plus million also comes due in April. The joint venture said it is "highly unlikely" it can pay the April and May notes on time.
At last word, according to an Aug. 7 filing with the Securities and Exchange Commission, the joint venture was "actively working with our partners to explore the alternatives" for the debt.
Revenge of the living debt
Will Blackstone be able to pull a rabbit out of the hat with its deal? Debt has proved to be the bugbear of theme-park operators in the past few years, and the always handy excuse of "weather" has been trumpeted, too.
Too much debt forced Six Flags to seek bankruptcy protection in June. Six Flags has sold some parks and renegotiated some debt schedules, but it decided that Chapter 11 was the best move. For the first six months of 2009, revenue dropped 14% and attendance fell 9% versus the year-ago period; the company cited the bad economy, bad weather, and bad publicity about its bankruptcy filing.
Cedar Fair (NYSE: FUN), a publicly traded limited partnership, just renegotiated a credit agreement that pushes the maturity date for $900 million in debt to 2014 from 2012.
For the first half of the year, Cedar Fair said revenue dropped to $290.6 million from $336.6 million for the year-ago period. The net loss accelerated to $45.9 million, from $29.1 million. The company blamed the economy, the weather, and 39 fewer operating days than the year-ago period.
At Great Wolf Resorts (Nasdaq: WOLF), which operates indoor water parks, second-quarter revenue of $68.6 million rose 8.9% versus the year-ago period, but the net loss grew to $5.7 million from $4.1 million. The company said the second half of 2009 will be "difficult."
No discussion of theme parks would be complete without a mention of Disney (NYSE: DIS), illustrating that bigger doesn't necessarily mean better. For its third quarter ended June 27, Disney's parks-and-resorts revenue dropped 9%, to $2.8 billion, while operating profit fell 19%, to $521 million. Visitors spent less in part because of discounted hotel rates and lower average ticket prices.
Taking the consumers' pulse
If you're an optimist, the Blackstone deal shows that a powerful player forecasts a bright future for the entertainment industry, and as always, the best time to be a buyer is when everyone is running scared. However, if you're a realist, you'll note that theme-park companies were willing to take a revenue hit in the form of discounts just to keep the visitors coming through the turnstiles. That lack of pricing power bodes ill in an industry with high debt. In any case, Anheuser-Busch InBev is glad to be rid of the parks.
While the big players can absorb some consumer skittishness because they're involved in multiple businesses, consumer malaise affects Disney in more ways than just theme parks. For the others, investors should consider their views of consumer confidence and examine the balance sheets to decide when it will be fun to invest in the fun business again.
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