Looking to make a bigger splash than a killer whale in a bathtub, SeaWorld Entertainment (SEAS -1.65%) reportedly made a $3.4 billion offer to snap up regional amusement park operator Cedar Fair (FUN -0.03%) this week. Bloomberg broke the story, and Cedar Fair is reportedly studying the unsolicited all-cash offer.
It doesn't seem like a plausible deal on the surface. Didn't Cedar Fair rebuff advances when rival Six Flags Entertainment (SIX -0.59%) reportedly made a stock-and-cash offer valued at $4 billion in late 2019? Why would Cedar Fair settle for less? SeaWorld is also doing well as the industry's hottest stock. Why would it risk the bullish momentum with a sizable acquisition and the clunky digestion process that follows? The deal doesn't make sense, but dive deep things become clearer for both parties.
The $3.4 billion question
Let's start with the $4 billion Six Flags deal that never happened. Why is it that having Six Flags take out Cedar Fair at $70 a share didn't make sense, but somehow it's perfectly fine that SeaWorld steps up with an exit strategy for the same investors at roughly $60 a share? Well, late 2019 was a different time, and Six Flags stepped up with a largely stock deal at a time when its stock was moving lower for the second consecutive year. It just wasn't appealing as currency to close a deal, where SeaWorld reportedly has an all-cash offer.
Cedar Fair was also concerned that combining with Six Flags would put an end to its tax-advantaged status as a limited partnership, where the lion's share of its profits were distributed to its investors who don't generally have to pay taxes on the distributions as a return of capital. The rub there is that Cedar Fair hasn't paid out a distribution in 23 months. It should return to profitability this year, but distributions aren't coming back anytime soon. In its November earnings call, Cedar Fair said its priority was to pay down its debt in the near term, resuming its cash distributions in the long term.
It's also fair to say that, post-pandemic, Cedar Fair isn't the same beast we have now. Cedar Fair had the slowest reaction time to the COVID-19 calamity. It essentially phoned it in come 2020, with its revenue plummeting 88%. Six Flags and SeaWorld top lines moved 76% and 69% lower, respectively, that year.
SeaWorld Entertainment -- when it reports financial results later this month -- will show the world that its 2021 revenue topped where it was in 2019. Cedar Fair isn't there. Six Flags isn't there either. SeaWorld stock has more than doubled since when Six Flags and Cedar Fair were playing cat and mouse in the fall of 2019. Shares of the two regional amusement park operators are lower. A $4 billion offer for Cedar Fair in Six Flags stock back then is worth just $3.4 billion now. It's that poetic. It's that pathetic.
Paying $60 in cash for each Cedar Fair unit may not seem like much. It's a modest 21% premium to where it was at Monday's close. However, Cedar Fair was struggling to get that high on its own. Outside of a brief time in October 2019, when news of the Six Flags offer became public, you have to go back 42 months to find the last time Cedar Fair was trading above $60. With Cedar Fair prioritizing the drawdown of its more than $3 billion in debt in a climate of rising interest rates, is an exit strategy really that outlandish?
A cash and stock deal would be better for Cedar Fair than just a tall pile of money, given SeaWorld's rising shares. This $3.4 billion deal is still better and more timely than the missed connection of three years ago. Cedar Fair would look great on SeaWorld's arm. Overlay a map of SeaWorld's parks on top of Cedar Fair properties, and you see a stronger chain of gated attractions across the country. Most of SeaWorld's parks are in the three most populous states in the country, blessed with year-round operating weather. Cedar Fair is absent from two of those three states.
It's not just about the map, though. SeaWorld needs Cedar Fair, too. It will make SeaWorld less susceptible to Blackfish 2 or whatever controversy lights the picketer ire. It will make it easy to sell annual passes, packing more value with more parks bundled together. It will be easier to justify national marketing campaigns instead of regional hits. SeaWorld parks could use more rides. Cedar Fair parks could use more attractions. Meeting in the middle -- with a best-of-breed approach to each operator's strengths -- will make this better than the sum of its parts. If you're not taking Cedar Fair or SeaWorld Entertainment seriously as tastemakers among leisure stocks just see what they can do together. Buckle up, hands up, and enjoy the ride if it happens.