On Friday the peculiarly public bidding war for Great Wolf Resorts (NASDAQ: WOLF) between private equity powerhouses KSL Partners and Apollo Global Management (NYSE: APO) came to an end. Apollo upped its bid to $7.85 a share, an increase of 57% over its initial bid of $5, and KSL walked away on Friday. Deutsche Bank, serving as investment bank for Great Wolf, submitted a valuation analysis that priced the takeover valuation range between $4.40 and $5.70. So what exactly is it about Wolf Resorts that has Apollo howling at the moon?
The theme park space is very competitive with the likes of Disney, Six Flags, Cedair Fair and Universal, but direct competition from indoor waterparks is limited. There are 47 indoor waterparks with at least 30,000 square feet of attractions and Wolf operates 11 of those.
The sales pitch in the Apollo boardroom may effectively be summarized in this sentence from the Annual Report regarding new ventures: We expect each of these joint venture arrangements would involve us having a minority or no ownership interest in the new resort. Upkeep on the parks must be outrageous pumping water to all the rides. There is no doubt that one of the most lucrative components of this buyout would be to sell parks to property management firms and receive licensing and royalty fees. Great Wolf has already sold off three of its parks and is a minority stakeholder in another.
As shown from the chart, Great Wolf currently owns at least a stake in 8 of its 11 resorts. Selling these to a property management company while maintaining a revenue stream via licensing and royalty agreements will alleviate much of the cost burden of running these resorts while maintaining a steady cash flow. Many of its competitors parks are closed for parts of Q1 and Q4, but Great Wolf Resorts are open year round which makes cash flows more predictable and limits seasonality (both private equity friendly).
There is a slight bump during spring and summer, but Wolf isn't nearly as reliant on Q2-Q3 as Six Flags (NYSE: SIX) and Cedar Fair (NYSE: FUN). Summer gas prices will put immediate pressure on revenue for competitors. Great Wolf management suggests a majority of customers live within reasonable distance of the resorts and that they typically drive to them. Major theme parks draw from much larger markets and could see their summer numbers struggle as longer travelers substitute to cheaper, closer options.
Another factor that may have wooed Apollo is Wolf's inventory. Wolf's average daily rate (ADR), the average revenue for an occupied room across its portfolio of hotels, is $201 for its smaller resorts and $279 for its larger resorts. The smaller resorts, referred to by management as Generation I, also have a lower occupancy of 55% compared to larger resorts, or Generation II, that have 66%. Increasing occupancy is a sure fire way to increase both revenue and margin. The increased cost of running a resort with 265 occupied rooms versus 244 is negligible. Let's assume that Great Wolf is able to increase occupancy by 5% in Generation I resorts and 10% in Generation II locations. These increases are not outlandish; Marriottâ's occupancy was 70% last year.
Increasing occupancy by realistic figures adds $25 million in annualized revenue and probably makes Wolf profitable next year assuming overall revenue is also able to increase. Net loss last year was $25M, I can guarantee a modest marketing budget with some promotions can get these occupancy figures up. I can also guarantee you that Apollo will find ways to increase RevPOR, or Revenue Per Occupied Room, a hospitality metric that takes into account revenue obtained thru amenities above and beyond room fare. On the expense side, management alludes to Wolf's debt being poorly capitalized, Apollo should be able to refinance a ton of debt into more manageable obligations.
But it is not all sunny skies for Apollo, after all the sun doesn't shine at all at an indoor waterpark. It is very possible that the firm's judgment was clouded by its failure to secure a deal with Cedar Fair back in 2009. Since that deal fell through, Cedar Fair has been on fire, up 200% versus market gains of around 25%. The chart below, compliments of Morningstar, shows Cedar's rollercoaster ride upwards since its Apollo deal fell through. There is no doubt that the failure to get that deal done played a role in the high stakes bidding war with KSL.
With a bid increase of 57%, egos were definitely at play and it is possible that Apollo may have drastically overpaid for this indoor water park that had a loss of $25M last year and $51M the year prior. But the classic private equity opportunity is present. Wolf has a ton of assets that can be sold while maintaining royalties and the company has already committed to expanding future parks through this model. Is it possible this is a wolf in sheep's clothing and Apollo may not make money on the deal? Yes, but it will be interesting to see how it plays out.