Cedar Fair encourages unit holders to vote against Q Investment proposals

Posted Monday, December 13, 2010 1:04 PM | Contributed by Jeff

[Ed. note: The following is an excerpt from the press release issued by Cedar Fair. -J]

The Board of Directors of Cedar Fair Entertainment Company (NYSE: FUN), a leader in regional amusement parks, water parks and active entertainment, today sent a letter to all unitholders stating its reasons for opposing the proposals submitted by Q Funding III, L.P. and Q4 Funding, L.P. (“Q Investments”), one of the Company’s largest unitholders, to be considered at a Special Meeting of Unitholders on January 11, 2011.

The Board believes the proposed amendments to the Company’s Partnership Agreement would not be in the best interests of unitholders because they would severely limit the options available to the Board in pursuit of its strategy to maximize long-term value. In addition, they would greatly disrupt the Company’s deliberate and ongoing succession planning process that is well under way and is expected to be completed by the end of the second quarter of 2011.

Read the entire press release from Cedar Fair.

Wednesday, December 15, 2010 3:04 PM

I'm no financial guru but I think the difference now is that in this more uncertain economy the institutional investors are seeing that large debt load as a more significant problem and they have been pressing the company on it for the past 12 months or so. So, in order to pacify those heavy hitters they have made these moves.

That is just my take on it having listened in on more of the quarterly conference calls over the past couple of years.

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Wednesday, December 15, 2010 3:25 PM

RatherGoodBear said:
Yes, the CF board paid a one-time $0.25 dividend in November. I was referring to Q's push for a $1.00 dividend. That comes to 25 cents a quarter, which buckeyes1 thinks amounts to Q looking for a quick return on their investment.

Based on the low price that Q Funding paid for its CF units, I suspect that $1/unit/year distribution would be a higher return on investment that other existing Q Funding investments (without any increases in unit price -- bump up in unit price would move their IRR higher)

If paying down the debt is the only thing CF should worry about, perhaps they could drop capital investments for the next 5 or 10 years and devote all that money they've been spending on rollie coasters to reducing their debt.

Who said paying down debt was the only thing CF should worry about?

As a CF unitholder, I don't care about pre-bankruptcy Six Flags. They never paid a dividend and they still had to declare bankrputcy.

So then why bring up the fact that post-bankruptcy SF is trading at 4 times the value of CF and recently announced it will be paying dividend?

But CF purchased Paramount's parks in 2005 or so, yet managed to continue and even increase the dividend to $1.92 per share per year, with the same amount of revenues they announced for this year and nearly the same amount of debt. So what's so different now?

You don't know what happened since 2005?

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Wednesday, December 15, 2010 4:09 PM

wahoo skipper said:
I'm no financial guru but I think the difference now is that in this more uncertain economy the institutional investors are seeing that large debt load as a more significant problem and they have been pressing the company on it for the past 12 months or so. So, in order to pacify those heavy hitters they have made these moves.

Lenders are another reason for the emphasis on reducing debt. Deals that got done 3-4 years ago on high leverage are now only getting done with lower leverage. You either increase your EBITDA (not easy to do in this environment) or you reduce your debt to lower your leverage ratio. Reducing debt reduces interest costs (both in terms of the debt that is repaid and, because interest rates under credit agreements typically are reduced with lower leverage ratios, in terms of the remaining debt).

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Friday, December 17, 2010 11:45 AM

GoBucks89 said:

RatherGoodBear said:
Yes, the CF board paid a one-time $0.25 dividend in November. I was referring to Q's push for a $1.00 dividend. That comes to 25 cents a quarter, which buckeyes1 thinks amounts to Q looking for a quick return on their investment.

Based on the low price that Q Funding paid for its CF units, I suspect that $1/unit/year distribution would be a higher return on investment that other existing Q Funding investments (without any increases in unit price -- bump up in unit price would move their IRR higher)

If paying down the debt is the only thing CF should worry about, perhaps they could drop capital investments for the next 5 or 10 years and devote all that money they've been spending on rollie coasters to reducing their debt.

Who said paying down debt was the only thing CF should worry about?

As a CF unitholder, I don't care about pre-bankruptcy Six Flags. They never paid a dividend and they still had to declare bankrputcy.

So then why bring up the fact that post-bankruptcy SF is trading at 4 times the value of CF and recently announced it will be paying dividend?

But CF purchased Paramount's parks in 2005 or so, yet managed to continue and even increase the dividend to $1.92 per share per year, with the same amount of revenues they announced for this year and nearly the same amount of debt. So what's so different now?

You don't know what happened since 2005?

Many people who purchased the stock when it was down in the $7-9 dollar range probably sold off once it went over the $11-12 mark. I don't know what the exact value of the shares was when Q bought them, but I'm reasonably sure that at least one of their purchases was made when the stock was around $12-13 (it was above the $11.50 price CF was willing to sell to Apollo for). So right now, they may have made 15-20 percent. I doubt a firm like Q is in the business to make that little on an investment. They're looking for 3 or 4 baggers, which they're not going to get only from a $1.00 dividend.

Compared to 2005, their debt is somewhat reduced and their revenues are comparable, if not higher, according to their own press releases. Yet, they're resisting paying a dividend worth half the value they paid before reducing then suspending it.

GoBucks, you're welcome to vote your shares as you wish (if you have any), and I'll vote mine as I wish.

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Friday, December 17, 2010 2:14 PM

Never said a $1/unit dividend was all the Q Funding needed to get to a desirable return. Increasing the dividend would provide a significant increase in their return (even looking at a $12-13/unit purchase price) expecially with a bump up in unit price that would likely accompany an increased dividend (assuming Q Funding was thinking short term). And everyone wants higher returns. But in reality, even the most successful investors do not get them every time.

You don't pay dividends with revenue. You pay them with free cash flow. You need to look at the cash that those revenues are generating. And what other cash needs that they have (such as debt repayments). I haven't compared that data from 2005 to the present. But you also need to look at the economic environment which has substantially changed for the worse in the past 4-5 years. And the outlook for the next year or two isn't exactly glowing.

But with all of that, I suspect that the company is spinning the dividend situation somewhat. They may believe that they could increase the dividend by some amount. However, under their credit agreement, I understand that they cannot pay anything more than about $35 cents/unit/year. I would imagine that CF tried to negotiate a higher level (banks probably started with $0 in their initial drafts). The company may have given on the dividend issue to get other points in the documents with the banks. The banks may have drawn a hard line in the sand on the dividend issue. Company management typically doesn't like to tell investors that they want to do x but their banks won't let them (or they got other concessions as a trade off) so they spin it that they think its better if they don't do x right now. And at this point, there is a good argument to be made for not increasing the dividend. Look at see what happens in 2011 or maybe even 2012 (and revisit with the banks at that point).

RatherGoodBear said:
GoBucks, you're welcome to vote your shares as you wish (if you have any), and I'll vote mine as I wish.

Never suggested anything any different.

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Saturday, December 18, 2010 1:12 AM

But in general, more revenue means more free cash flow, unless something major happens with expenses, taxes, interest, etc. I don't know if there's any reason to believe there would be any major unforeseen increases there.

Other than reinstating a regular, decent sized dividend, do you see anything else that would cause the unit price to go up substantially? For the next year or two, the price will continue to bounce between 12 and 15 dollars. People who happen to buy at the lower end of that range will sell off once they make a few dimes per share, and the price will drop back again. Lather, rinse, repeat.

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Saturday, December 18, 2010 3:26 PM

Check the SEC website for the newest letter written by CF's board. It is a VERY strongly worded letter and directly addressed to Geoffrey Raynor. It basically calls Raynor out as a liar (in CF's terms his "mischaracterizations" and "misstatements") and reitirates his only interests in CF are to realize "the short-term interests of your (his) own hedge fund investors."

Reveals that Raynor turned down an opportunity to sit on the CF board and be intimately involved in the succession planning process. There's 2 paragraphs in there about Falfas in which CF reitirated it was an "unfortuante and unexpected" resignation. It also reveals that Raynor's group has met with Falfas several times since his resignation yet refuses to communicate with CF about his (as in Raynor's) concerns. The letter also mentions, which I think is pervasively relevant, that Raynor's many public demands and ultimatiums is having an adverse effect on attracting the most qualified CEO to the company.

The real kicker is the last paragraph in which CF reitirates that the letter is signed by ALL Board memebers and ALL directors are against his 2 proposals even (as CF put it in the letter) 2 directors Raynor describes as "exceptionally well-qualified and completely independent."

Boy, I would not want to be an investor in CF right now.

Last edited by Buckeyes1, Saturday, December 18, 2010 3:27 PM
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Saturday, December 18, 2010 3:48 PM

No link?

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Sunday, December 19, 2010 1:23 AM

SEC filing here.

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Sunday, December 19, 2010 12:35 PM

Thanks! It's the Internet, and I'm lazy.

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Sunday, December 19, 2010 1:44 PM

I just stole the link from PointBuzz. :)

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Sunday, December 19, 2010 2:06 PM

Obviously I don't know what exactly happened with Falfas, although from what I've garnered, it was not an "unfortunate and unexpected resignation." Now if I'm a unit holder with that impression (and I have to believe that there are some unit holders that know exactly what happened with Falfas) and his departure was not "unfortunate and unexpected", then they just outright lied to their unit holders. What would lead me to believe anything else they have to say?

On the other hand if I'm someone that knows exactly what happened with Falfas and it was "unfortunate and unexpected", then the rest of what they claim in the letter would really have me questioning Q right about now.

As for the every day unit holder that doesn't really have any clue, has got to be confused as heck by now and has no idea what to believe with all this drama.

I hope that made sense.

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Sunday, December 19, 2010 2:16 PM

I'm troubled by that as well, because the rumor and innuendo suggests that it was anything but a voluntary resignation. That's the problem with rumors, but it's also a problem with the lack of transparency. In all of this time, the company never asserted that he resigned. Why not?

Raynor does seem like a douche, and I don't agree with increasing the distribution just for giggles, but I do think the company would be in a much better place with new leadership, and it is proper governance to split the roles of CEO and chairman. I'm also surprised he hasn't pulled the nepotism card yet. That seems like an obvious way to get people to see your side of things.

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Sunday, December 19, 2010 9:46 PM

CF's letter sounds like a pile of crap to me. It's obvious that Raynor has struck a few nerves and forced the Board to make a statement where they normally would have stonewalled and swept everything under the rug.

Re: Falfas. Why is it that only after the group who holds 18% of the units pushes the issue does the Board even offer a general explanation of the circumstances under which he left? Do you think Raynor was the first or only shareholder to ask? The company never made a public statement, they only made the required filing with the SEC. How many average shareholders read the SEC website daily for news about the companies in which they own stock?

As Jeff said, the entire situation is surrounded by rumors and innuendo. The company's opinion has been that it's nobody's business, and nothing anyone needs to worry about. A company acting in the best interest of its shareholders would offer an explanation, even if it weren't the most pleasant news. Also, how can the 2 new members sign off on this since they weren't even around when Falfas was with the company? Are they just accepting Kinzel's take of how things went down?

"This is a board that is solely focused on the best interests of all unitholders." Except when we're telling them to sell their units for $11.50, even if they paid $20-30 some dollars per share. Oh yeah, and when a few officers get golden parachutes in the same deal. Apparently, the Board has different definitions of what the best interest of "all" shareholders is.

"Our successful refinancing has proven to be a very wise move that the market has clearly embraced." I guess that depends on your definition of a clear embrace. If you mean that stock hasn't totally tanked, you may be correct. If you mean the stock has remained at a level well below pre-recessionary levels (even though many other stocks have rebounded and are hitting new highs), I wouldn't call that an embrace. In fact, other than Q/Raynor, I haven't seen any indication of the "buy low, well high" investor grabbing up units.

"We believe Cedar Fair has the strongest management team in the industry, as is evident by the Company's superior product quality and operating margins." Except when the boats don't fit in the trough. And there's that whole other Junior Kinzel thing. And we still think we're going to make a mint on that property out in Aurora. But other than that, yeah, we're the best.

"Statements like this from shareholders will only make it more difficult to attract the best possible CEO candidate." Seriously? We're only allowed to speak about Cedar Fair using happy talk? I didn't know unitholders signed away their rights to make negative statements or complaints when they purchased shares. And Lord knows, any potential CEO's would get all flustered an run away if they didn't hear strains of Kum-Ba-Ya all around them. Better watch what you say on Coasterbuzz-- you might scare off any potential CEOs.

I'm sure other unitholders have voiced concerns to the Board over the years that were simply pooh-poohed and ignored. Finally, there is someone who has weight to throw around, and the board can't handle it. If Q hadn't filed all these lawsuits, I bet most of us would have never heard about these issues, especially people relying only on the contact they receive from company press releases. Raynor is only voicing what many unitholders already think but never had the opportunity to say.

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Monday, December 20, 2010 12:16 AM

RatherGoodBear said:
Other than reinstating a regular, decent sized dividend, do you see anything else that would cause the unit price to go up substantially? For the next year or two, the price will continue to bounce between 12 and 15 dollars. People who happen to buy at the lower end of that range will sell off once they make a few dimes per share, and the price will drop back again. Lather, rinse, repeat.

Any company can increase its stock price (at least in the short run) by paying or increasing its dividends. Doesn't mean that it should when taking a long term view. CF sells a totally discretionary product (in an ever increasingly competitive entertainment industry). A significant portion of its "service area" is in areas hard hit by the current economic problems. My guess is that your average CF customer is more likely to be un/underemployed than your average business. Not sure there is anything that will result in its unit price increasing substantially (short of the weakening of the dollar) in the short term. Don't think the short term unit price should be the goal though. Company has indicated that its goal is to increase the distribution over time. At this point they are taking a conservative approach. Given all the problems that individuals, companies and governments are in with respect to debt, I don't think being conservative can be viewed as incorrect at this point given the current economic climate.

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Monday, December 20, 2010 12:55 AM

RGB- The 2 directors placed on the Board by Raynor I don't think are signing off on much related to Falfas. What they are doing is signing a letter stating that Raynor is lying about the company and has nothing but the short-term interests of his hedge fund investors in mind with regard to CF. I think that speaks volumes about Raynor. 4 months ago Raynor appointed them to the Board... now they are saying he is publicly lying about the company and has nothing but short-term interests in mind. If Raynor really did have long-term plans regarding Cedar Fair, why would he turn down an offer to sit on the Board? Probably because his plan is to get a decent distribution over the next few years and then sell the stock once the unit price increases to x-level, which in will undoubtedly do with an increased dividend. Not a bad plan for buying the stock at the $11.50 range.

I'm also not sure why you are discounting the argument with regards to the succession planning process. It would be one thing if Raynor were offering constructive criticism, ideas or concers (either privately or publicly) but he isn't. He is offering numerous public demands and ultimatiums. Sure, he has a right to do that as a shareholder but how is that helping to attract a well-qualified candidate? Not too many people would want to step into a position where the company's largest shareholder is repeatedly demanding something that is not in the long-term best interests of the company. And as Raynor says, if you don't agree with him, he's going to "actively campaign for removal at the earliest possible time." Do some research on Raynor...it ain't all pretty... CF isn't the first company to claim he is litigation-happy.

Again, I think a wide-reaching leadership change from the outside is the best thing that could happen to the company right now. Kinzel needed to go a decade ago, but with the way Raynor is handling this, I wouldn't be surprised to see people come out in full-force in support of Kinzel. Nothing makes 2 adversaries come together more than another opponent they both hate even more.

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Monday, December 20, 2010 8:15 AM

As far as Falfas goes, the only reason we aren't hearing more about what happened, in my opinion, is that there is a lawsuit pending. In that case it is quite logical that a judge would have ordered both sides to keep quiet and since it involves the two people at the top there aren't likely a lot of others who have any knowledge of what REALLY happened anyway.

As to the succession planning, I don't think Cedar Fair had any intention of doing that before the pressure by Q. It isn't in Kinzel's nature to be proactive about anything so I think all of this is smokescreen to get through the next year or so.

My feeling right now is that I will be voting yes on the measure to separate Chairman/CEO and I will be voting no on the measure to increase the dividend. I think that is a short term, "feel good" measure that goes against common business sense. The debt needs to be paid down before I would be comfortable taking any more distributions.

At the same time, I won't feel good about my investment until I can feel assured that Kinzel has someone watching over his shoulder. I have never felt that with the Board of Directors. And, even though he supposedly is departing in a year, he can do a lot of stupid things in that year.

My hope is that the splitting of the roles passes, a new Chairman is brought in and Kinzel, for the first time in his career as CEO, has someone questioning him which would be too much for his ego and he resigns early. Then they find a replacement in the CEO role. If people really think the company cannot survive without Kinzel at the helm then the company is far worse off than any of us realize.

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Tuesday, December 21, 2010 5:21 PM

Q has now filed another SEC filing which includes a letter from Falfas' attorney that claims he did not resign but was terminated.

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Tuesday, December 21, 2010 5:29 PM

Well - it is certainly a pissing match now - I'm not sure we'll hear the court's final stance until after the meeting though.

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Tuesday, December 21, 2010 5:33 PM

Its like a middle school cat fight. Would be funny if a $800 million company wasn't at issue.

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