Cedar Fair proposes public offering

Posted | Contributed by Jeff

Cedar Fair today announced its intention, subject to market conditions, to raise up to $250 million in a public offering of its limited partnership interests. The Partnership intends to use the proceeds of the offering to repay a portion of the term loan debt that it expects to incur to finance the previously announced acquisition of the Paramount Parks from CBS Corporation. The Partnership believes the offering, if completed, will allow it to reduce its overall leverage and achieve an economical total cost of capital. The Partnership anticipates that the offering will be completed within the next six months.

Read the press release from Cedar Fair.

Jeff's avatar
Well that's one way to reduce your debt load on such a huge purchase. I'm sure this was always part of the plan.
What does this mean for those of us in FUN already? I can only assume that this new offering increases supply and therefore...? Should I be selling?
Not necessarily. The question is: will the increased earnings of the new combined set of parks offset the dilution of additional units?

CF is so sensitive to their dividend payout---after all, that's why the big institutional investors own---that I'm sure they'll try to stay on the right side of that line.

Alright, I'll admit it, I don't know what this means. Anyone willing to put it into terms that someone who knows nothing about the stock market would understand?
Jeff's avatar
In other words, they're going to sell more units. You hear about tech companies doing an initial public offering (IPO), where they sell stock for the first time. This is conceptually similar, only there is already stock in the marketplace. (And by the way, Cedar Fair is a limited partnership, and therefore has partnership units instead of stock. Aside from tax implications, they're more or less the same thing.)

Companies sell stock to the public to raise money, in exchange for the stock holders (unit holders) owning a piece of the company. Smith asks the right question though, in that if there are more pieces of the company out there, and the company were to stay the same financially, each unit would theoretically be worth less, and it would be a good idea to sell.

However, with the acquisition of Paramount Parks, the company will grow a lot in a very short period of time. Right now there are something like 54 million units outstanding, and when you multiply that time the stock price you get something around $1.4 billion. Assuming for a moment that they can sell new units at $25 a piece to raise the $250 million, that would be another 10 million units total. That puts you in the neighborhood of $1.65 billion.

But consider this... if the company is worth $1.4 billion now, and Paramount Parks really are worth $1.24 billion, then the combined amount is $2.45 billion, well short of the $1.65 billion worth of stock hanging out there. I'm no expert, but to me that means the company would be severely under-valued, and the stock price should go up. The trick is that they'll need to show consistent revenue and profit, maintain the distribution and service debt quickly to pacify investors.

So even with the additional units in the marketplace, I don't think it's possible for the unit value to be diluted unless they do something incredibly stupid.

Thanks for explaining, Jeff. So in theory, if there was a good time to buy, it may be right after this public offering happens?
We'll have to see what the Motley Fool has to say about this. CF is a company whose performance they rate highly.
Jeff's avatar
I think now is a good time to buy, just because the price hasn't been this low in awhile, and I can't think of any legitimate reason for it to be low other than the market in general being down lately. But again, I'm not an expert at investing.
Thanks Jeff...I was not aware of the underlying financials. I'm usually a buy and hold guy...I plan to do the same with FUN. Although I'm researching the possibility of buying more now (given your insight).

There is a lot to be said long term. These guys are major players in two HUGE markets (Toronto and SF) now. Given their past history at running parks...I would think it is a rather safe bet that they will be profitable long term. The only risk I see is the ability to attract initial investors to pay down the debt...? I can't imagine they made this transaction without a good "hunch" that they could easily finance this thing.

The company will grow? Sure in equity but Im seeing a strong trend of declining attendance and price adjustments just to get it's main source of income (Actual guest) To the parks

In other words, They're trying to knock off a chunk of the two billion dollar loan before it's even spent.

Were the Paramount Parks needing price adjustments to keep hold of a decreasing customer base? I was under the impression that Paramount Parks were doing fine and actually turning a nice profit...but they just did not fit into what Paramount's current direction is...?

I understand your point as it pertains to the "old" Cedar Fair parks. Nothing has changed there. What they have done is brought into the fold a new group of supposedly profitable parks. If the premium paid (1.24 billion?)is reasonable (?) then you might think they have improved their lot...no?

Furthermore...we know of Cedar Point's recent (minor?) business woes which certainly are a concern as the flagship park. However, by getting King's Island and Canada's Wonderland they have certainly, to some extent, captured some of the regional market that used to travel to Cedar Point, but instead stayed closer to home in recent years. In other words....they've captured some of that "profit" back by virtue of the proximity of the parks they aquired to their flagship.

I'm not overly bullish or bearish...I just thought I'd throw this out there for disussion.

*** This post was edited by Jeffrey R Smith 6/15/2006 1:06:45 AM ***

IMHO a lot of parks are in for a price adjustment. CP's already done it and I see many others dropping prices.

Average wages going down or remaining flat
Price of fuel being high
Price of everything rising due to high fuel prices

= less money in people leisure accounts.

Any questions because parks and other things are gonna have a wakeup call when people can't afford it.

Gee, it cost me more to fill my car than visit a park but when I can no longer afford both, Which do I choose?


Jeff's avatar
Well the company certainly grows when it nearly doubles in size.

I don't see any particular negative trends as much as I see cyclical trends. Attendance goes up and down, per cap spending by some miracle continues to rise, and most importantly, that number on the bottom line gets bigger year after year. The price adjustments are proactive to keep that bottom line growing, not a reaction to it shrinking.

Selling extra units makes sense to me, especially considering it only knocks off 20% of the Paramount Parks acquisition. That says to me that the company is confident enough to believe that the rest of the chain, new and old parks, will generate enough cash to take care of the debt. Make no mistake, they aren't going down this path and crossing their fingers that they can pay it off. They have a plan, and they will pay it off quickly because the financial performance of the parks is so predictable.

In an article on Motley Fool today, Rick Munarriz calls the offering "a bit of a head scratcher." He didn't go into a lot of explanation of why he felt like he did, but he thought that with a company like CF that pays a healthy dividend, debt would be preferable to equity.

You can check out the whole story on www.fool.com Search for the item called "Cedar Fair Offering Too Much?" (Registration is required). You could also access the article from the www.msn.com by entering FUN in the stock search block, then clicking on news.

Jeff's avatar
Just login with bugme@not.com when you're asked to login.


Rick is saying that the new offering dilutes the value of the stock, and therefore the annual distribution (since the amount they payout has to go to more units). While I get what he's saying, it's as if he's totally forgetting that the Paramount Parks will add more revenue to the company. And by my post above, that additional revenue far outweighs the diluting of the units and distribution.

Cedar Fair is conservative. Like the stick-in-the-mud people that won't take a loan out to buy a car, they don't like paying interest. So when the company takes out a big chunk in the debt with the funds from this new offering, and gets to pay on it with revenue from not seven, but 12 amusement parks (plus the water parks), it gets there a lot more quickly. If they can do it five, six, maybe seven years, whatever it is they think they can do, then all of that revenue going toward servicing debt goes straight to the bottom line, and presumably to unit holders.

Is it a quick turn around and gain? Nope. Is it risky? I don't think so. Will it be an example of ass-kickery that few companies can match in the long run? You bet.

Here is another article from the fool.com saying its a good deal.


Jeff's avatar
Well that makes a lot of sense, as much as corporate finance makes sense. :) My take from that is that they come out sweeter in the long term, but don't trash their credit rating in the short terms so they can keep building new rides. I'm OK with that!
With Cedar Fair making an effort to improve their equity position, this could put them in a better position in the future to build some new parks in areas where they don't have any parks.

Houston is the most obvious example of this. The Houston market is big and with no nearby (day-trip range) competition, a properly done park could draw 2 to 3 million visitors annually. (SFAW did about 1.5 million with a land-locked park lacking hypercoasters or the big B & Ms and Intamens). Putting a park in Texas would place Cedar Fair in a region where they currently are absent.

I asked my broker about this today, and he told me it's nothing earth shattering, but he did mention a few things. He said in general, when a company does a secondary offering, they offer the new shares at a lower price than what the stock is going for. They do this in order to entice people to buy, since there will be millions of new shares available they really want to sell.

But what usually happens is that the regular price of the stock will decline until it meets the price of the secondary shares. If that's not too low, it's no big deal, and in time the shares will probably appreciate again. It all depends on what they set the price of the offering at.

I also asked him about the possible diluting of the shares. His feeling was that CF is a company that many people invest in because of the healthy and consistent dividend, so CF will do everything it can to maintain that. If they would substantially reduce the payout, a lot of unitholders would bail out, and that would reduce the stock price even more.

He said CF is taking on more risk, but there is going to be sizable revenue from the new parks. He thought it better for them to offer more shares and use that income to pay down their debt (what they borrowed to buy Paramount) rather than pay the debt with their normal revenue. In short, it's nothing that hasn't been done before.

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