Q Investments wants Cedar Fair to reinstate distribution

Posted Wednesday, May 12, 2010 6:07 PM | Contributed by Jeff

Q Investments, the Texas-based hedge fund manager that owns 18 percent of Cedar Fair, said in a letter to the company's board of directors on Wednesday that it believes Cedar Fair can afford to pay at least half of the recently cancelled dividend - 50 cents per share, per year - to investors beginning this year.

Read more from The Plain Dealer.

Wednesday, May 12, 2010 7:42 PM

You think they'll continue to make demands on a one per week basis?

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Wednesday, May 12, 2010 9:16 PM

Didn't take long for this particular other shoe to drop.

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Wednesday, May 12, 2010 10:16 PM

Sounds like Q isn't in this for a quick flip... :)

--Dave Althoff, Jr.

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Wednesday, May 12, 2010 11:27 PM

I think an activist investor is exactly what this company needed after particularly the last decade, where nothing has ever been challenged.

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Thursday, May 13, 2010 12:41 AM

Why was nobody from Cedar Fair available for comment on this story? Was everybody out measuring the boats?

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Thursday, May 13, 2010 1:06 AM

I rather like the approach Q has taken, essentially saying, "We don't really want to run the company, but we're also not real happy with the way the company is running." It's less scary than an outright takeover bid, but it looks like it might get some much needed changes invoked.

It's an interesting strategy, and when Q talks You Know Who into retiring, he'll probably think it was his idea all along...

--Dave Althoff, Jr.

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Thursday, May 13, 2010 8:39 AM

I think Cedar Fair is doing the right thing paying down debt. With a distribution unit holder have to pay income tax on it. The same money used to pay debt mean the stock is worth more with no tax hit until you sell.Plus not paying down debt you end up where six flags is.

It is a good thing to do unless you need to show your boss/company owning this stock is a good business move "Yeah there is no dividend but at some future point years down the road the stock will be worth more"

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Thursday, May 13, 2010 11:04 AM

I believe tax is part of the issue. If FUN shows a profit this year (and there is no reason to believe they will not; their worst year was still profitable) then the unit holders are on the hook for paying a share of the income tax, even if they don't get a distribution. My understanding (what do I know; I am not a unit holder...) is that the tax liability associated with holding units of FUN is usually lower than the income from the distribution. But if there is no distribution, then holding units of FUN actually *costs* the unitholder money.

Or something like that. Any unitholders want to try and explain it?

--Dave Althoff, Jr.

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Thursday, May 13, 2010 12:10 PM

Dave is right. At the very least, you want to cover whatever you're on the hook for. For smaller investors, the amount is negligable anyway, but still. The bigger issue is that no one ever bought Cedar Fair for its growth potential, they bought it as an income stock. For years it was payoff out at a rate of 5-7%, almost as if it were a sure thing.

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Thursday, May 13, 2010 12:53 PM

I think the theory is that none of the unitholders is going to have an income that is as great as that of the Partnership, so instead of paying income taxes as a Partnership the unitholders cover the tax liability on their personal income taxes, since they are taxed at a much lower rate than the Partnership would be, and as unitholders they are (in theory) receiving the income from the Partnership anyway, in the form of the unitholder distribution.

So conceptually, at least, Q is right in saying that the Partnership should reinstate the distribution, as the distribution is supposed to be the vehicle through which the Partnership disposes of its profits. Absent the debt load, that's what they should be doing. Right now the question is one of whether it is better to maintain a distribution, or to accelerate retirement of the corporate debt.

--Dave Althoff, Jr.

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Thursday, May 13, 2010 2:39 PM

^Dave how come you know so damn much about everything???

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Thursday, May 13, 2010 2:48 PM

It was my understanding if the money (profit) is used to pay debt then it is not profit (it is a charge off for the year)so no taxes are paid on that "profit" I could be wrong .

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Thursday, May 13, 2010 3:54 PM

I'd be shocked if business interest expense was deductible.

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Thursday, May 13, 2010 4:29 PM

RideMan said:
Sounds like Q isn't in this for a quick flip... :)

--Dave Althoff, Jr.

What makes you say that? Reinstating the dividend will increase the unit price quickly. Paying down the debt is long-term.

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Thursday, May 13, 2010 6:01 PM

Unitholders' distributions would be taxed at whatever the rate of capital gains is. With the profit or loss, the total is divided by the number of shares currently held (not outstanding), and each holder is assigned their share of the profit in proportion to the number of units they hold.

The difference is, holders receive a Schedule K-1 from CF, and their share of the profit is added directly to their income on their 1040s. So say the company reports a profit of $2.50 a share, and you own 200 shares, your portion of the profit is $500. Now, you never got a check from CF for $500, or merchandise or tickets worth that amount. But on your tax return, you would have to add that $500 as income, even though CF might be taking that money and paying off their debts with it.

In general, if there's a profit, it's better for a limited partnership to pay a sizable portion of it out to shareholders as a dividend.

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Thursday, May 13, 2010 6:39 PM

Partnerships do not pay income taxes at the partnership level; they are pass through entities for income tax purposes. Partners owning the partnership pay taxes on their pro rata share of the income of the partnership whether or not the partnership makes any distributions. Distributions are not taxable income to the partners but are typically made to help partners pay taxes on the partnership's income. If a partnership has income but makes no distributions, the partners will have income tax liability. If the partnership has no income but makes a distribution, the partners will have no income tax liability. Partnership itself will not pay any income taxes in either case. Partnership income increases basis of the partnership units owned by the partners and distributions reduce that basis. Limited liability companies and limited liability partnerships are also pass through entities.

Corporations are not pass through entities. They pay taxes on their income and their shareholders pay taxes on dividends that are paid on their stock. Commonly referred to as double taxation. If the corporation has income but pays no dividends, the corporation will pay income taxes on its income but its shareholders will not have any income tax liability. If the corporation has no income but pays a dividend, the corporation will not have income tax liability but its shareholders will.

My guess is that Q wants some help paying its share of CF's expected income for the year and going forward. Can't blame them for that. They will need to work with management and the lenders to determine if that is workable and on balance what level of distribution will make the most sense in terms of reducing leverage and restoring the distribution.

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