Leon Black’s Bid Gets No Respect as Great Wolf Surges: Real M&A

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Apollo Advisors LP founding partner Leon Black. Photographer: Jamie Rector/Bloomberg

Traders who like indoor water parks aren’t taking Leon Black seriously.

Great Wolf Resorts Inc., which runs 11 resorts that feature water slides and pools, has traded above a $5-a-share offer from Black’s Apollo Global Management LLC each day since it agreed to sell itself to the buyout firm. The stock rose again today and is now 12 percent higher than the offer, more than any agreed-upon deal in the U.S., according to data compiled by Bloomberg.

Neuberger Berman Group LLC and WallachBeth Capital LLC say the bid is too low, disputing Chief Executive Officer Kimberly Schaefer, who called the Apollo offer “best overall” after 33 potential buyers expressed interest. While Great Wolf has lost money each year since 2004 as debt payments exhausted its income, Tullett Prebon Plc says future tax benefits from the deficits and the value of its resorts that produce sales year-round mean Apollo can afford to pay at least 20 percent more.

“This bid is the definition of opportunistic,” Yemi Oshodi, New York-based managing director of M&A and special situations trading at WallachBeth, said in a telephone interview. “There were a ton of bidders in here. People were tripping over themselves to bid. Apollo is going to have to bump.”

He estimates that Apollo or another private equity firm could raise the offer to at least $6.50 a share.

Charles Zehren, a spokesman for Apollo, declined to comment on whether it is considering boosting its offer. Black, the 60-year-old co-founder, chairman and CEO of the $75 billion firm based in New York, was also unavailable to comment, Zehren said.

‘Compelling Opportunity’

Carrie Bloom, a spokeswoman for Madison, Wisconsin-based Great Wolf, said she couldn’t immediately comment beyond Schaefer’s remarks to Bloomberg News on March 20.

The agreement with Apollo is a “compelling opportunity for shareholders,” Great Wolf’s Schaefer said in a telephone interview that day.

Great Wolf owns, manages and licenses family resorts featuring indoor water parks, suite-style rooms, restaurants, spas and arcades. The company started its first Great Wolf Lodge in Wisconsin Dells, Wisconsin, in 1997, and the chain has since expanded into eight other U.S. states and Canada.

Shares of Great Wolf, which reached an all-time high of $25.78 in 2005, traded for as little as $2.18 in October before almost doubling in the next four months. On March 13, Apollo said it agreed to buy Great Wolf in a deal valued at about $649 million including net debt, data compiled by Bloomberg show.

Great Wolf jumped by the most in more than three years on the day of the announcement and surged past the takeover price.

Bidding Process

The stock, which ended 52 cents above Apollo’s bid yesterday, advanced 1.3 percent to a more than three-year high of $5.59 today. The gap indicates that merger arbitragers are skeptical of the takeover price and are betting that a higher offer will emerge, according to data compiled by Bloomberg.

“Apollo was the best overall bidder,” Schaefer said in the telephone interview. “We really looked at the highest bid that we could get for the company and the most likely to close this transaction.”

At least 33 potential bidders, which included companies in the theme-park industry and private-equity firms, expressed interest during a process that Great Wolf undertook to find a buyer, the company said in a March 13 filing with the Securities and Exchange Commission.

Of those, at least 11 signed confidentiality agreements to review Great Wolf’s financial statements, including Apollo, which first met with management in June. Apollo made a $4.65-a-share offer in December and raised it twice to $5 a share as competing buyers bid $5 and $5.05 a share, the filing showed.

Fair Value

Deutsche Bank AG, Great Wolf’s own financial adviser, valued the company at $3.74 to $7.98 a share based on comparable transactions in the industry, according to the filing.

In its deal with Apollo, Great Wolf was required to adopt a shareholders’ rights plan to thwart hostile acquirers and agreed not to solicit other interested parties. It will also pay the buyout firm $5.3 million, and up to $1.7 million in Apollo’s expenses, if the company accepts a superior offer.

“The company is worth substantially more than $5 a share,” Richard Nackenson, the New York-based manager of the Neuberger Berman Multi-Cap Opportunities Fund, said in a telephone interview. Neuberger Berman, which oversees $193 billion, owned about 6 percent of Great Wolf as of Dec. 31. “There is now an opportunity on a going forward basis for the public markets to recognize a higher valuation.”

Nackenson says that Great Wolf is worth $8 to $9 a share, based on his estimates for free cash flow and earnings before interest, taxes, depreciation and amortization in 2013.

Theme-Park Deals

Apollo’s agreement values Great Wolf at 8.4 times its Ebitda in the past 12 months, data compiled by Bloomberg show.

That’s about 20 percent less than the median 10.4 times multiple for announced takeovers in the resorts and theme-park industry of at least $500 million, the data show.

Among publicly traded targets, just one successful acquisition, Goldman Sachs Group Inc.’s buyout of Japanese theme-park operator USJ Co., was cheaper. Two other asset sales of theme parks were also less expensive, according to data compiled by Bloomberg and Standard & Poor’s.

NBC Universal bought the 50 percent stake in two Universal Studios theme parks in Orlando, Florida, from Blackstone Group LP that it didn’t own for less than 7 times Ebitda, while Blackstone acquired Anheuser-Busch InBev NV’s amusement park business at a multiple of about 7.4 times Ebitda, the data show.

The agreement with Apollo prompted shareholders to sue Great Wolf, claiming it didn’t get the highest possible offer.

Poison Pill

The so-called poison pill provision also makes it harder for any acquirer other than Apollo to buy the company, Scott Ferguson said in his complaint, filed March 15 in Delaware Chancery Court. Ferguson and David Raul, custodian for another shareholder in a separate lawsuit, seek to represent all Great Wolf shareholders in an effort to get the court to bar the deal.

Great Wolf said in an SEC filing that the lawsuits were “baseless and without merit.”

One reason Great Wolf deserves a higher price in a takeover is because its indoor resorts are able to generate revenue year-round, unlike most amusement and water parks, which are seasonal and close for parts of the year, according to Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon.

Annual sales at Great Wolf have never declined since becoming a publicly traded company in 2004, according to data compiled by Bloomberg. In 2008 and 2009, during the worst recession since the Great Depression, revenue increased by 31 percent and 7.5 percent, respectively, the data show.

‘No Brainer’

As American families continue to seek out deals and cheaper getaways, revenue is projected to reach records this year and next, according to analysts’ estimates compiled by Bloomberg.

“The bottom line here is that the company is actually growing every year,” Shah said. Even with the recession, “parents were paying to go and stay there. It’s almost like a hotel meets amusement park. This is a no brainer,” he said.

He values Great Wolf at about $6.50 a share as an independent company. Including the potential tax benefits earned from Great Wolf’s net operating losses, which a buyer can take advantage of when it becomes profitable, the company could be worth $8 to $8.50 a share, Shah said.

The amount that Great Wolf owes to its creditors could still dissuade some buyers and could keep Apollo from increasing its own bid, according to William Marks, a San Francisco-based analyst at JMP Securities. The company has $515 million in total debt, almost three times its market value of $185 million, according to data compiled by Bloomberg.

Value Proposition

Great Wolf’s suburban locations and the cost of maintaining its resorts could also reduce its attractiveness, he said.

“The stock market certainly thinks it’s going to sell at a higher price and it’s possible that that happens,” Marks said in a telephone interview. “There are issues though.”

“The locations are not in key urban areas, they include high-maintenance water parks, and the leverage of the company is higher than an average hotel,” he said.

Apollo also met with resistance from investors when it attempted a theme-park takeover in December 2009. The firm offered to buy Sandusky, Ohio-based Cedar Fair LP for about $2.2 billion including net debt, or $11.50 a share, according to data compiled by Bloomberg. The amount valued the amusement-park operator at 6.9 times Ebitda, a lower multiple than what it agreed to pay for Great Wolf, the data show.

After Cedar Fair’s shareholders rejected the transaction, Apollo called off the deal in April 2010 and the company remained independent. Cedar Fair’s shares have since more than doubled to $29.48 as of yesterday’s close.

‘New Frugality’

The difference is that Great Wolf is a more attractive takeover candidate because its revenue growth is more stable than other theme-parks and deserves a higher valuation than Apollo is offering, according to Tullett Prebon’s Shah.

“There’s a new frugality in this country now,” WallachBeth’s Oshodi said. “You drive your car there, you spend the night and you have some good, clean fun and it doesn’t cost you a lot of money. That’s in demand now.”

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