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A Rough Ride
The Amusement Park Industry has fallen on hard times. The U.S. economy had been in a prolonged downturn until approximately the middle of last year. This put at least some pressure on attendance figures. However, the primary problems affecting the industry are a bit more deep-rooted. Barriers to entry are extremely high in the industry, due to its capital-intensive nature. Therefore, there are only a few major competitors. However, overall competition is quite intense. Most amusement parks operate with a large amount of debt owing to the immense capital investment. What’s more, the aforementioned aggressive capital spending programs needed for a competitive edge also adds financial strain.
Many companies have felt the ill effects of too much leverage. One that comes to mind is Cedar Fair. The partnership had to take on debt to finance the acquisition of Paramount Parks. Though the transaction proved good for geographic diversification, the increased leverage led to significant cash-flow problems. In fact, the partnership suspended its dividend late last year, which is very uncommon for a limited partnership. The partnerships’ stock price fell sharply following that news. Cedar’s debt-to-total capital ratio was just over 90% at the end of the third quarter. However, an affiliate of Apollo Global Management came to the rescue with an $11.50-a-share cash offer for FUN unitholders. The deal represented a 26% premium to the prior day’s closing price. The $2.4 billion transaction is likely to close by the end of the second quarter.
Cedar wasn’t the only company that was acquired by a private equity firm. On October 7, 2009, Inbev announced that it had sold all of its Busch Gardens amusement parks to The Blackstone Group for $2.7 billion. The deal included all of Busch’s Entertainment properties, and was finalized on December 3, 2009.
Competitor Six Flags, however, wasn’t so lucky. The company has lost money in every year since 1998, while amassing more than $2 billion in debt. Shareholders revolted claiming that the company had overexpanded and was mismanaged. In 2004, the Six Flags began to sell assets in order to help lesson the financial pressure. However, this only lessened the bleeding. In 2008, the company filed for Chapter 11 bankruptcy protection. Six Flags is now in the process of reorganizing its operations in an attempt to return to profitability. The stock is no longer listed on the New York Stock Exchange.
Meanwhile, there are some major changes going on at industry bellwether Disney (DIS), where the parks remain profitable. The company’s long-time CFO, Tom Staggs, now runs its Parks and Resorts business, while Jay Rasulo, who formerly ran that division, will assume the role of CFO. Profits at the Parks and Resorts business have declined this year, reflecting a drop in consumer spending and travel due to a weak economy. In the near term, Mr. Staggs appears to have a lot on his plate. He will attempt to engineer a turnaround at Disney’s U.S. theme parks by paring discounts without hurting attendance figures. Over the longer pull, he hopes to successfully incorporate a cruise line that will double in capacity by 2012. What’s more, the company will open a Hawaiian hotel and time share next year. Earnings growth will be difficult to achieve, as Disney already has a substantial market presence and meaningful expansions require millions in capital resources. On the international front, Disney plans to expand its parks in Hong Kong, while opening up a facility in Shanghai, China. Disney is a huge conglomerate (Parks and Resorts account for about 30% of revenue), and thus we don’t think that it will have any profitability issues, or face the possibility of a buyout.
Although the Amusement Park industry has fallen on some difficult times, we don’t expect it to go away anytime soon. Some of the problems that the sector is facing today are the result of economic issues, which we believe will pass when conditions strengthen. Also, the active role of private equity firms in snapping up highly leveraged companies is a positive sign for the long term.