|Shares Out. (in M):||55||P/E||100x||8.8x|
|Market Cap (in M):||550||P/FCF||4.2x||4.5x|
|Net Debt (in M):||1,775||EBIT||229||200|
Idea: SHORT Cedar Fair Entertainment (NYSE: FUN)
Mkt Cap: $550m
Dividend Yield: 10%
Cedar Fair is reporting tomorrow. They are going to miss expectations by a long shot. They are likely going to have to suspend their dividend distribution starting 12/31/09. The Company will survive long term, suspending this dividend is a very important move as the co. is running very close to the edge right now, they are way too tight on cash needs with the dividend in place, and retaining this dividnd is the right long term move as FUN needs to pay down quite a bit of debt before it matures, needs to be refi'd at MUCH higher rates, and the company really gets itself in trouble.
I tend not to like short term calls, and this is VERY short term (with an earnings announcement tomorrow). However, this overlevered, 3rd tier amusement park operator is being propped up by a dividend that I believe is about to come to a halt (they've already had to cut it 50% this year). I wish I could have posted this with more forewarning, but I just started looking at this again last night. I'm very familiar with the company as I narrowly averted being duped into buying a few years ago while debt was still cheap and plentiful (the key to their equity investment thesis). I took a look at where they stand today for the first time in 18 months and was very surprised.
As it is the day before announcement I will keep this write-up quick, happy to expand in Q&A
Quick thesis for near term movement:
1. Stock is propped up by it's 10% dividend yield
2. Dividends can only be paid out if the company stays under a maximum leverage ratio (steps down to 4.75x starting December 31, 2009)
3. Company is nearly all fixed costs, earns the full year's EBITDA in the 3Q every year (highly seasonal amusement park operator)
4. Has AREADY REPORTED revenues are down 10% for the 3Q through August - July & August are the lionshare of earnings for the amusement park business. Usually a stable business, however it has been very cold and wet throughout their markets this summer (those living in the NE can attest) - see climate charts here: http://www.ncdc.noaa.gov/sotc/?report=national.
5. Even if you get very aggressive on free cash flow and EBITDA between now and year end, they will wind up >4.75x levered, will have to suspend the dividend, and I expect the stock will plummet to a more reasonable level.
Longer term problems - (reason I didn't buy the stock initially):
1. FUN business model is entirely dependant on leverage. A capital intensive, steady cash flow asset base. FUN has levered up with cheap debt to maximize dividends to shareholders (it's an MLP, pay 100% of cash flow out essentially). If cheap plentiful leverage is not available, and this is a very low growth asset, when debt matures and they need to refi, much of the cash flow to equity that currently creates such an attractive FCFE yield will need to be diverted to paying off higher-cost debt.
2. FUN is overlevered. FUN completed a major asset purchase of Paramount's Parks in 2007, FUN levered up heavily with the intention of issuing equity to pay down debt afterwards. The Company's equity valuation started to fall and mgmt kept waiting for a rebound to issue equity at a good price. Rebound never came, so here they sit hugely overlevered
3. Core assets are exposed to bad markets - significant exposure in economically hard-hit areas, flagship properties in auto-manufacturing Midwestern regions
However, despite what will be an overwhelmingly terrible quarter, I do believe the company is largely resistant to downturns. It is a trade-down vacation (or at least it would be if it wasn't catering to a Flint, MI client base). This 3rd quarter is partially driven by the economy, but also heavily driven by bad luck with a cold, wet summer (btw 3rd quarter is their ENTIRE YEAR because it's such a seasonal business). However, this one bad quarter will be enough to likely wipe out the dividend for the next year at least, which is the only ground the stock is standing on today.
Cedar Fair, L.P. owns and operates amusement and water parks in the United States and Canada. The company owns 11 amusement parks, including Cedar Point located on Lake Erie between Cleveland and Toledo in Sandusky, Ohio; Kings Island near Cincinnati, Ohio; Canada's Wonderland near Toronto, Canada; Dorney Park & Wildwater Kingdom located near Allentown in South Whitehall Township, Pennsylvania; Valleyfair located near Minneapolis/St. Paul in Shakopee, Minnesota; Michigan's Adventure located near Muskegon, Michigan; Kings Dominion near Richmond, Virginia; Carowinds in Charlotte, North Carolina; Worlds of Fun located in Kansas City, Missouri; Knott's Berry Farm located near Los Angeles in Buena Park, California; and California's Great America located in Santa Clara, California. It also owns and operates the Castaway Bay Indoor Waterpark Resort in Sandusky, Ohio; six separate-gated outdoor water parks in Missouri, Ohio, and California; and five hotels. Cedar Fair Management, Inc. operates as a general partner of the company. Cedar Fair, L.P. was founded in 1983 and is based in Sandusky, Ohio.
I've shown below a few key quarterly metrics. The big question is 3Q09 numbers. The company has already reported Q3 results through August of attendance down 10%, spending per guest down 1%. July and August comprise the vast majority of Q3 results as the amusement park biz trails off in September.
So we KNOW the revenue number is down significantly (I est. down 9%, trying to give them benefit of the doubt at every turn).
Amusement park cost structure is HIGHLY fixed. It's running the rides, paying employees, just a bit of marginal costs in some food/merchandise (about ~35% of revenue). They have reduced headcount in the past year, they are making a concerted effort to squeeze costs out of the business as the downturn in the debt markets has left them very exposed. In the past 3 quarters, they've managed to reduce COGS by approx. 8%, and SG&A by approx. 12%. These cuts were made off the far smaller, off-season numbers. To give FUN maximum benefit of the doubt for cost-cutting, I've extended these percentage declines to the much larger Q3 numbers in my analysis, AND assumed they can take an additional 15% cost reduction in all additional high-season expenses (e.g. for peak season expenses that we haven't seen in the prior quarters, they are able to reduce COGS and SG&A by 8% and 12%, respectively, then an ADDITIONAL 15% on the added expenses for the peak quarter).
In sum, this gives me a quarterly EBITDA number of approx. $260m. Note, this estimate is VERY HIGH. I don't expect them to beat $250, however I think these figures are the "worst-case" for someone with a short position. This would actually represent an INCREASE in EBITDA margin, which is almost laughably optimistic with revenues down 10% on a cost structure that is largely fixed costs.
This would generate LTM EBITDA of approx. $315m. 4th quarter is not a large contributor to EBITDA, and they have a very tough comp coming up due to aggressive promotions at Paramount's California properties last year. I think they'll be very lucky if they ended the year with $315m of EBITDA.
The leverage test to pay a dividend is 4.75x, which means debt cannot be higher than $1.5B. Debt at the end of Q2 was approx. $1.775B. They will generate positive free cash flow in Q3, negative free cash flow in Q4. Again, being hugely generous on the estimates, I assume FUN generates the same amount of FCF in 3Q09 as they did in 3Q08, despite the significant EBITDA decline. I credit them for a land sale they completed in Q3 (assume no taxes paid on it), and very low capex. I can't see how they will come in shy of $1.5B net debt at the end of the 3rd quarter, much less come in low enough to sustain negative cash flow in the 4th quarter.
In short, despite being very aggressive in my assumptions, I don't see how this business meets the 4.75x covenant and continues to pay dividends. Below, simplified projections for the 3rd Quarter - these I believe are the absolute best FUN will achieve, expect actual results much lower).
|Rolling EBTIDA||340.1||336.4||352.4||343.4||355.2||353.4||335.2||314.7||<<VERY GENEROUS estimate, expect $300|
|Cash from Ops||(69.0)||75.1||194.3||(18.2)||(53.0)||96.0||205.9||(33.6)||(69.6)||85.6||205.9||<<Give them credit for full cash flow like last year (unlikely)|
|Capex||(21.4)||(31.8)||(13.6)||(11.7)||(25.3)||(35.5)||(12.5)||(10.4)||(22.9)||(18.3)||(10.0)||Record low Capex|
|Property Sale||50.0||(assume no tax)|
|Cash Flow||(90.4)||43.3||180.7||(29.9)||(78.3)||60.5||193.4||(44.0)||(92.5)||67.3||232.1||<<Best Cash flow FUN can hope to achieve|
|** Q4 Cash flow always negative - most locations closed|
With only a $500m mkt cap, FUN does not have much analyst coverage. Keybanc and wells Fargo both follow the stock. Both have noticed that the dividend covenant may get tight, but they are inexplicably projecting flat or slightly down EBITDA this quarter despite all that management has already announced about the quarter through August.
|Q3 EBITDA Expectations|
|Mine||282.4||261.8||High (shown in analysis)|
Management just declared the Q3 dividend last week. This is very strange behavior if the facts are going to play out the way I expect them to. However, I just can't see a way to keep the company under the 4.75x max leverage for a dividend covenant, so I expect that Q3 payment will be the last for a while. Trading ex-dividend as of today.
Also, the Blackstone / Busch Theme parks deal was done at approx. the current trading level of FUN (but with a much better cap structure). I don't think FUN gets taken out at current levels, however this is an arena that has always attracted Private Equity interest.
I can't see how FUN will continue to pay it's dividend following 12/31/09. Shareholder base is very dividend focused. This would follow on a 50% cut in the dividend earlier this year, which was not enough. I expect the stock to trade down significantly if the dividend is suspended.
Again, I apologize for the very late posting of this idea - just started looking at the Company last night. I'm never a quarter-to-quarter earnings watcher, but refreshed my work on this, and I think the idea is unusually compelling. If nothing else, I don't see much upside to this stock in the Q3 reporting, if they somehow manage to squeak through and can pay dividends, well, you can take off the short. Not sure what the borrow is like on this, I'm prohibited from shorting so had to buy overpriced put options. Best of luck if this reaches you in time!
3rd quarter reporting TOMORROW
|Subject||RE: RE: FCF yield|
|Entry||11/03/2009 09:15 AM|
Yeah - my timing was not very helpful to others looking to get in. My apologies for that, hadn't looked at the name for a while, just took a look again yesterday, and rushed this to print after getting my position in -- quick decisions on short-term trades like this not my bailliwick.
The dividend announcement 2 weeks ago VERY STRANGE if this is going to play out as I expect, this is what gives me the most pause about the idea. Just can't imagine a management team in their right mind making that announcement. However, I take comfort from the fact that the downside risk on shorting this today is low -- whether or not they trip the covenant and are prohibited from paying dividends, this will be a terrible quarter. If they don't trip the covenant, it shouldn't be too expensive to trade out.
If they do indeed take the EBITDA tumble I expect, they won't have any choice around the dividend suspension, it's in their credit agreement. So they wouldn't need to announce anything, it would be clear that they can no longer payout, and I'd think they'd have to address it. Just saw this AM that their conf call is listen-only unfortunately.
We'll see, still waiting for the earnings release....
|Subject||3rd Qtr EBITDA $264.6 mm|
|Entry||11/03/2009 09:22 AM|
What's your take on earnings so far?
|Subject||Earnings Released - Just as Expected|
|Entry||11/03/2009 09:40 AM|
Happened just as expected - They have to suspend the dividend.
So here's the quick read on results before the conference call:
1. Quarterly EBITDA number in at $264.6m.
a. This is against my number above of $262m, worse than the analyst estimates ($282m from KeyBanc and $271.5m from Wells Fargo)
2. Gross Debt at quarter end (net debt not reported) of $1.6B, higher than my debt expectation (as discussed, mine was rigged to be as optimistic as possible), but they haven't reported cash.
So, we end up with $317m of LTM EBITDA, somewhere between $1500-1600 of debt, they are well through the 4.75x covenant and will have to suspend dividend per the credit agreement. 2 more quarters of negative cash flow coming from the seasonality, so this is a lock.
Now - how will the market react?
|Subject||RE: 3rd Qtr EBITDA $264.6 mm|
|Entry||11/03/2009 09:44 AM|
Hey David -
Dividend will be suspended. Now it's just a question of how the market reacts. I think most holders of this stock are in it for the dividend yield.
The risk is - suspending the distribution and repaying debt actually the right move for the company. If I owned the stock I'd be happier the dividend ceased (though terrified at the results). But I think this shareholder base holds the stock mostly for dividend, will be interesting to see what happens.
They beat my rev number, but cheated by keeping parks open longer. Came in right on EBITDA (which is bad). They've also said October will be a complete disaster, so the hits just keep coming....
|Subject||Worse than thought - NEW PROBLEM|
|Entry||11/03/2009 10:57 AM|
Just heard the conf. call - (on a listen-only line unfortunately).
Some quick back of the envelope calcs that concern me. Company has two leverage covenants in the credit agreement ---
1. Leverage Covenant that requires they stop paying Dividends if broken (steps down to 4.25x 12/31).
2. Max leverage covenant - a regular default covenant (steps down to 5.25x at 12/31)
I've been focused on the sure thing they'd break the dividend paying covenant. Based on results, it now looks like a sure thing they break the default covenant:
$317 of LTM EBITDA x 5.25 = $1,664 of debt allowed (if EBITDA stays stable, which it won't)
They've got $1,600 debt now, so they can withstand $64m of negative cash flow and stay within the covenants.
For the past two years, cash flow for 4th and 1st quarters always negative:
4Q08: +71.8m net debt
1Q09: +119m net debt
And these aren't normal conditions - They've told us October rev is down 11% (and remember this co. is nearly all fixed cost structure). How could they not run up at least $64m of debt?
And this is all if EBITDA is stable -- LTM EBITDA is probably going to come down further too since Q4 last year is such a difficult comp and they've already told us that October (biggest month of the 4th quarter) revenues are down 11% on a fixed cost structure.
|Subject||RE: RE: 3rd Qtr EBITDA $264.6 mm|
|Entry||11/03/2009 11:05 AM|
Great call. Congrats. Any thoughts on valuation or where you may look to cover?
|Entry||11/03/2009 05:13 PM|
This was a great call and solid writeup, but seriously, the day before, in the late afternoon???
|Subject||RE: RE: Heads up?|
|Entry||11/03/2009 06:18 PM|
I know, I know. Really wished I had gotten it up earlier, but again, just lucky enough to peruse the financials for the first time in a while yesterday, was just happy to come to a conclusion in time to trade myself.
Agree, for super-timely stuff like this maybe makes sense to just get the basics up fast and support later (and be ready to get a lashing from the very thorough constituency of VIC).
I'm doing a quick little update at the moment now that the smoke's cleared on the NEW 5.25x default covenant risk. Will post in a while for you guys. Spoke to the sell-side today and they initially acted like I had 3 heads, so I don't think this new revelation is in the market yet (though that may have changed during our discussions). But hopefully sell-side either won't write about it or get their work out late so you all have a chance to assess the situation in the AM. Riskier to wade in at these levels, but there's still some big bad news coming that mgmt avoided being open about today....
|Subject||RE: Apollo buyout|
|Entry||02/01/2010 06:25 PM|
PGTenny, do you have any updated thoughts on the Apollo buyout situation? It looks like Q Funding along with Neuberger Berman will vote against the acquisition, and as a result they will likely have more than the 1/3 vote they need to block the deal. If that happens my understanding is that FUN will have to pay Apollo's expenses up to $6.5mm, and Apollo can terminate the agreement without paying any termination fee. The "go-shop" period ended without any other buyer emerging and as a result it appears that Apollo is the only buyer interested in FUN. See Dealbook's Deal Professor article below:
Meanwhile, as you wrote previously it appears that FUN will breach its 5.25x total leverage covenant by the end of this, the first quarter of 2010, assuming they didn't already in 4Q09 (by my calculation if they drew their cash down to $5mm they would have needed to generate about $5mm in EBITDA in order to avoid the breach. There is some flexibility assuming they can choose to postpone some CapEx). Q Funding and any other shareholder who has bought the stock since January 6th at a price above $11.50 must believe: a) FUN stock is undervalued at $12 and will be higher based on the company's value as an independent going-concern, or b) Apollo will increase its acquisition price in order to get the votes required to complete the deal. The first point might be true, but then we have the issue of the likely covenant breach assuming Apollo walks, which will most likely force a dilutive equity raise. The second point appears unlikely in my view. If I'm Apollo, and I'm fairly confident that there are no other buyers since the 40-day "go-shop" period has passed, why would I allow a couple of funds to force me to pay more than I agreed to in a heavily negotiated deal with a company facing a likely covenant breach within the next two months? Based on where Q Funding has been buying it is unlikely that they would accept a small bump in the price, say to $12.50. They are probably looking for significantly more than that, and every $1 increase in the price is about $55mm Apollo would need to foot. While there appears to be some room under the covenants on the debt commitments they've secured such that they could raise the price into the $14 range, I don't see any reason why they would do this when they can instead walk away after a "no" vote on the deal, get their expenses paid, and return in two months or so when the company will likely be in a significantly weaker negotiating position should they breach the 5.25x covenant. At that point they might be able to buy the company without paying much to shareholders at all, and save themselves hundreds of millions of dollars on the purchase price. The proxy indicates that Apollo had a very difficult time securing the financing for this deal, which assuming that is true, does not bode well for FUN as an independent entity trying to renegotiate its loans after amending them only eight months prior, in August.
I'd appreciate any of your thoughts.