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Equity expert talks about Apollo's Cedar Fair offer

Tom Jackson • Mar 8, 2010 at 8:03 AM


Big changes loom at Cedar Fair.

If unitholders approve the deal, an affiliate of Apollo Global Management, a huge New York private equity firm, will acquire the Cedar Fair Entertainment Co. in the next few weeks. But what does that mean for Cedar Fair and Cedar Point?

Follow our coverage of the Cedar Fair deal HERE.

Josh Kosman, the author of the new book "The Buyout of America," says private equity firms usually harm the companies they buy. But Steven Neil Kaplan, Neubauer Family professor of entrepreneurship and finance at the University of Chicago and a noted expert on private equity firms, says the weight of evidence shows that most improve the companies they buy.

Kaplan has a doctorate degree in business economics from Harvard University, has testified before Congress and has won numerous awards for his teaching and research papers.

We reached Kaplan on the telephone at his Chicago office.

Q. The Blackstone Group bought the Busch Entertainment parks, and Apollo Global Management has made a deal to buy Cedar Fair's family of amusement parks. Why are private equity companies interested in amusement parks right now?

A. I don't know for sure, but what I would guess with amusement parks (is), 1) they want to buy them at what they think is an attractive price ... and 2) the businesses generate cash flow, right? It's largely a cash business; you don't have big inventories, you don't have big receivables because people pay when they come. So, it's a business where you can put leverage on it and you can actually make your debt payments. I think probably, third, they think with some of these, they think there is room for some improvement over the way they have been run at the moment, and that's what they typically look to buy.

Q. Are these deals a sign that the credit situation is improving? Is it easier for private equity companies to borrow money and make these kinds of deals and acquisitions?

A. Yeah, absolutely.

Q. I've been trying to do a crash course on private equity companies, and as part of my research, I listened to an interview Josh Kosman did with National Public Radio and I've been reading his book. He doesn't really paint a very positive picture of most private equity firms. He said they usually harm the companies they acquire.

A. His book is completely wrong and is very selective in what it presents. For example, he quotes some of my work in a negative way about private equity. He doesn't quote any of my work that is very positive. And in fact, the overall evidence, which he doesn't cite, is that private equity firms basically improve the operations of the company. There's a lot of variance, so sometimes they don't. Sometimes they do.

But if you look at large samples, the evidence is largely positive. Some of the evidence is mixed. Some of the evidence is positive. There's almost no evidence that is negative. So when you look at large numbers of deals and you look at the record, it's basically on average positive what happens at the companies that the private equity firms invest in.

He of course in his book picks negative examples. And what he cites in his book, he cites negative examples. I'm not sure why he does that. He was once fired by a private equity owned company. He may have an ax to grind.

The other thing that I think he gets wrong in his book is he says that when a private equity owned company has trouble making its debt payments that they're always shut down, and that's just completely wrong. There's no way Cedar Fair will be shut down. As long as the operations generate cash, they'll operate. It's really a question of how much debt they're going to end up having.

The bottom line is that private equities are not perfect. They do good deals and bad deals. But on the whole, they actually end up increasing cash flow in the companies in which they invest. If they didn't, lenders wouldn't give them money.

Q. Right now, Cedar Fair is a publicly-traded company. If they are acquired by Apollo, it is going to take them private. What kind of changes are at least possible or even likely in such a scenario?

A. They will look at how Cedar Fair is run. What private equity firms usually do is, they look in to see whether there are some opportunities to cut costs and to run more efficiently. If there are, they will do that. That sometimes means job losses in the short run, but it varies. They will also look for opportunities where they might make investments.

Q. One of the reasons that Cedar Fair was listening to offers was that they have a really big debt load right now. Part of the deal is that Apollo is going to assume all of that debt load. The way Cedar Fair has explained it to me, they needed someone who can help them refinanance and take care of that.

A. That's the third thing these firms do. This is what Apollo has more of a reputation for doing, is restructuring debt. There you wouldn't see much of an effect on the core business. So business would go on, and what Apollo would be doing would be financially engineering the capital structure so that the company has more room to operate, and wait for the economy to pick up. In that case, you would not see a whole lot change in the immediate short run, other than they would figure out a way to restructure the debt. That's something that Apollo in particular has a reputation for and expertise in doing.

Q. That sounds like good news. Professor Kaplan, the current CEO at Cedar Fair, Dick Kinzel, has been promised he is going to stay on as CEO and run the day-to-day affairs of the company. Some of the people I've interviewed are kind of skeptical. They say that with ownership comes management, and we shouldn't take those assurances too seriously.

A. I think that's correct. Once the private equity firm owns the company, they control the company.

I think if they told the CEO they're sticking with him initially, they probably are.

If he delivers, if the company performs well, he will stay. My guess is that if the company doesn't perform well, then he will not stay.

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