Paramount purchase led to much of Cedar Fair's debt

SANDUSKY Cedar Fair's acquisition of Paramount Parks in 2006 hung a big debt millstone around Cedar
Tom Jackson
Mar 8, 2010

SANDUSKY

Cedar Fair's acquisition of Paramount Parks in 2006 hung a big debt millstone around Cedar Fair's neck.

The planned deal for Apollo Global Management to acquire Cedar Fair for about $2.4 billion includes Apollo's plan to assume $1.6 billion in debt, much of it incurred when Cedar Fair bought Paramount's five theme parks, including Kings Island in Cincinnati.

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Cedar Fair's CEO, president and chairman Dick Kinzel has defended the Paramount acquisition, pointing out there was no way Cedar Fair executives knew the economy would turn bad -- cutting Cedar Fair's revenues -- and that credit markets would decline, making it harder for the company to deal with its debt load.

Documents Cedar Fair filed with the Securities and Exchange Commission and statements by company officials reveal that Cedar Fair executives have been preoccupied with dealing with the company's debt.

In 2006, Cedar Fair spent $1.2 billion to buy the Paramount parks. Cedar Fair went a little more than $2 billion into debt to finance the sale, refinance existing debt and provide itself with cash flow.

Paying off that debt became tougher than expected after the recession hit and business at Cedar Fair's 11 amusement parks and six water parks declined.

Cedar Fair has tried to pay off much of its debt by selling three amusement parks -- Great America in Santa Clara, Calif.; Valleyfair in Shakopee, Minn., and Worlds of Fun in Kansas City, Mo. -- but hasn't been able to sell any of them during the recession.

A form Cedar Fair filed Sept. 27 last year with the SEC says in August 2009, the company reached new terms with its lenders for $900 million of its $1.6 billion in debt.

The $900 million in term debt, which was supposed to come due in 2012, was extended to 2014 in return for a hike of about 2 percent in the interest rate Cedar Fair pays. At the time, Cedar Fair's debt cost was about 7 percent.

That still left $700 million due to mature in 2012, and it was uncertain how Cedar Fair would do when it tried to refinance that money, or the $900 million coming due in 2014, said Stacy Frole, Cedar Fair's director of investor relations.

The steps that the debt forced the company to take last year included ending its cash distribution to unitholders.

On Nov. 3, Cedar Fair announced that cash distributions to unitholders would be suspended in 2010, with the money used instead to retire debt.

An agreement between Cedar Fair and its creditors requires the company to suspend its cash distributions when the ratio of its debt to EBITDA (earnings before interest, taxes, depreciation and amortization) reached a certain point. It became clear the decline in Cedar Fair's revenue would make that provision kick in. The company had paid out cash distributions to its investors for 21 years, ever since it became a public company.

Cedar Fair officials feared that under any refinancing deals the company could make for its debt, the lenders would restrict Cedar Fair's ability to resume cash distributions to lenders, an official familiar with Cedar Fair's thinking said.

"It was unclear even when we could start paying distributions at all," he said.

Apollo has offered $11.50 a unit to buy Cedar Fair. When Cedar Fair announced its merger deal on Dec. 16, $11.50 represented a premium of about 28 percent over the current price.

The thinking was that investors could pocket the money from their unit sales and invest it in a way that would provide a more certain source of income, the official said.

Kinzel said in a recent interview that he's had to concentrate for the last couple of years on managing Cedar Fair's debt. Apollo, which has promised to keep Kinzel and his management team in place, will deal with the debt, allowing Kinzel to concentrate on operations.

Apollo's planned acquisition of Cedar Fair will reach another milestone tomorrow.

The go-shop period, when Cedar Fair can solicit offers from rival financial suitors, is set to expire at 11:59 p.m. Monday.

"Obviously, the Jan. 25th date is another key date in this process," Frole said.

Cedar Fair has not commented on whether it has received interest from other companies.

The company will likely make a statement on Tuesday, officials said.

On Wednesday, Q Funding of Fort Worth, Texas, turned in an SEC filing revealing it has now acquired about 5.4 million Cedar Fair units, 9.8 percent of the total.

"I do not believe they've been investors in the past," Frole said. "We'll touch base with them as we do with our other unitholders."

Other holders of large stakes in Cedar Fair include Neuberger Berman, which owns 8.8 percent of Cedar Fair's units, and Kinzel, who owns 3.4 percent, according to a proxy statement Cedar Fair filed on Jan. 8. Neuberger Berman is an independent asset management firm with headquarters in New York City.