Last week, SeaWorld and its iconic orcas filed with the Securities and Exchange Commission for an initial public offering. It's fair to call this the "Shamu IPO," even though the original Shamu, who performed at the original SeaWorld in San Diego, died in 1971. SeaWorld has kept the moniker around as a sort of branded stage name for orcas.
SeaWorld also operates marine-based theme parks in Orlando, Florida, and San Antonio, Texas; the parent company, SeaWorld Parks & Entertainment, runs eight other venues in the U.S. And that parent company is owned by Blackstone, a huge private equity firm that bought SeaWord from Anheuser-Busch in 2009.
For Blackstone, as the Motley Fool's Evan Black points out, it was a classic distressed-asset play: SeaWorld, despite having operated parks for decades (SeaWorld San Diego opened in 1964; Orlando opened in 1973), was losing money, as the financial crisis caused consumers to curtail their spending on frivolities, like watching killer whales and dolphins perform dazzling aquatic feats.
The theme park business has since bounced back. (There's clearly a lot of pent-up demand for roller coasters and well-trained marine mammals.) Disney has seen its parks contribute substantially to its bottom line over the past year as its movie business has struggled (despite the box office success of "The Avengers").
Early reports suggest that the IPO, led by JP Morgan and Goldman Sachs on the investment banking front, will bring in $100 million. Blackstone bought SeaWorld for $2.4 billion and, according to Antony Currie at Breakingviews [via the New York Times DealBook], the IPO could value the company at $3.3 billion.
But here's the problem: There are lots of reasons to take a company public. And one of them is to deal with debt. Blackstone has already extracted money from SeaWorld, as private-equity firms will. They buy struggling companies with borrowed money, try to improve the business — by any means necessary — with the goal of selling the company or taking it public. Along the way, they pay themselves. Blackstone has already made $610 million, according to Currie.
But at the heart of this IPO is debt — or, in the language of finance, "leverage." This is from the S-1 filing with the SEC and it pretty clearly details SeaWorld's main risk factor going forward (beyond the orcas dying or eating a trainer). I've bolded the salient words:
We are highly leveraged....Our high degree of leverage could have important consequences, including the following: (i) a substantial portion of our cash flow from operations is dedicated to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations, future business opportunities and capital expenditures; (ii) our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate purposes in the future may be limited; (iii) certain of the borrowings are at variable rates of interest, which will increase our vulnerability to increases in interest rates; (iv) we are at a competitive disadvantage to lesser leveraged competitors; (v) we may be unable to adjust rapidly to changing market conditions; (vi) the debt service requirements of our other indebtedness could make it more difficult for us to satisfy our financial obligations; and (vii) we may be vulnerable in a downturn in general economic conditions or in our business and we may be unable to carry out activities that are important to our growth.
That's two "leverageds" and four mentions of "debt." So how much debt are we talking about? We're talking $1.7 billion. Obviously, even a successful $100 million IPO will only put a very small dent in that.
The SeaWorld IPO, if it happens — and no date has yet been set for the offering, nor have shares been priced — will continue a trend of IPOs undertaken to contend with debt issues.
Unfortunately, there's another trend associated with this trend: IPOs being cancelled if investors don't take the bait of buying shares so that private equity firms can de-leverage. I wrote about two occurrences of this in 2012, when both Fender (which builds guitars in the Golden State) and CKE, the Southern California-based parent of Carl's Jr. and Hardee's, filed for IPOs and them backed off:
What's similar [in both cases] is the use of the IPO process to raise money to pay down debt. That's a useful practice, but it can lead investors to see a company as a one-time shot, rather than a operation that's going to reward investors with growth down the road. This may have been Fender's problem. For CKE, it's probably less of an issue.
But as it turned out, it was an issue for CKE.
Will SeaWorld be a different story? If the economy holds up and the revival of theme park fortunes persist, probably. But IPOs that are designed, in part, to shed debt can be like swimming with sharks when it comes to convincing investors that they're a good deal.