Saturday, January 5, 2013

Private Equity Tentacles: Blackstone Files to Take SeaWorld Entertainment Public

Private Equity Tentacles: Blackstone Files to Take SeaWorld Entertainment Public

When private equity files to take one of its portfolio companies public, we get an opportunity to peak inside their business and get some sense of how it really works.  Late last year, Blackstone filed a registration statement with the SEC to take SeaWorld Entertainment public.  The initial filing with the SEC is still full of blanks, and we’ll learn even more as they get closer to the IPO date.  However, there’s already some good stuff in the preliminary filing.

Let’s begin with a small amount of background.  Blackstone acquired SeaWorld, including the Busch Garden properties from Anheuser Busch/InBev (AB/InBev) in late 2009. You may recall that InBev, the Belgium beverage conglomerate, acquired Anheuser Busch in June 2008.  As it turned out, their timing was awful.  The credit crunch was just unfolding.  By the summer of 2009, AB/InBev was trying to raise cash.  The SeaWorld assets were put on the auction block, and Blackstone acquired SeaWorld for $2.7 billion.

Off to Malaysia (1999)

Blackstone deserves credit for stepping up to this investment.  The travel and leisure businesses were reeling as the global recession cut deeply into profits.  However, Blackstone had experience with these types of investments through its ownership of Universal Studios and Madame Tussaud’s. 

If they can complete the IPO, Blackstone will, undoubtedly, trumpet its investment and operational acumen.  They’ll point out that the financial results at SeaWorld have improved dramatically, and that their investors stand to make a nice multiple on the investment.  They’ve already paid out $610 million in dividends, so more than half their money is off the table.  What Blackstone won’t tell you is that the rebound in the economy and the stock market are largely responsible for these gains.  Since Blackstone made the acquisition, the S&P 500 has risen by about 40% and comparable stocks like Disney have just about doubled.  In fact, the results for Disney’s theme parks mirror the turnaround for SeaWorld.  While Blackstone put a lot of work into this investment, the key ingredient to their success was buying a depressed asset from a desperate seller.

Aren’t Blackstone’s institutional investors better off because of this investment?  The answer is that they are marginally ahead, at best.  Almost all Blackstone’s institutional investors also owned AB/InBev.  It is one is the most widely held stocks.  So the investors basically sold the SeaWorld to themselves.  Over the period of Blackstone’s ownership, leisure and entertainment stocks have gone up by about 80%.  Thus, an institutional investor could have made nearly three times his money by investing in a Leisure ETF or Disney stock, while employing the same amount of leverage as Blackstone used in the SeaWorld deal.  Moreover, he wouldn’t have incurred all of Blackstone’s fees and transactions costs.  When Blackstone finally disposes of all of its shares in SeaWorld, who do you think will own those shares?  It’s the same institutional investors, who owned Anheuser Busch in the first place.

Private Equity and the bankers are, yet again, the winners.  In addition to the usual management fee and carry that Blackstone earns for managing the SeaWorld investment, there are a bunch of ancillary benefits.

·         -- The IPO will trigger a termination fee on Blackstone’s consulting contract with SeaWorld.  We don’t know the amount yet because the draft document is still blank.  But we do know that Blackstone has already received $11 million under this agreement.  Amazingly, SeaWorld is required to enter into a new consulting arrangement with Blackstone upon completion of the IPO.

·         -- SeaWorld has signed an agreement with an entity called Core Trust Purchasing Group.  This agreement requires SeaWorld to purchase 80% of its products and services through the Trust, on which Blackstone earns a commission.  The amount is not disclosed.

·         --  No potential fee is too small.  SeaWorld is obligated to pay a Blackstone affiliate $2.50 per month per employee (there are 8,400 employees) for arranging health care benefits.  The contract automatically rises to $2.60 and $2.70 per employee in 2014 and 2015.

·          =-A portion of the proceeds from the IPO will go to pay 111% of the principal amount of the senior note outstanding.  Who do you think owns a chunk of those bonds, as well as other debt?  Another Blackstone affiliate.  Under the terms of the deal, SeaWorld will acquire 35% of the senior notes at the 11% premium.

The investment bankers will, undoubtedly, pick up their advisory and underwriting fees on this deal.  However, Goldman Sachs stands to gain additional benefits.  It turns out that they own $300 million of the senior notes, so some portion of their bonds will receive the 11% premium I just mentioned.  Moreover, Goldman Sachs has an undisclosed amount of ownership in the Blackstone fund that, in turn, owns SeaWorld.  Fortunately, the financial filing discloses this information for what it is: a conflict of interest.

If you’re thinking that this is an extraordinary deal for Blackstone or Goldman Sachs, you are mistaken.  This is business as usual.  The money managers and bankers have sunk their tentacles into the pockets of their investors, and the SeaWorld deal just shows how good they are at their craft.  I keep telling you, there is no better business than money management.

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