The controversy surrounding SeaWorld (SEAS) has been well-told. Now, if you’ll recall, Corsair Capital put out a bullish thesis on SEAS via its 2Q14 investor letter, slapping a $28 price target on the company. Since then, shares are down 23%. The fund didn’t anticipate the impact that the Blackfish documentary would have on attendance. They also blamed excessive rain in Orlando - weather should never be used as an excuse for being wrong.
In any case, I’m not here to rehash this. At a certain price, everything is a buy. The stock is nearly 30% off its 52-week high and yielding nearly 4%. But that’s still not why I’m here.
Rather, SEAS is an interesting story, with inherent value that’s trapped inside a company battered by negative publicity. The Blackfish news is slowly wearing off, but has still left a major overhang. Even firing the CEO did little to reinstall investor confidence.
Here’s how we get out from under this overhang: Firstly, it may well take an intervention from an activist investor to convince the company to get this done; but the idea is that the company is an amusement park operator at heart and a breakup would benefit the company immensely. Side note - one hurdle, at least for a shorter-term activist, is that this could be a multi-year play (more on this later).
The split includes spinning off eight parks from its three SeaWorld branded parks. Its nine parks that would be spun off under the Busch Gardens name into a separate public company would include two Busch Gardens parks, Discovery Cove, Sesame Place, Adventure Island, Water Country, and two Aquatica parks.
So - (1) you’d have the Busch Gardens spin, where Busch Gardens and other parks generate about 40% of EBITDA, with the three SeaWorld parks accounting for the rest.
A spinoff of Busch Gardens, trading in-line with amusement park peers Six Flags (SIX) and Cedar Point (FUN) at roughly 11.5x EV/EBITDA, and leveraging it in-line with SIX and FUN at 4.7x debt to EBITDA, would give it a $1.02bn market cap. Roughly $11.50 a share of SEAS value.
The ultimate upside (catalyst) for Busch Gardens lies in the fact that there are few theme park players, namely SIX and FUN. Given the minimal territorial overlap, the Busch Gardens spinoff could become takeover bait for a SIX or FUN. In the case that you have a bidding war, Busch Gardens could fetch a 15x multiple - or $17 a share, suggesting 50% upside. Yet, that wouldn’t happen for at least 24 months given tax rules.
Next - (2) you’d have the remaining core SEAS, left with $895mm in debt and trading with a $910mm market cap - around $10 a share. Or, roughly 8x EV/EBITDA. A warranted discount to other amusement park operators, given its publicity overhang and operational leverage lag (read: higher maintenance costs, food, etc. related to animals).
But when you look out 24 months from now, as the Blackfish overhang rolls off, the multiple should re-rate higher. Assuming SEAS trades more in-line with peers by then, near 10.5x, there’s upside of 60% for this business to $16 a share.
But there are a couple catalysts for core SEAS as well. First, being the potential for a REIT formation after it uses up its NOLs over the next couple years. It has some 400 acres of land that’s on the books at just around $280mm.
The second catalyst for core SEAS is that it could be the victim of yet another private equity buyout - the key is that quarterly results need to be out of public scrutiny so the company can focus on brand rebuilding.
Beyond the spinoff catalyst, there are a few things that make SEAS interesting even as a single company -
High barriers to entry
Owned real estate is somewhat of a backstop
Surrounding undeveloped park acreage presents some monetization opportunities - if played right - including hotels, etc.
A recent (while private ~2009-2013) robust upgrade of park infrastructure that won’t be needed again for some time
Decent, near 4%, dividend yield, where it’s paying out just ~50% of free cash via dividends
Assuming attendance does make a turn at some point, don’t underestimate the operating leverage that SEAS could enjoy given the relatively high fixed costs of the business
In the end, you’ll eventually get some multiple expansion closer to peers even if the status quo remains. We’re heading into the first summer season since Blackfish. We also have a slate of marketing campaigns that’ll be rolling out through the rest of spring to get us ready for this summer season.
Now, in the case that SeaWorld’s attendance numbers are forever impaired, it’ll just further make the case to separate out non-animal related parks to maximize value. However, in the case that we see an activist push SEAS to unlock value for shareholders, the ultimate upside over the next 12 months could be to $27.50 a share - with just a Busch Gardens spinoff and slight re-rating for core SEAS.
In the very best case, where we have core SEAS either taken private (at a 30% premium) or forming a REIT which also re-rates the stock higher, and Busch Gardens bought out (as discussed above) after the 24 months, the 24-36 month upside is to $38 a share.