Saving SeaWorld: Moats, Whales, Sharks And Remoras by Broyhill Asset Management

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I’d like to talk about a very simple business today.

After a long haul listening to very thorough presentations and detailed financial analysis, we are going to try to make this one relatively easy.

Saving SeaWorld: Moats, Whales, Sharks And Remoras

We’ve been following the theme park industry since Six Flags filed for bankruptcy. We don’t own SIX but we’ve owned Cedar Fair for several years. The stock is up roughly 5x since Apollo attempted to take it private during the crisis. There’s plenty of money to be made in simple businesses.

Private equity’s attraction to the industry is easy to understand – the businesses are recession resilient and throw off tremendous cash flow through the cycle. It’s a mature business but zero supply growth and good consumer value provide owners with plenty of pricing power.

We’d highly recommend Buzz Price’s book Walt’s Revolution for a detailed history of the industry. Price was the founder of leisure?time economic analysis. He worked along Walt Disney for five decades shaping the landscape of postwar American amusement.

In addition to siting and contributing to the development of Disneyland in Southern California and of Walt Disney World in Central Florida, his clients included Six Flags, World Fairs, Knott’s Berry Farm and SeaWorld.

Today, I’d like to talk to you about SeaWorld which has a rich history dating back to 1959, when Busch Gardens Tampa, shown here, first opened. The park’s second location in Williamsburg followed in the 70s.

Our research began shortly after in these very short and a little too snug shorts.

SeaWorld

The company was later purchased by Anheuser?Busch in 1989. In 2008, BUD was acquired by InBev. New management slashed capital expenditures and began soliciting bids for noncore assets like Busch Entertainment Corporation.

One year later, Blackstone acquired Busch Entertainment for $2.7 billion – not too far from the stock’s recent enterprise value. Blackstone took SeaWorld public in April 2013 at $27 per share and the stock closed its first day of trading up 25%. The good news stopped shortly after.

This is a good business suffering from temporary challenges. It’s a simple business. So I’d like to spend my time today reviewing those challenges and explaining why we think the market is overreacting. If you believe the brand is not permanently impaired (we do), fair value is significantly greater than today’s price. Let’s take a look.

This is a great white shark. Along for the ride are remoras. Remoras use the shark for transport, protection and also feed on the crumbs left behind.

We think of SeaWorld as the remora of the amusement park industry, feeding on the crumbs left behind by Disney and Universal. There’s a lot of money to be made as the number three player in this business. It’s not a zero sum game.

Of course, this was also true when the stock traded near $40, so it’s important to understand what has changed since then and determine the impact, if any, on value.

Expectations

This is an easy way to think about the IPO. High expectations allowed Blackstone to sell their shares at a premium. Wall Street pitched investors a compelling story.

Public investors bought the story and the shares. Reality turned out somewhat differently, leading to disappointment.

SeaWorld

The next two slides illustrate the street’s expectations at the time of the IPO. You can see here that consensus projected a rebound in attendance and pricing.

This wasn’t an outrageous assumption considering that attendance in 2012 was still a million below prior peak levels and the company was in the “early innings” of its dynamic pricing strategy.

SeaWorld

They also assumed that capital expenditures would normalize. Again, this appeared to be a reasonable assumption as capital spending was elevated for years under Blackstone after being cut by InBev. This was a big reason to be long the stock as these dollars would have dropped straight to the bottom line.

See full slides below.

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