SeaWorld - As Blackstone Continues To Sell, Stay Out Of This Overvalued Offering

| About: SeaWorld Entertainment (SEAS)

SeaWorld Entertainment (NYSE:SEAS) made its public debut on April 19. Shares of the theme park and entertainment company, ended their first trading day with gains of 24.1% at $33.52 per share.

The Public Offering

SeaWorld is a leading theme park and entertainment company, owning 11 regional theme parks across the U.S. including SeaWorld, Shamu and Busch Gardens.

SeaWorld sold 26 million shares for $27.00 a piece. As half of the shares being sold were offered by selling shareholders, the company raised $351 million in gross proceeds in the offering process, valuing the equity of the company at $2.50 billion.

The offering was a great success. The offer price was set at the high end of the preliminary $24.00-$27.00 price range set by the firm and its bankers. On top of that was the favorable price action on Friday.

In total some 28% of the total shares outstanding were offered in the public offering. At Friday's closing price of $33.52, the firm is valued at $3.11 billion.

The major banks that brought the company public were Goldman Sachs, J.P. Morgan, Barclays, Citigroup, Bank of America/Merrill Lynch and Wells Fargo, among others.


SeaWorld's entertainment parks offer customers a strong value proposition as visitors can watch shows, go on rides and view some 67,000 animals. Last year, the theme parks of the company attracted some 24 million visitors.

The company aims to continue to grow future revenues by increasing attendance rates and boosting visitor spending in its parks. SeaWorld furthermore looks to open news parks and leverage its brands into media and entertainment products.

SeaWorld has been owned by the Blackstone Group LP (NYSE:BX), which acquired the company back in 2009. Over the past years the private-equity firm has aggressively grown revenues and improved profitability of the firm.

For the year of 2012, SeaWorld generated annual revenues of $1.42 billion, up 7.0% on the year before. The company reported net profits of $77.4 million, up from merely $19.1 million a year earlier.

As a result of being owned by a private equity firm, SeaWorld operates with a lot of debt. The company spent $111.4 million on interest payments for the past year.

SeaWorld raised $351 million in gross proceeds in the offering process. As such net proceeds are expected to come in around $330 million. The company operates with $45.7 million in cash and equivalents and $1.82 billion in short- and long-term debt. Consequently, Pinnacle will operate with approximately $1.45 billion in net debt, following the offering.

Based on Friday's valuation of $3.11 billion, the market values the company's equity at 2.2 times annual revenues and 40 times annual earnings.

Investment Thesis

As noted above, the public offering of SeaWorld has been a success. Shares were offered some 5.9% above the midpoint of the preliminary offering range and are currently trading some 31.5% above that level.

The company plans to use the proceeds of the IPO to repay $140 million in senior notes, which carry a 11% interest rate and mature in 2016. The company will furthermore pay Blackstone a $47 million one-time termination fee and will use the remainder of proceeds to further reduce debt.

Back in 2009, Blackstone Group LP bought SeaWorld for $2.7 billion from Anheuser-Busch, which in its turn tried to reduce debt from the mega-merger with Inbev a year earlier. The private equity firm saddled the company with $1.8 billion in debt, while the offering will reduce the net debt position towards the $1.5 billion mark. Blackstone received some fat special dividends totaling $610 million in 2011 and 2012 in return from SeaWorld. As a result of the reduction in leverage following the public offering, net income could increase by some $15 million per annum, assuming statutory tax rates.

The sizable total debt position is not the largest risk to SeaWorld's future prospects, as the majority of its debt is due more than five years ahead in time. The company generates some 55% of total revenues from its activities in Florida, which makes the company vulnerable to hurricanes in the area. Furthermore, both attendance rates as well as spending rates at its parks greatly depend on the overall economic conditions. In the recession of 2009, both attendance rates and spending rates fell as consumers cut back on discretionary spending.

The reduction in leverage will boost the bottom line to an estimated $92 million in 2013, assuming operating profits are unchanged compared to 2012. While the revenue multiple is fair, the earnings multiple will still be rather high at 33-34 times estimated annual earnings. A reduction in leverage could further boost the bottom line, given that the company paid an average of 6.1% in interest over its debt over the past year.

A key comforting fact is that the company already proposed a quarterly dividend payout of $0.20 per share, for a decent annual dividend yield of 2.4%. Furthermore, Blackstone Group LP will continue to hold a 73% stake in the business, which is key for a good alignment of incentives following the public offering.

Yet I refuse to participate in this successful offering. The company has concentrated risk in Florida and by nature operates in a high operational leverage business, with high fixed costs and low variable costs. Over the past year it generated some 62% of total sales from park attendance. The company is furthermore not so resilient in an economic downturn. As recently as 2010 the company was forced to report losses as a poor economy impacted discretionary spending, which is a dangerous cocktail combined with a leveraged balance sheet.

In this offering the sellers are the smart guys and Blackstone knows what they are doing. Recently the private equity firm sold more leveraged firms to the public, including the public offering of Pinnacle Foods (NYSE:PF).

All in all, these are enough reasons accompanied by premium valuation rates why retail investors should not participate in this latest public offering.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.