Great Wolf Apollo Acquisition

[Leland Wykoff]

The New York Post is reporting a battle between Apollo Management and shareholders at Great Wolf Lodges:

http://www.nypost.co...fsCtXyJVspFQLMK

The opening paragraph of the NYPost story, in reference to the recent failed Apollo attempt to take Cedar Fair private, speaks volumes, "Leon Black’s Apollo Global Management must be hoping that history does not repeat itself."

Why is Apollo once again at odds with shareholders?

Shareholders may not wish to surrender the upside potential at Great Wolf just as the light at the end of the tunnel is coming into focus. The deal discounts any "tax loss credit" advantage--and thus many believe it to be significantly under priced. Many shareholders know the best returns are not necessarily to be found in selling out to private equity funds. Shareholders question sweet-heart deals made to retain and reward current management with bonuses when deals close.

What challenges does Apollo face to consummate this deal?

The deal calls for fifty percent of the shares to be tendered at the $5.00 offer price or the deal is off (as I understand the documents--keep in mind I am not a lawyer--never even played one on television). This is a high hurdle when approximately 50% of the share float was recently held by institutional investors and many of those institutions insist share have a today value in the $8 to $9 range.

Great Wolf shares continue to briskly trade at prices well above the offered tender price--closing Thursday at $5.52 a share. About half of the share float has changed hands since the merger announcement. One must wonder, "who is buying all those shares, and why would they pay more than $5.00 each?"

You can pretty well bet the answer is not, "So they can transfer them in a $5.00 tender taking and be rewarded with a fifty-plus cents loss per share." That works out to an annualized loss in the neighborhood of 260%.

What if shares are being acquired by the institutions already holding shares? What if a significant number of retail investors decide not to tender shares? Doing the math it seems a strong possibility Apollo may not reach the threshold of 50% required to effect the merger.

What does Great Wolf have to say?

Bloomberg reports managements stated belief, "the sale would maximize shareholder value."

What does Apollo have to say?

The NY Post reports, "An Apollo spokesman declined comment."

Ah, right.

Sounds a lot like the proposed Cedar Fair Apollo marriage.

[The Interpreter]

And I wonder where some Kinzel progeny are? Golden parachutes financed by Apollo again in this deal, but one must wonder if they would have been included. No Q's necessary. Leland, wasn't it on something like this when first we met?

I guess some investors aren't easily subjected to Soak City and not all q's are big, bad wolves.

[Leland Wykoff]

The news surrounding Great Wolf Lodges Apollo proposed merger just keeps getting worse. Bloomberg News is out with a story of just what putting WOLF into the Black would mean for shareholders.

http://www.bloomberg.com/news/2012-03-23/leon-black-s-bid-gets-no-respect-as-great-wolf-surges-real-m-a.html

As an example of the inadequacy of the Apollo offer Bloomberg offers up "The stock rose again today and is now 12 percent higher than the offer, more than any agreed- upon deal in the U.S., according to data compiled by Bloomberg."

Mean while, back on the ranch, Great Wolf and CEO Kimberly Schaefer are strangely quiet. Ms. Schaefer has given new spin to being the "Undercover Boss." Schaefer continues to stand by her pronouncement, when the deal was first hatched, the $5.00 deal offered “compelling opportunity for shareholders.”

Oddly enough, Schaefer may have hit the nail on the head with this statement, shareholders have been presented a "compelling opportunity" to refuse to tender shares and thus perhaps end this abusive merger offer.

Like Cedar Fair the future of Great Wolf may best be left in the hands of the current shareholders. The potential to improve the company performance lies in getting more heads in beds and refinancing/restructuring debt. These are challenges an appropriate management team, possessing the right skill set, should be more than able to conquer.

It is looking more and more like the real challenge at Great Wolf Lodges will be addressing the management deficiencies. After all, is that not the primary strategies Apollo would employ? Investors do not need Apollo to clean out the executive suite. Investors can achieve that task simply by holding its Directors feet to the fire.

Goddess knows Cedar Fair experience has taught us all that lesson well.

[Oldiesmann]

What I find most interesting about this is that the CEO continues to claim that Apollo gave them the best offer, but there were apparently 32 other offers as well. If this is really the best deal out of 33 potential offers, I'd hate to see what the other offers actually were.

[Oldiesmann]

WOLF closed even higher on Monday, at $5.64 a share, just $0.09 of the new 52-week-high of $5.73. There's also this new article, but I have no clue what it means, so I'll let Terp or Leland explain it

http://www.marketwat...2017-2012-03-26

[The Interpreter]

Bondholders had to agree to the sale by The holders of a majority of the principal outstanding by last Friday. That didn't happen. So, the company extended the deadline til today, Tuesday. It means the bondholders ain't agreeing so far.

Ironically, this "poison pill" provision, meant to stop hostile takeovers (and to protect current management and its jobs), may stop management from selling out the shareholders while protecting (and perhaps enriching--there must be SOME reason the head of the company has STILL been calling this now below market buy-out offer compelling) itself. Not unlike what would have been the golden parachute/handcuffs seen for a certain Mr. K and a few other insiders in a relatively recent frustrated Apollo proposal.

There is no financial advice contained herein. The writer is not a financial advisor nor a registered dealer of securities in Ohio, Georgia or any other state. If you need, or think you need, financial or professional advice, consult an appropriate competent professional. And don't get soaked.

[Oldiesmann]

Thanks for the explanation Terp.

I definitely agree that this just doesn't add up - stock is trading 13% higher than the offer price and we're being told that this is the "best" out of 33 offers (I sincerely doubt that the other 32 offers are worse than this - surely there aren't that many companies who would make an offer without ensuring that it looked good for shareholders).

I'm wondering if the CEO stands to get stock options or a bonus out of this deal.

[jcgoble3]

Maybe it is the best offer—for the CEO.

[The Interpreter]

Now extended through close of business Friday. This deal is in trouble:

http://www.marketwatch.com/story/great-wolf-resorts-inc-extends-consent-solicitation-for-10875-first-mortgage-notes-due-2017-2012-03-28

There is no financial advice contained herein. The writer is not a financial advisor nor a registered dealer of securities in Ohio, Georgia or any other state. Seek the advice of a competent professional should you have or think you might have a financial question. And don't get soaked.

[malem]

Why would holders of secured debt want to block the deal, unless these entities also hold stock? APO seems less likely to default on debt than WOLF.

[The Interpreter]

Why would holders of secured debt want to block the deal, unless these entities also hold stock? APO seems less likely to default on debt than WOLF.

The holders of debt want to see the company maximize its value to shareholders. Valuable companies pay off debt. In addition, frequently creditors and equity holders are one and the same.

[Leland Wykoff]

Wednesday WOLF closed up 2 cents at $5.66. This on a down day for the market.

In addition to the cooperation of bond holders it appears 50% of shares must be tendered for the merger deal to close. They may be having a bit of trouble on this front as well--the trading price well above offer is the tell on that dynamic.

Management must brace itself for an overhaul when this merger fails. Shareholders will be in no mood to coddle those who pushed this deal. It is clear fresh new talent must be brought to bear. Marketing talent to get more heads in beds, and CEO CFO talent to refinance/restructure debt. It seems current management were either not up to the tasks, or not capable of the tasks.

Remember WOLF has [or had] large blocks of shares controlled by institutional shareholders. Some of those holders also prevailed in defeating the Cedar Fair deal. Such institutional holders often feel the real value in a distressed company is in unlocking revenue streams and plugging expense holes. They often feel little can be gained by selling out on the cheap to private equity as it robs shareholders of the upside potential [if any].

I concur with The Interpreter and believe this deal to be in trouble. The continued extensions of deadlines does not bode well. Developments should soon dictate the outcome.

[The Interpreter]

Now three lawsuits seeking to stop the deal. And a reason the CEO thinks the deal is compelling? How about more than 7 and 3/4 million dollars? That's what she could get if the deal goes through and she loses her job.

And 7 million is how much Apollo walks off with if Great Wolf cancels the deal. And an alleged conflict of interest by an advisor.

Not to mention it is claimed there were at least two other, higher offers. The CEO said this was the best overall.

http://m.host.madison.com/mobile/article_74bdab14-7aab-11e1-aa91-001a4bcf887a.html

Looks like quite a few lessons were learned and others ignored from the earlier attempt to have fun.

[The Interpreter]

Leland Wykoff quoted in an interesting article comparing this Apollo proposal to the one that attempted to buy FUN:

http://m.host.madison.com/mobile/article_a0148416-7ab2-11e1-b03a-001a4bcf887a.html

[Oldiesmann]

That would definitely explain why the CEO thinks this is such a great deal. Will be interesting to see where things go in the coming weeks.

[Leland Wykoff]

Once again it appears Great Wolf has extended the deadline for change in control permission from debt holders.

This process is sure going sluggish and may well sink the deal. The mortgage holders do not seem eager to give permission for the Apollo deal.

One wonders if the debt is held by some of the same institutions holding large chunks of WOLF stock shares?

See story here: http://finance.yahoo.com/news/great-wolf-resorts-inc-extends-123000453.html

[Browntggrr]

http://host.madison.com/wsj/business/apollo-outlines-how-it-would-reshape-great-wolf-s-board/article_0945e99c-7cf8-11e1-b919-0019bb2963f4.html

[The Interpreter]

http://www.thestreet.mobi/story/11482988/1/cedar-fair-lp-case-study--comments-attributable-to-pwk-partners-atlas-funds-llc-graphic-business-wire.html

[Leland Wykoff]

As Browntggrr brings to our attention with his link to the story "Apollo Outlines How It Would Reshape Great Wolf's Board" we see the Apollo strategy is to replace leadership and, possibly other management, at the company.

Shareholders do not need Apollo to achieve this goal. Shareholders can simply begin undertaking actions to replace board and management members who are sub-par performers. Elections are held each year at WOLF. Shareholders are given the opportunity to vote on every board position each year. Cleaning house is easy.

Management contracts expire. Executives may be removed, for cause, without much costs at all. Executives may be asked to resign in the wake of costly and embarrassing gaffs such as failed merger proposals. If push comes to shove executives may be removed and paid severance.

Apparently Apollo has a price on Great Wolf's CEO head. The Apollo cut the head off price is just shy of $8 million.

Shareholders can get a better bargain than that.

[The Interpreter]

Apollo Offer Topped for Great Wolf:

http://mobile.bloomberg.com/news/2012-04-05/great-wolf-gets-offer-from-ksl-topping-apollo-s-bid.html

[Oldiesmann]

And the plot thickens...

Will be quite interesting to see where things will go from here.

[Leland Wykoff]

Here is a fresh story concerning the new offer:

http://www.reuters.c...ketsNews&rpc=43

The time clock is ticking on the Board and Management at Great Wolf. A careful reading of the merger proposal and deal seems to suggest WOLF only reacted to offers that came to it. WOLF apparently did not seek out offers.

Woops!

WOLF also disclosed in the deal prospectus the business plan to expand by acquiring, re-branding, and/or licensing the operating procedures and intellectual proprieties to other operators was a flawed and unworkable plan. They then discounted the future earnings and operating efficiencies from the forward projections, which one would imagine, reduced the price the company should be sold for.

Odd management and the Board felt no growth opportunities existed for the company. Bet Apollo felt just a little bit different about that idea.

Here is another good article from the hometown papers of Great Wolf:

http://host.madison.com/wsj/business/another-bidder-makes-better-offer-for-great-wolf-resorts/article_ab6e66b6-7ed0-11e1-a9b8-001a4bcf887a.html

Likely, this will all be enough to keep the lawyers busy for quite some time.

[Leland Wykoff]

Great Wolf management would be terribly surprised by this news from a similar type resort in Sevierville Pigeon Forge area of Tennessee:

http://www.themountainpress.com/view/full_story/18127417/article--Wilderness-Resorts-target-of-foreclosure-?instance=homeleftlocal_top_stories

Foreclosure action on property adjacent to the Wilderness Resorts. Perhaps such a Resort would benefit from association with the Great Wolf Lodge brand?

[Leland Wykoff]

Steven Davidoff, the Deal Professor at the New York Times DealBook column has weighed in on the proposal by Apollo to acquire Great Wolf Lodges. This proposed deal has been altered by a competing bid for WOLF at $6.25 per share, or $1.25 higher than the Apollo bid. The shares closed today well above the new offer price, up an additional thirty-five cents per share over the new offer.

The Deal Professor makes an interesting observation in his analysis, "Except for requiring the adoption of the poison, which may go too far under Delaware law..." which suggests a bit of a legal problem for WOLF and Apollo may loom in the distance.

Here is the link to Professor Davidoff's article:

http://dealbook.nytimes.com/2012/04/05/apollo-may-again-face-an-unwanted-battle/

As always, Davidoff is an interesting read and offers insightful analysis.

Enjoy the read!

[Leland Wykoff]

Bubble, bubble, toil and trouble:

Here is an excellent review of the recent WOLF/Apollo/KSL merger news. This article is by Judy Newman who has been avidly following, and quite capably writing on, the developing Great Wolf story for several weeks now:

http://host.madison.com/wsj/business/great-wolf-stock-jumps-after-unsolicited-second-bidder-enters-ring/article_6073237a-7f31-11e1-9ab1-0019bb2963f4.html

Ms. Newman reports just 1.4 million of the 32.9 million outstanding shares have been tendered--far to low for the deal to consummate, which would require approximately 16.5 million shares to be tendered.

More shocking is Ms. Newman's report "no notes have been properly tendered" in the offer to debt holders to clear the change of control hurdle--a requirement of the Apollo proposal.

Link to the WOLF news release:

http://investor.greatwolfresorts.com/file.aspx?IID=4107002&FID=13085184

[Leland Wykoff]

Today the Wisconsin State Journal has another excellent article and featuring new developments:

http://host.madison.com/wsj/business/large-shareholder-calls-on-great-wolf-board-to-consider-better/article_bb25e032-7ff9-11e1-98d0-001a4bcf887a.html

HG Vora Capital, an owner of 12.3% of the Great Wolf shares, has asked the Board to rescind the poison pill provisions. The stock closed at $6.58 Thursday, up 15.4% from Wednesday's close.

[The Interpreter]

Apollo offer increased to $6.75 per share:

http://www.marketwatch.com/story/great-wolf-and-apollo-agree-on-increased-offer-price-of-675-per-share-2012-04-06

[CoastersRZ]

And the plot continues to thicken...

Apollo, it seems, has run into trouble with several of their las attempted buyouts. They do own some pretty notable brands though. AMC Entertainment, Claire`s, Caeser`s Entertainment, Norwegian Cruise Line, Centurey 21 and Coldwell Banker realtors, and CKE, which owns Hardee`s and Carl`s Jr. restaurants.

[Leland Wykoff]

Once again, the Wisconsin State Journal has an excellent article on the increased Apollo bid:

http://host.madison.com/wsj/business/deal-to-buy-great-wolf-approved-after-apollo-increases-offer/article_bb25e032-7ff9-11e1-98d0-001a4bcf887a.html

While the increase by Apollo of $1.75 per share is dramatic, I predict we are not yet at the end of proper valuation of WOLF.

No. Much more room to go.

[Leland Wykoff]

Great Wolf Resorts now offered $7.00 per share by KSL Capital Partners on Sunday.

See story here:

http://host.madison....8ddf14ff62.html

This bid now beets the Apollo increased offer of $6.75.

And still, I believe, we have not reached proper valuation of WOLF.

I do not believe this is the end of the road for offers. We have much more room to go. A suite deal would be in the $9.00 range. This assumes one believes the best option is to sell the company. I do not believe this to be the case. I would argue for retention and improvement of the company by shareholders. This, I believe, could lead to much better returns.

Having looked over the deal solicitation I am troubled by the comps used by Deutsche Bank in their analysis: one of the three Lodging Companies comps was Gaylord Entertainment. Seriously? Gaylord is, and has been, under attack by activist investors seeking to improve performance. The share price has been all over the board--from $17.39 to $36.62 in the last year. The other lodging comps have problems as well (Solicitation page 34).

The Leisure Companies included among the three Six Flags and Cedar Fair. Not the best comparisons--Six Flags has recently emerged from bankruptcy, and Cedar Fair was a failed target of Apollo about a year ago.

Of specific concern is the lack of a cruise line and an all inclusive resort company in the comps. Great Wolf Resorts is, granted, a tough comp due to the unique business model. However, if we consider WOLF carefully we can see it much more resembles a cruise line. The Wolf Lodges are much like beached ocean liners. The provide a complete package of entertainment, food, recreation, accommodation, alcohol, children's programs, adult programs, all in a controlled cocooned type environment. In this regard they also closely resemble all inclusive vacation resorts.

One must wonder why DB failed to include such comps in their evaluation.

The specific Precedent Transactions chosen for analysis are also alarming. Three of the six Waterpark Hotel Transactions considered were WOLF properties--two of those transactions involved the original concept smaller properties which WOLF was shedding. One of the other comps was the Sheboygan Blue Harbor Resort--also a concept being abandoned by WOLF (Solicitation page 35).

Among the DB Theme Park Transactions is included the Cedar Fair acquisition of Six Flags World of Adventures. Cedar Fair eliminated the animal park, later completely closed the dry side of the theme park, and currently operates only a waterpark on the site. Many believe Cedar Fair acquired this park primarily to eliminate a Cedar Point competitor. Thus, it is an odd choice as a comparison.

As I said at the outset of the Apollo offer, "This could get FUN."

And it has.