Friday, February 9, 2018

What's happening with SeaWorld? Part 1: The Finances

Ever since Blackfish was released, SeaWorld Entertainment has been struggling. Attendance is down dramatically at their Orlando flagship and in San Diego, and attraction closures at their less struggling Busch Gardens facilities are becoming an epidemic. There are investigations, lawsuits, and flat out bad press. Trying to make sense of this in a vacuum would be difficult. The tea leaves on theme park media, meanwhile, are often intentionally impossible to read. Jeff Putz, the man behind (it mattered more in the pre-social media era) had this to say as someone who wound up doing contract work for the company:

"Now the word comes that the CEO is stepping down, and they're laying off about 300 people across the chain. That's unfortunate, and I think it's an over-reaction (the company is still profitable), but it's also not surprising. Is it because of Blackfish? I don't think you need insider knowledge to know the answer to that question. As someone who has observed the theme park industry for around 15 years, I think it's obviously not that.


I have no idea what they were up against in each of their markets in terms of competing attractions, but that you have to sink some cap ex dollars into theme parks to keep attendance up isn't some secret sauce. Disney, Universal, Six Flags, Cedar Fair and even independent parks like Holiday World get it. That's where SEAS is failing."

Robert Niles at Theme Park Insider instead points at another factor: The loss of free beer.

"Leaving the Anheuser-Busch family not only robbed SeaWorld/Busch Gardens of a corporate owner with deep pockets, it meant the end of the beer giveaways that time has shown might have been the most under-rated attraction at those parks. Without the lure of free beer, the SeaWorld/Busch Gardens parks have been exposed as under-capitalized attractions in generally inconvenient locations near competitive markets, without the hotels and secondary development to support growing attendance, and attraction line-ups that have suffered with too many recent flops."

Niles goes on to argue that theme park fans don't care about animals in the same piece that establishes SeaWorld Orlando as having had an attendance of 5.5 million within recent memory. That's pretty inconsistent as a take, but the general theme continues here that SeaWorld's mistake was not spending more money or that the money was spent poorly on the wrong rides/attractions. For most, this is a satisfactory answer. It's simple enough to grasp and to lots of people makes sense given the popularity of attractions like The Wizarding World of Harry Potter and Cars Land. It even fits well with the popular internet idea that audiences specifically demand "fully immersive" attractions such as this. 

As is often the case on this blog, I often look at issues or topics in the theme park industry that aren't well analyzed. As good an explanation as this is, is it actually the right one? 

My first clue that there might be something else at play wasn't a SeaWorld article at all, but instead reading about the collapse of Sears. Sears Holdings is on the ropes, and the truth is that it is intentionally on the ropes. A series of companies have been spun off of Sears, taking away assets and often acting in a very counter-productive way for the original parent company. Seritage, for example, is a publicly traded corporation that exists as a Real Estate Investment Trust (REIT) of Sears properties. As an independent corporation, it seeks to maximize the value of its commercial real estate, which often means kicking Sears out and replacing it with anything that can pay a multiple of Sears' rates. The largest shareholder in all of these new companies - Seritage, Land's End, Orchard Supply, KCD (Kenmore/Craftsman/Diehard) - is Eddie Lampert, the CEO and primary shareholder of Sears. Eddie also happens to be the primary financier for Sears, which means that should Sears go belly up, Eddie Lampert will wind up possessing the brand's IP and most of its stock and assets. Most analysts recognize now that Sears is set up, intentionally, to fail. If it does, Eddie Lampert stands an opportunity to gain an array of things while alternately profiting from the spinoffs.

That a company can be run intentionally into the ground is against many people's conceptions of what capitalism is all about and how it functions. And yet, here it is, clear as day. When I thought about SeaWorld, I began to think about the financial aspects I knew of from reading reports:

-SeaWorld revenue has dropped each year since a peak in 2013. The company was still posting a profit in 2014 and 2015, but became unprofitable in 2016.

-SeaWorld had entered an initial restructuring period in 2014 that led to layoffs, and those layoffs have continued to occur into the present day.

-SeaWorld has a large amount of debt - the company's valuation is $1.2 billion. They have $1.5 billion in debt. This is a very bad equity/debt ratio.

Sears has a notice on their annual reports that spells out the reality of the company's future:

"Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company."

I thought it was interesting to see that. I wondered; Did SeaWorld have something similar in the 2016 annual report? So I looked:

"Affiliates of Blackstone will continue to be able to significantly influence our decisions and their interests may conflict with ours or yours in the future."

"We are highly leveraged." (Every annual report)

There is a literal book about the hostile takeover of Anheuser-Busch by InBev that describes in great detail all the really dumb things done by the Busch family which led to them being punted out of control. That takeover was done with debt; most purchases in the world are. You purchase things with debt every time you utilize a credit card. Visa, Mastercard, Discover, and American Express in turn take a percentage of the sale and then charge you interest if you carry the debt into a new billing period. Debt is a frightening word post-Great Recession, but in reality, it's only got power if you give it power. And you give it power by taking a lot of debt on. InBev, to acquire A-B, took a lot of debt on.

All debts need to be paid back, and for InBev, one way to start paying back debts and reduce future debt service (what you might call paying interest) was to sell non-core components of Anheuser-Busch. The Busch theme parks we just such a component that InBev had no interest in and which they saw market value in selling. Blackstone Group purchased the parks for $2.3 billion dollars and the rights to future earnings from the investment capped at $400 million. This allowed InBev to pay back its lenders (monsters like BNP Paribas, Bank of America, and Deutsche Bank) a portion of the $52 billion immediately. Think of it as though you buy a furnished home for $200,000: You might only have 10% for a down payment, but you obtain the remaining $180,000 from a lender at an interest rate you're happy with. You like the house more than most of the furnishings, so you sell some at auction or on Craigslist. The money generated by their sale is only a couple thousand, but it's a couple thousand you can sink into the mortgage to pay it off more quickly. Besides, you didn't like the couch, so why keep it?

Now, we need to talk about Blackstone. Blackstone, like Apollo, like Bain, and like other companies that I don't feel like listing, is a private equity firm. It is publicly traded; you can buy shares in Blackstone today. As I write this, they're trading around $32/share. What's important to understand about private equity firms is that they fundamentally don't carry debt. The way they make money is as such: they court institutional investors who give them cash with which to make smart acquisitions. These are not typically individual shareholders: they're banks, investment firms, pension plans, super rich individuals and "sovereign wealth"; the last ones means money funneled in by independent countries with nationalized industries such as China, Qatar, Saudi Arabia, Singapore, and Iran. Cash is spent buying assets - for Blackstone, this primarily means companies - and managing them in such a way as to maximize return for the investors. If you have a 401K or 403B, or if you collect a private or public pension, you may have some position of return in Blackstone.

That's great jargon, but I want to make this really easy for anyone out there to understand as to how or why this is specifically important to SeaWorld. As SeaWorld went from being a subsidiary of a privately controlled corporation to a subsidiary of a private equity firm (with a minority public stake), the expectations of SeaWorld changed from being able to be measure profitability against long term stability to raw profit. This was no longer a pet project of a family run business to provide great theme parks; SeaWorld simply became an entity to extract money from.

What then did Blackstone do to extract money out of SeaWorld? It sells shares to the public on the stock market. Prior to going public, Blackstone extracted a dividend of $110 million dollars in 2011 and $500 million in 2012. It then put shares of the company on the market valued at $702 million as an initial offering in April 2013. An additional $540 million in shares were sold in December 2013, followed by another $518 million dollars sold off in April 2014. The last of the shares were sold in 2017 (and we'll get to that, I promise) for $449 million. Blackstone bought the company for $2.3 billion remember, and they got back $2.82 billion. You might notice that $500 million in return is a lot of money, but not necessarily a great rate of return, especially since InBev is supposed to get $400 million of that. And you'd be right.

SeaWorld also paid cash dividends on a quarterly basis. Since Blackstone was still a shareholder until 2017, they received money from that totaling millions per quarter. The public offering triggered a clause in an advisory contract with a Blackstone "affiliate" (one of their many subsidiaries; there may be thousands registered in Delaware) requiring SEAS pay $46 million in termination fees in 2013. We're now talking in excess of $3 billion dollars here. If you Google to see what analysts say about Blackstone's return though, you'll see estimates in financial circles of a nearly 300% return. 300% of 2.3 billion is not 3 billion. Something's up with this sum. And if you've been paying really good attention, you know what it is already. Think hard here.

Give up?

"As of September 30, 2017, the Senior Secured Credit Facilities consisted of $557,658 in Term B-2 Loans which will mature on May 14, 2020..." (Q3 2017 Report, page 14)

Back at the very start, I said that SeaWorld's debt/equity ratio makes them, excuse the pun, under water. They owe more than the company is valued at. Then I went in and talked about how debt isn't bad unless you let it gain power over you by accruing too much of it. Blackstone bought them finding funding from a variety of institutional sources, and as a whole Blackstone doesn't have any debt. If it still isn't clicking, I'll spell it out.

When Blackstone bought Busch Entertainment for $2.3 billion, Blackstone got a steal. They effectively took 100% of the company's equity, but they didn't pay $2.3 billion for it. They paid $1 billion for it. The other $1.3 billion came from banks. We don't know specifically who those banks were in 2009, but we know who SEAS owes money to now thanks to the publication of the 8th amendment in an 8-K Report this year:


When Blackstone paid itself $600 million in dividends, it chose to do so to maximize their return on investment with the plan of offloading the financing cost from the banks as debt. And the banks had agreed to it in order to not run afoul of federal laws that limit their equity positions in non-financial service industries. And Blackstone got those 2010 and 2011 dividends by, for example, giving all of Busch Entertainment's cash reserves and profits to itself and establishing a larger line of credit (financed by the banks) as a replacement. The banks also got themselves variable rate loans when the company went public, and as long as SEAS didn't go into the tank, they'd get paid back with interest. Everyone was going to profit.

And then Blackfish happened.

Blackfish debuted on January 19, 2013 at the Sundance Movie Festival, 3 months before the SeaWorld initial public offering. It would receive a much publicized limited summer release in July, and from then on, SeaWorld was on the defensive. Blackstone pushed forwards with additional stock offerings while downplaying or ignoring the role of the film in declining attendance and public perception. This resulted in a lawsuit, still rolling through the courts, Baker v. SEAWORLD ENTERTAINMENT, INC. The jist of the lawsuit is simple: Blackstone knew that Blackfish had damaged the brand and lied to investors, suppressing information about the damage in order to convince them to acquire shares. Documents made public as the suit moves forward sure suggest merit.

By May 14, 2020, SeaWorld Entertainment, a company that is presently cash flow negative for two straight years, will need to have paid back, in full, $557 million dollars in debt plus associated interest. It then has 4 more years to pay back another $993 million dollars in debt. To service this debt, payments have increased 30% year-over-year putting them on pace to pay over $80 million in debt service in 2017. SEAS will still need to increase that sum to nearly $50 million per quarter in order to not default on payments. The terms of these loans also present issues - sales of any parks must go entirely to payment on the debt, and there are terms on "excess cash flow" which results in mandatory payments up to 50% of that sum. Other chains like Cedar Fair have similar required payments, but are capped at a specific dollar amount.

SeaWorld has options to get out from under their loans, but none of them are good.The Busch Gardens and accompanying water parks in Tampa and Williamsburg could provide substantial relief. To this day, Orlando still brings in more than half the revenue for the chain, suggesting that perhaps selling those facilities wouldn't make it impossible to make up the difference in revenue. However, with an overall valuation of $1.2 billion for the company, they may only find offers that would bring in a small fraction of the required $500+ million. Another option is to offer unsecured notes: Cedar Fair has done this in the past, and will likely do so again prior to 2020. Prior rounds have seen an improvement in their Moody's grading from B2 in 2011 to Ba1 in 2017 - this is just short of investment grade. SeaWorld, meanwhile, has seen their investment rating drop to a B2, only one step above junk status. Any attempts to issue unsecured loans would probably plummet them into junk status.

Further, the present loans are actually recent refinances: their maximum leverage ratio is 5.75 to 1.00. What does that mean? Well, the ratio is based on a calculation of debt to Earnings Before Interest, Taxes, Depreciation and Amortization, also known as EBITDA. EBITDA is often used by companies who want to isolate whether or not they are operationally cash flow positive, as it doesn't include decreasing value of assets or interest payments from loans. SEAS ratio has crept up consistently:

2014: 4.25 to 1
2015: 4.38 to 1
2016: 4.61 to 1
Q3 2017: 4.93 to 1

That the rate has not only increased, but accelerated is extremely concerning. If the rate exceeds the 5.75x mark, SeaWorld defaults. They go bankrupt.

Please investors cautious decision-making, attention investment risk. (Google Translate,  Zhonghong Holdings Co., Ltd 2017 Annual Results Notice, 1/31/2018)

Blackstone's primary mission is to maximize its investment, not ensure a long and healthy life for the companies it spins off. Sometimes that works out, sometimes it doesn't. That's the nature of Private Capital. When Blackstone sold off the remaining shares in their SEAS to Zhonghong Zhuoye Group Co., Ltd, the primary motivator was the value per share. The Chinese firm paid about $6/share more than the market value, keeping at least within shouting distance of the $27, $28, and $30 valuations previously dished out. The move was touted as a win-win, as the Chinese firm would in turn contract with SeaWorld to build new theme parks under subsidiary Zhonghong Holdings, and couldn't sell their interest for two years.

And now the harsh truth: Zhonghong Zhouye Group doesn't have any money. Zhonghong Holdings Co., the subsidiary that was to build the SeaWorld Parks and to which there are contractual agreements to do so, was frozen and then delisted by the Shenzhen Stock Exchange in July of 2017, having seen shares plummet 85% from a high in 2010 to only .30 a share. In January 2018, Zhonghong Zhouye's interest in Zhonghong Holdings was frozen by the China Securities Regulatory Commission pending investigation. Wang Yonghong, the former CEO, is still believed to be in charge of the company. He had been implicated in foreign investment schemes via the Panama Papers and was tied to Xu Xiang through his ownership of Zhonghong shares. Xiang is a famed real estate mogul that was arrested and convicted of insider trading during Xi Jinping's corruption purges. Yonghong also recently made news when he was sued by Christie's for non-payment on a vase (the most expensive ever purchased; and have you ever heard about money laundering in art?) Virtually all of the money used for the purchase of SeaWorld shares was borrowed either from related companies or banks. And Zhonghong Holdings? They have a debt-to-asset ratio of nearly 3 to 1 in favor of debt, and are expected to post a loss in excess of 1 billion yuan for 2017.

A cynical interpretation of events was that Yonghong and his family he installed as the figure heads were looking to obtain investor visas in the United States via buy in on SeaWorld, get money out of China, and perhaps ultimately themselves. Time might have run out for all of that.


With a new largest shareholder that has no money to pump in, an over leveraged balance sheet, and debt crisis after debt crisis heading towards SeaWorld that could lead to default, drastic measures have to be taken. In Part 2, we look at how SeaWorld is trying to prevent bankruptcy and whether or not there's any reason to believe they have the right idea.

1 comment:

  1. Hit the nail on the head. However, outcomes of class action suit, derivative suit, DOJ criminal investigation and SEC investigaion may sign the death warrent for Sea World