Saturday, February 10, 2018

What's happening with SeaWorld? Part 2: The Plan?

Prior to discussing what it is SeaWorld is doing and whether or not it is working, let's first summarize Part 1 of this series:

-Busch Entertainment (what is now SeaWorld Entertainment) was acquired by Blackstone in 2009 from InBev, who was seeking to rid themselves of non-core assets of Anheuser-Busch after InBev's hostile takeover of the company. 

-Blackstone and it's investors paid $2.3 billion dollars to InBev; Roughly $1 billion dollars was cash from Blackstone and it's investors, and the remainder was in deferred financing provided by banks. Over the next three years, Blackstone would extract $610 million dollars from SeaWorld in the form of dividends. These dividends came from company profits, cash reserves, and sales of non-core assets.

-In 2013, 3 months after Blackfish made its debut at Sundance, Blackstone made the first public offering of SeaWorld (SEAS). They would sell stock 4 additional times until which time they ceased to have a position with the company. The stock sales and dividends paid over this time period allowed Blackstone to make nearly triple their money back on SEAS, even as the stock faltered in the wake of Blackfish. In addition to sale of stock, the deferred financing now hit the SEAS books as long term debt of roughly 1.5 billion dollars owed to various large banks. 

-SeaWorld's has two debt bubbles which may burst based on debt/EBIDTA ratio and more frighteningly, a maturing note in 2020 which SEAS best option to avoid default on may be selling attempting to sell junk bonds.

-Negative attendance in the wake of Blackfish, potentially lied about by SeaWorld management, led to collapse of share value. Blackstone's last sale of stock was to a Chinese firm (Zhonghong Zhuoye Group) in 2017 who paid in excess of market value for the shares using borrowed money. The company's chief  was embroiled in criminal legal wranglings, and the company's stock has been frozen by Chinese regulators in the months since. 

There's a lot there to grasp, and while there's certainly a lot of financial issues, they're compounded by poor managerial decisions and bad promotion. That's what Part 2 intends to tackle.

In the lead up to the public offering of SEAS, Blackstone had invested some decent money into new attractions for the 2011 and 2012 seasons:

-SeaWorld Orlando received Turtle Trek; 

-SeaWorld San Diego opened Manta;

-SeaWorld San Antonio opened a water park;

-Busch Gardens Williamsburg got Verbolten and Mach Tower;

-Busch Gardens Tampa saw Cheetah Hunt and a new Animal Care Facility with accessibility to the public

2013 was by comparison an off year with one major exception: Antarctica: Empire of the Penguin. Designed as a new themed area of SeaWorld Orlando, it was anchored by a new penguin exhibit accessible via trackless dark ride, the first installed in Orlando. SeaWorld hyped the new attraction for over two years during construction prior to it's opening in May of 2013, two months before wider release of Blackfish. For the region responsible for greater than 50% of SeaWorld's revenue, Antarctica was hoped to be a big success given the somewhat weak competition (Transformers at Universal Orlando, the first phase of New Fantasyland at Magic Kingdom). 

Word of mouth, however, buried the attraction out of the gate. The animal exhibit was not accessible except by riding, which meant you had to wait. The attraction featured two, largely indistinguishable "programs" between the cars, with the "wild" version only offering an extra car spin or two. It was short, unremarkable in theming, and concluded with a long video screen section prior to the penguin reveal. While the area around it was great, the decision to shoehorn in a very expensive ride system with the new penguin enclosure and related hype backfired terribly. As the firestorm hit from Blackfish, the new ride was so poor that it couldn't pull in anywhere near as many people as now chose to skip the park. SeaWorld Orlando's biggest and most expensive expansion in history saw a 5% attendance drop.

It would not be the end of SEAS poor choices that led to attendance dips after CapEx. After a disastrous, delayed decision to buy an untested drop tower from Moser Rides at Busch Gardens Williamsburg, SEAS opted for a more reliable manufacturer at Busch Gardens Tampa in Intamin. However, not leaving well enough alone, SEAS asked for a prototype "laydown" seating option. Sure enough, the ride that became Falcon's Fury turned out to be another outstanding Intamin product, destroying itself on its first test run and opening months late. SeaWorld's CEO was forced to admit that the late opening for Falcon's Fury was damaging to Busch Gardens Tampa's attendance that year, having missed the prime tourist season entirely. 

In 2014, SeaWorld announced the BlueWorld project; a series of updated Orca environments which would be far larger and more aesthetically appealing than the current series of tanks in usage. The idea was to counteract some of the negative associations with the Orcas that people had following Blackfish, and untold sums of money were pushed into development of the facilities. San Diego's was to be the first, with a price tag of $100 million dollars. As the months moved on, the outcry against SeaWorld didn't die down one bit. SeaWorld announced in 2016 that they would be ending their Orca breeding program, and subsequently the BlueWorld project was cancelled. SeaWorld San Diego's attendance continued to suffer.

Busch Gardens Williamsburg began construction on a new roller coaster in 2014. The chain had acquired a Premier Skyrocket to open for the 2015 season, and it would be given a cycling theme. However, the chain opted for what appeared to be a conscious decision to not announce the attraction or hype it in any way. The coaster, ultimately named Tempesto, had its last piece of track installed in January of 2015 just two months prior to park opening. The ride was formally announced on Pass Holder Preview Day, March 21st. This is in stark contrast to every other regional chain in the US, whom combine their announcements with beginning of season pass renewal periods in order to drive advance sales. Coaster investments in Florida for the 2016 also produced negative attendance growth at both SeaWorld and Busch Gardens Tampa, suggesting a conflict between offerings and public demand. The most recent flop was Ocean Explorer in San Diego, which appears to have not stemmed any bleeding of attendance away from what was once a park that exceeded 4 million visitors a year.

Beginning in 2014, waves of closures began to hit the chain. Gwazi, the dueling wood coaster in Tampa, had half of its track boarded over in the station in 2014, and the remainder closed in February of that year. Rhino Rally there also closed in 2014; they were in turn followed by the Tanganyika Tidal Wave in 2016 and the Jungala section in 2018. Busch Gardens Williamsburg closed Europe in the Air in 2016, then stunned fans by shutting down and scrapping DarKastle, their giant dark ride prior to the 2018 season. Antarctica, SeaWorld Orlando's big 2013 expansion, has already been knocked down to weekend only operation. Hundreds were laid off, and upper park management became a revolving door as park presidents like David Cromwell and Terry Prather left the company. 

With the turmoil at the top, the company has been consistent at one thing: raising prices. Even though they are often competing against new attractions with ride closures, SEAS has opted not to aggressively court travelers to Central Florida or San Diego with lower prices, but rather opted to increase pricing in tandem with comparable attractions. One Day Tickets to Sea World San Diego are still more expensive than San Diego Zoo even as their attendance plummets. Gate price admission to Busch Gardens Tampa is now $104, while their Fun Card is....$104.99. Simply put, the parks are not worth the gate admission price. Attempting to engage advance sales of food or photos as Six Flags and Cedar Fair have done has gone equally poorly, with pricing that was far too low and encouraged over use in their year round facilities. 

Whether you see SeaWorld's financial troubles having exacerbated their mistakes or vice versa, they have set a clear path as to what it is they're attempting to do. SeaWorld is hoping to find the bottom; a floor. At that floor is the number of people who will always attend the park regardless of how much is closed or how much gate admission is increased to. From that floor, staffing needs and attraction openings can be built on top of to grow the company. The term most frequently used in business is "rightsizing," defined as "reduce the size of (a company or organization) by eliminating staff positions, specifically when business conditions necessitate such a reduction." Rightsizing is a great buzzworthy word; the problem with it is that at the institutional level, such as a big corporation, rightsizing rarely succeeds. Worse, in the amusement industry, "rightsizing" has a 100% failure rate. 

It isn't that it hasn't been tried before. In the mid 2000s, Cedar Fair acquired Geauga Lake from Six Flags, ensuring that no one would be able to compete with them for Cleveland's population. They opted to "rightsize" Geauga, removing rides, shifting the water park, and eliminating the animals, while attempting to encourage separate ticket visitation by not making it free to visit with a Cedar Point pass. There is now a lot of commercial real estate at reasonable prices where Geauga used to be. Around the same time, Six Flags was closing down rides and then parks, abandoning Six Flags New Orleans post-Katrina, selling a profitable Astroworld and leaving it to the wrecking ball, and running from the Kentucky Kingdom lease. They went bankrupt. 

Idora Park in Ohio lost rides due to a fire and tried to drag itself along: It's gone. Whalom Park lost its ballroom to flames and had to shut down many a classic ride due to part cost; the sale of its carousel is speculated to have been undervalued due to collusion in the market. It's a housing development today. Joyland Park in Kansas, Alabama Adventure, Euclid Beach, Indiana Beach, Hard Rock/Freestyle Music Park, Conneaut Lake; it has a 100% fail rate of preventing parent company bankruptcy. And why should it? Demand for amusement parks is not like demand for health care or groceries. They're an experience, one which is being priced at the same level as arguably superior competing experiences. That makes the demand very elastic, and when quality falls as price increases, that elastic demand will snap back and drop. The bottom in the theme park industry is always the same: the attendance floor is 0. 

What do we prescribe then that SEAS does?

-Evaluate the cost of the creative team on staff vs. the cost of outsourcing. You can be a good creative mind with outstanding ideas that work well with large or unlimited budgets who isn't so good when presented with limitations. Does it cost less to outsource design to a LA or Ohio firm? Then do that and let go of everyone. Does it cost the same? Still let go of everyone. They've had their chance to theme on a budget.

-Analyze your public relations and promotional folks. Is everyone that thought the idea of not promoting the chain's largest capital expenditure in 2015 gone? If not, they go too.

-You're going to have to spend some money to get people with experience from outside. You have some cash reserves; now use them.

-You're also going to need to buy and build stuff for 2019 just about everywhere. You're going to need to be very smart about this, because you don't have very much money. Think kids and seniors for a change, not teenagers. You don't need more coasters. You need attractions with lower height limits to encourage families to come back. Building more coasters instead is putting you in the opposite direction of Cedar Fair, Disney, and Universal in terms of their trends. You might be building a lot of off the shelf kids rides, but go look at Toy Story World at Disney Studios Hollywood. 

-When you build rides, put more money into the rides than theme. The people telling you that the rides are "undercapitalized" might not be happy, but they are never going to cover you like they do Disney anyhow. And for the love of god, if you close rides with low height requirements off for a retheme, have something to take their place immediately. 

-Lower prices ESPECIALLY in Florida and San Diego. Per capita income in Orlando and Tampa is lower than Detroit and almost equal between Orlando and Cincinnati. You cannot price your parks like this is NYC. You cannot lose your attendance to Fun Spot. You need to be able to appeal strongly to school groups, and that's tough at $100/pop plus meals.

-Weekend operation of Antarctica is actually not a terrible idea as long as you apply it elsewhere. Six Flags and Cedar Fair are not about to collapse, and they have rides and sections that open at different times. At a place like Sea World San Diego, offer heavily discounted weekday tickets and run rides for only half the day (or less, honestly). 

-You want to build hotels but you don't have the money. So how about instead you put some Yurts up in Busch Gardens Tampa? At least test out whether or not people really want to stay there before you wind up losing an occupancy battle with the Embassy Suites down the street. 

-Bring back annual dining, photo, etc passes and charge appropriately. A year of food at SeaWorld Orlando should be more like $200. You'll find people who pay it, trust me. 

-Sell the Busch Gardens parks to Merlin. If their bid is at the $150-200 million dollar mark for those properties, negotiate deferred service payments based on revenue and an agreement for continued cooperation on tickets and passes. This will allow Merlin to invest in those parks over a 3-5 year span prior to the payments coming due. You'll be able to put money towards service of debt now, and you'll have money later.

The purpose of the suggestions here is to increase attendance and revenue even if it comes at the cost of per capita spending. Even if one approaches this with the concern that the increased spending could trigger the Debt/EBIDTA ceiling to be broached, the last five years of SeaWorld operation has already managed to increase that without an measured, aggressive Capex strategy, and some savings would be obtained in personnel hours from reduction of ride operations at several parks and eliminations of existing divisions. Further investment in automation for, example, food ordering kiosks, would also help realign staffing levels to provide a higher quality of service while not requiring additional hiring at inflating personnel costs. 

If attendance can be stabilized or increased under this plan, SeaWorld would likely be able to refinance the existing B-2 loans due in 2020 for a later date. Not doing so and instead dealing with falling revenues by continuing to reduce costs is almost certainly likely to lead to a downward spiral unless there is something truly exceptional about SeaWorld. It seems unlikely, though, that this is the direction the company is taking. SeaWorld appears committed to an expensive ad campaign in 2018, followed by 2019 destined to see a giga coaster opening in Williamsburg and more layoffs and closures across the board. 

Should SeaWorld be incapable of dragging itself out of debt, it will likely enter bankruptcy between now and the Second quarter (April-June) of 2020. It is probable at that point that a core asset or assets would be sold. Eliminating the debt on the company could lead to a very successful restructuring in 4-5 years time. There's also the distinct possibility the entire chain could be taken over by a player such as Merlin. Merlin has shown a lack of interest in the SeaWorld branded parks due to their use of marine mammals, but could be convinced at the right park to take them always and re-position SeaWorld's brand by combining other efforts for animal reserves with aquariums and their own facilities to create new tourist destinations. Florida is already slated to be home to a dolphin habitat featuring animals from the National Aquarium in Florida; why not something in Tampa to combine with Busch Gardens? After all, the real truth is not that people's perception of SeaWorld has changed not because they don't care about animals. It has changed because they very much care about animals, and now believe the animals that they care most about have a negative quality of life.

What should be important to all is to not allow the parks as they are now to slip into disrepair and poor appearance with many, many closed rides and attractions that don't fit the mix of customers/guests. Retaining as much value in the parks as possible is of the utmost importance for their survival, bankruptcy or not. 

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