Wednesday, April 07, 2010

Cedar Fair Entertainment (NYSE:FUN): Raising to Outperform, $18-20 fair value - Wells Fargo

Wells Fargo Securities is upgrading Cedar Fair Entertainment (NYSE:FUN) to Outperform from Market Perform raising valuation range to $18-20 (prev. $11-13)

According to the firm their Outperform rating on Cedar Fair units and $18-$20 valuation range reflects their view that the termination of the acquisition agreement with Apollo provides management an opportunity to immediately pursue renegotiating/refinancing the company’s maturing debt against a backdrop of 1) favorable credit markets, and 2) an improved outlook for the ’10 operating season due to a gradually improving economy and easy weather comparisons.

While management could pursue deleveraging/restructuring debt maturities/recapitalization through multiple combinations of equity/debt offerings, WF believes the most likely (and most shareholder friendly) will be a restructuring of debt maturities with existing creditors. Given the favorable conditions in the credit markets and current ~ 8.4% average weighted cost of debt, they are optimistic that the company could ladder out its current 2012 and 2014 maturities at a weighted average cost of debt between 7-9%. Removal of this refinancing uncertainty along with an improved 2010 operating environment from a gradually improving economy and easy weather comparisons (FUN’s management team is widely respected as one of the best operators in the industry) should serve as an upward revaluation catalyst for the units toward at least the lower end of an ~8-10x forward historical EV/EBITDA range.

Finally, WF would note that otheir ‘10/’11 EBITDA estimates are $11.6MM/$14.3MM below those outlined by management in the recent proxy filings related to the now terminated Apollo acquisition. Upcoming debt maturities: 8.30.11 $310MM revolver maturity, ~ $640MM of maturing ’12 term debt, and $900MM of maturing ’14 debt. Firm expects there will be a distribution provision in any new financing agreement requiring certain criteria be met before a distribution could be re-instated. They believe management will focus primarily on debt reduction and strengthening the balance sheet in the near-term, rather than resuming a distribution. WF's $18-$20 valuation range implies an EV/EBITDA range of 7.6-8.0x relative to the historical range of 7.9- 9.9x and a free cash flow yield of 10.5-9.4% to our 2011 EBITDA/unit and free cash flow/share estimates of $5.87 and $1.89, respectively. They also view these multiples as reasonable at worst to conservative versus a likely “trough” earnings year in 2009, considering:

- The regional price/value “getaway” proposition offered to consumers by Cedar Fair parks/hotels in a slowing U.S. economic environment,

- Geographic diversity and opportunity for in-park revenue enhancement via the June 2006 acquisition of five Paramount amusement parks,

- Suspension of distribution with free cash flow used to deleverage balance sheet of elevated but serviceable debt levels, and

- Development (revenue opportunities) adjacent to existing parks.

While Cedar Fair was in violation of its Q409 distribution provision, the company was in compliance with its Q409 debt covenants (required 5.25x consolidated leverage ratio). The company’s consolidated leverage ratio debt covenant tightens in Q410 to 5.0x and WF current estimates project that management will remain in compliance with a Q410E 4.53x consolidated leverage ratio. WF current estimates include repayment of $46.0 million in term debt during 2010 following $161.3 million of term debt repayment in 2009. This debt repayment should provide increasing cushion versus debt covenants by reducing the numerator of the consolidated leverage ratio calculation. Long-term, they believe the company’s goal is to reduce debt to achieve a 3.5-4.0x consolidated leverage ratio.

Notablecalls: Wells Fargo's Timothy Conder & him team are making a pretty big call here.

Apollo dropped their $11.50 takeover bid yesterday morning, after months of power struggle with current Cedar management.

The stock went briefly below the former offer price but rebounded rather violently throughout the day. That kind of shows buyers are looking to scoop up the shares around current levels.

Q Investments, a hedge fund that owns an 18% equity stake in the co is rumored to be looking to increase their stake. So that may explain the move.

Wells Fargo's valuation range of $18-20 should create further buy interest in the name.

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