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SeaWorld could be a whale of a deal for Disney or Merlin


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SeaWorld could be a whale of a deal for Disney or Merlin

With SeaWorld Entertainment Inc.'s stock price having sunk roughly 50% over the last four years, published reports suggest other theme park operators see a buying opportunity. But a deal may not be easy.

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Citing people with knowledge of the matter, Bloomberg News reported recently that Merlin Entertainments Plc — the U.K.-based theme park operator that runs the London Eye and the Legoland parks — has approached SeaWorld about a potential deal for part of the company. This is in line with previous comments from Merlin CFO Anne-Francoise Nesmes, who during an August earnings conference call described SeaWorld's Busch Gardens parks as a "good quality asset."

"We would be interested, but it takes two parties to do a deal," the executive said.

FBR & Co. analyst David Jacobs noted in a recent research report, however, that if SeaWorld is truly considering a deal, it would only make sense for the company to reach out to "every other major theme park company in response to an overture, including Six Flags [Entertainment Corp.], Cedar Fair [LP] … potentially Walt Disney [Co.] and Universal, and also private equity."

Notably, Walt Disney and Comcast Corp.'s Universal both already operate parks in Florida and California, states where SeaWorld similarly operates. While all three have locations in Orlando, Fla., Disney's Disneyland and Universal's Universal Studios Hollywood are both closer to Los Angeles, while SeaWorld's California parks are farther south in San Diego. As SeaWorld has said with its Orlando and Tampa parks in Florida, park clusters can create synergies through multi-park tickets and co-marketing arrangements.

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But according to Jacobs, Merlin has its own connection to SeaWorld, as both companies were once part of Blackstone Group LP's private equity portfolio before each began trading publicly in 2013.

"There is no doubt a high degree of familiarity between the two," the FBR analyst said.

Even so, Jacobs believes a deal will be difficult given SeaWorld's "big new [share]holders with lofty value expectations." In particular, he pointed to the investment firm Hill Path Capital, which as of an August SEC filing beneficially owned a 14.5% stake in the company. Jacobs believes Hill Path sees SeaWorld "long-term as a $500 million EBITDA company," as opposed to the $280 million to $310 million EBITDA range SeaWorld guided to for 2017.

The other major stakeholder is the Chinese real estate and leisure firm Zhonghong Zhuoye Group Co. Ltd. In May, a subsidiary of the firm bought a 21% stake in SeaWorld from Blackstone for $23 per share, a price well above SeaWorld's Oct. 10 closing price of $14.94. In connection with the deal, SeaWorld increased the size of its board to add two Zhonghong Group executives. As such, Jacobs said, "It might be hard to get a deal done at anything less than $23," a price he noted could be hard to justify in the midst of SeaWorld's turnaround.

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SeaWorld's reputation and stock price have both suffered in the wake of the 2013 release of the documentary "Blackfish," a film that raised questions about the mental and physical health of SeaWorld's whales. In response to public backlash from the film, SeaWorld ended its orca breeding program and pledged to phase out its theatrical shows to focus more on "natural" orca encounters.

For the past two years, the company has upped its marketing spend to address these perception issues, but it has still struggled.

Wedbush Securities analyst James Hardiman noted in a recent research report that time may be limited for a stand-alone turnaround given the company's debt obligations. The company maintains a 5.75x leverage covenant that would get tripped, meaning it would trigger a default, if annual EBITDA were to fall in the $265 million to $275 million range. Given SeaWorld's EBITDA guidance range for 2017, Hardiman said, "The low-end of guidance leaves minimal room for error."

A full or partial sale could be one solution to this predicament.

"SEAS is clearly in a special situation at this point," Hardiman said, noting that on one hand, the company is "dangerously close to a breach" on its debt covenant, but on the other, "Investors are now looking to a potential sale of the company, and SEAS certainly holds a number of assets that could be bid up by a number of suitors."

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