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Apollo takes debt risk in Great Wolf buyout

by David Carey and Lou Whiteman | Published March 14, 2012 at 3:32 PM

Private equity firm Apollo Global Management LLC will invest about $190 million of equity in a $703 million take-private of indoor water park operator Great Wolf Resorts Inc., according to a deal document filed with the Securities and Exchange Commission.

Apollo also will keep in place all of Great Wolf's existing $515 million of debt rather than refinance it, a person familiar with the matter said.

The deal, announced Tuesday, calls for an Apollo affiliate to pay $5 a share for Madison, Wis.-based Great Wolf, which operates 11 North American resorts, with lodging, indoor entertainment, spas and other amenities. The company, founded in 1997, reported Ebitda of $76.91 million on sales of $296.71 million in the 12 months ended Dec. 31.

The price represents a premium of 19.3% over the target's Monday close and 72.9% over the company's six-month average. The offer values Great Wolf's equity at $167.1 million. The $703 million total cost includes outstanding debt and certain transaction expenses.

The overall value equates to 7.9 to 8.4 times Great Wolf's projected 2012 Ebitda of $83 million to $89 million.

Despite the lofty multiple, investors Tuesday afternoon bid up the shares by $1.13, or 26.9%, to $5.32, evidently thinking a higher offer might materialize.

Apollo opted not to refinance existing debt, as happens in a typical leveraged buyout, because of the structural obstacles it faced, as well as cost, according to the source cited above.

Specifically, the creditor agreement for Great Wolf's $222 million of secured first-mortgage bonds bars refinancing any unsecured debt ahead of the bonds, the source said. Moreover, taking out the bonds would be quite costly because they trade at 12% above par.

Meanwhile, Apollo faces risks with the debt it will take on. For instance, there's $95 million in debt tied to one joint venture that comes due in August, which Great Wolf has tried and failed to have extended. What's more, $65.5 million in non-recourse debt on a Kansas resort is deeply under water.

"They're taking on some risk in the capital structure," the source said of Apollo.

In Apollo's eyes, the investment's upside outweighed the risk. The firm believes it can generate an attractive return by streamlining Great Wolf's operations and helping it expand its stable of resorts, sources said.

Also on Tuesday, the Great Wolf board approved a shareholder rights plan that would take effect should an entity other than Apollo acquire 12.5% or more of the company's stock.

The company in a statement said that the so-called poison pill is "intended to provide the board of directors with sufficient time to evaluate alternatives and to maximize value to stockholders," should a competing bid surface.

Company CEO Kim Schaefer in a statement said that the board "concluded that the proposal put forth by Apollo is the best way to maximize value for shareholders," adding that "we are excited about the prospect of working with Apollo as we further capitalize on opportunities to refine and grow" the brand.

A Deutsche Bank Securities Inc. team including Drew Goldman, Amish Barot and Arthur Goldfrank is serving as financial adviser to the company, with a team from Paul, Weiss, Rifkind, Wharton & Garrison LLP including Jeffrey Marell, Kelley Parker and Lawrence Wee serving as legal adviser. Morgan Stanley's Michael George, UBS Investment Bank's Matthew Spotnik and Nomura Securities International Inc.'s Mark Epley are serving as financial advisers to Apollo, and a Akin, Gump, Strauss, Hauer & Feld LLP team including Adam Weinstein, Tony Feuerstein, Brian Kim, Rosa Testani and Jeff Kochian is providing legal counsel to the private equity firm.

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