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SeaWorld Dives Into Wall Street’s Public Pool

A horde of penguins took over the New York Stock Exchange Friday morning as SeaWorld representatives rang the opening bell to herald the company’s entry into the public waters of Wall Street.

More than three years after its $2.3 billion sale by Anheuser-Busch InBev (BUD) to private-equity giant Blackstone (BX), SeaWorld (SEAS) is trading on the NYSE after raising a reported $702 million in one of the largest IPOs of the year. In its first minutes of trade, the stock is up 15% from its offer price of $27, which was at the top of a range starting at $24.

Credit: AP, Richard Drew
Credit: AP, Richard Drew

SeaWorld sold 10 million shares and Blackstone an additional 16 million, more than the 10 million originally slated. The underwriters, including Goldman Sachs and JP Morgan, have a 30-day option to sell an additional 3.9 million shares at the offer price. The deal values SeaWorld at just above $2.5 billion. This debut is part of a busy week for IPOs, which included New York-based grocery chain Fairway (FWM) on Wednesday.

The Orlando-based SeaWorld, which owns 11 parks throughout the U.S., including three separate SeaWorlds, Busch Gardens, Adventure Island and Sesame Place, filed to go public in December. It's the latest in a series of private-equity backed public offerings to commence trading in the early months of 2013, including Blackstone offering Pinnacle Foods (PF), Taylor Morrison Home Corp. (TMHC) and Norwegian Cruise Lines (NCLH). SeaWorld will use the money raised to pay down debt and settle a termination fee with Blackstone, which will maintain a controlling stake of more than 60%.

As Yahoo! Finance’s Michael Santoli pointed out this week, several of the names to go public this year are also of the lower-tech, "easy-to-understand consumer” variety. SeaWorld is one of the most widely recognizable brands to go public of late, and it does so at a time when theme park stocks are outperforming the S&P 500 (which, until this week’s pullback, had been up 11% year-to-date). Six Flags (SIX) is up 14% so far for the year, while Cedar Fair (FUN) has gained 18%. Disney (DIS) has also added 18%. Disney oversees the most profitable theme parks in the universe, but the bulk of profits for the House of Mouse come from its media operations.

A "solid" industry

Naturally, the theme park business depends on the discretionary spending habits of the tourist public. Visiting an amusement park is the kind of luxury families won't rush to partake in if consumer sentiment slips amid increasing worries of a slowdown in the global economic recovery.

Yet, right now, “the state of the theme park business generally is solid,” says Michael Broudo, analyst at Miller Tabak. “It’s a steady 3% growth industry where the key components are ticket pricing and attendance.”

On that note, SeaWorld did dramatically increase its fortunes while under Blackstone ownership. The company earned $77.4 million on $1.4 billion in revenue in 2012, with most of the revenue coming from admissions. Compare that to 2010, when SeaWorld lost $45 million amid what it calls “a decline in attendance as a result of the global economic crisis.”

Another black mark for the brand in 2010 was the tragic accident that resulted in the death of trainer Dawn Brancheau. Following a show at the company's park in Orlando, Brancheau was grabbed and thrashed repeatedly underwater by 12,000-pound killer whale Tilikum, all as a horrified crowd looked on. Brancheau's was the third death associated with Tilikum, who nonetheless made his return to the SeaWorld stage in late 2011.

Since the incident, SeaWorld and the Occupational Safety and Health Administration (OSHA) have been involved in a series of legal proceedings surrounding the park's safety standards. SeaWorld has approximately 67,000 animals, the bulk of which are fish. This includes 29 killer whales.

Safety issues

The safety of guests, workers and the animals is critical to the company's ability to succeed. As its prospectus states, “An accident or an injury at any of our theme parks … may harm our brands or reputation, cause a loss of consumer confidence in the Company, reduce attendance at our theme parks and negatively impact our results of operations.” Further, “The considerable expansion in the use of social media over recent years has compounded the potential scope of the negative publicity that could be generated by such incidents.”

In other words: Now a tragic event or another reputational blow (including protests from animal-rights activists who have long decried the practice of keeping sea creatures in captivity) could send the stock price reeling.

When contacted regarding the IPO, a representative for People for the Ethical Treatment of Animals, or PETA, provided its official statement on SeaWorld, which includes its plan to purchase stock Friday in order to "educate other investors about the suffering endured by ... animals who are confined to tiny barren tanks for human amusement ... and push for their release."

Other factors investors should keep in mind when deciding whether to dive into SeaWorld stock or stay onshore: The company's high debt levels and multiples. SeaWorld, when it filed to go public, had $1.8 billion in long-term debt, some of which was incurred by a special dividend of $500 million paid last year to Blackstone (following a $100 million dividend in 2011). SeaWorld states in the filing that its debt could hinder its ability to raise additional capital. Also, its high price tag gives the company a hefty trailing PE of more than 27, exceeding Cedar Fair's 22 and Six Flags' 10.99 (per Yahoo! Finance data).

SeaWorld plans to offer a quarterly dividend of 20 cents per share. At $27 per share, that puts the yield at 2.9%, which "is probably not enough to attract yield-starved investors," Miller Tabak's Broudo notes. Cedar Fair paid a dividend of 62.5 cents per share in the first quarter, while Six Flags pays a dividend of 90 cents a share.

Whether or not investors will sink or swim with SeaWorld remains to be seen. But Blackstone, which reportedly turned down takeover offers for the company before opting to take it public, is looking like a clear winner -- the company is likely to rake in more than 2.5 times its original investment ($1 billion cash and the rest in long-term debt) in the birthplace of Shamu.