SeaWorld (NYSE:SEAS) reported second quarter earnings August 13 after the markets closed. The theme park operator missed badly in its first quarter as a public company. Those who bought shares of its IPO at $27 are probably wondering if they should sell and take profits while they still can.
I believe investors should sell as soon as they possibly can--this IPO was doomed from the start.
Blackstone Group (NYSE:BX) took SeaWorld public on April 18 at the high end of its intended range. The company itself sold 10 million shares with Blackstone selling 16 million with an over-allotment option for another 3.9 million shares, which the underwriters exercised. SeaWorld's net proceeds of $245.4 million were used for several items including the repayment of $180.8 million in long-term debt and an increase in its cash position.
The private equity firm invested $975 million of its own capital to acquire SeaWorld in December 2009 from Anheuser-Busch InBev (NYSE:BUD) for $2.5 billion. The difference was paid for with new debt issued by SeaWorld. Blackstone received dividends totaling $615 million in 2011 and 2012 as well as $47 million in the IPO for a 2009 advisory agreement that was terminated by SeaWorld. All told, Blackstone used just $318 million of its own money.
The net proceeds from the 19.9 million shares sold in the IPO came to $505 million with 58.75 million shares to sell as early as October 16. Regardless of what happens between now and the fall, Blackstone has already recouped its initial investment of $975 billion as well as generating a realized profit of $187 million for its investors with another $1.84 billion in unrealized profits based on a $31.40 share price. That's an annualized return on its investment of 72.6%. Shamu's been good to Blackstone.
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Missing So Soon
It's never a good thing when a company delivers a negative surprise in its first quarterly earnings report. It's even worse when it's a 24% miss as is the case with SeaWorld. In addition to the earnings miss, it projects that 2013 revenue will be between $1.45 billion and $1.48 billion, slightly less than the $1.5 billion estimate set by eight analysts.
Not one…or two…but eight! How does a company that only went public at the end of April miss by the end of June? If you bought shares in the IPO and are still holding you have to sell because if it delivers another miss in Q3 it's all over but the crying. Its share price will be sub-$20 before you know it.
In my original article about SeaWorld's IPO my math was a little off. Actually—a lot off. I estimated that it would have 124.7 million shares outstanding after the IPO when it fact that came in at 92.74 million. I came to that outrageously high number because I valued the entire SeaWorld business at eight times EBITDA or $3.35 billion. Working backwards I figured it would price between $12 and $14 per share meaning it would need to sell more shares. However, underwriters valued its business at 10.5 times EBITDA, which meant an IPO market cap of $2.5 billion, not $1.5 billion as in my estimate.
In my April article I noted that both Cedar Fair (NYSE:FUN) and Six Flags (NYSE:SIX) had significantly larger real estate holdings than SeaWorld. In my opinion this was reason enough to balk at a valuation more than eight times EBITDA. Cedar Fair just delivered record second quarter earnings August 8. It has an enterprise-value-to-EBITDA ratio of almost half Shamu's. To own SeaWorld when you can get a much better deal elsewhere makes no sense at all.
Personally, I'd have a hard time considering SeaWorld's stock until it's trading below $20. In my opinion it's definitely time to get out of the pool.
Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.