Cedar Fair: An Exciting Ride?

Cedar Fair, which is in the business of delivering thrills and chills to its customers, wants to excite investors, too. The theme-park operator announced this week that it will buy CBS's Paramount Parks chain for $1.24 billion -- a deal that will nearly double Cedar Fair's annual revenues and visitor count. The acquisition, set to close this summer, will make Cedar Fair the nation's third largest amusement park operator in terms of attendance (behind Walt Disney Co. and Six Flags).

It wasn't surprising that CBS axed its theme parks division, which the company inherited after splitting with Viacom in January. Timothy Conder, an A.G. Edwards analyst, wrote in a note to clients this week that CBS's $1.24 billion price tag for Paramount Parks "appears to be rich" compared with Cedar Fair's previous acquisitions. But the premium seems warranted, he wrote, given that "diversification into new geographic markets with attractive demographics makes strategic sense" for Cedar Fair. Conder upgraded the shares of Cedar Fair, currently at $26, from hold to buy.

Actually, it's more technically correct to refer to the shares as units. Cedar Fair (symbol FUN) is set up as a master limited partnership, or MLP. MLPs trade like stocks, but profits are not taxed at the corporate level and instead flow directly through to unit holders. MLPs must distribute all earnings to unit holders.

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The units, which are trading near three-year lows, barely reacted to the news of the deal. Cedar Fair yields 7.1% and trades at 15 times analysts' estimated 2006 earnings of $1.75 per unit. Cedar Fair's market capitalization of $1.4 billion is barely more than the price tag for the CBS parks.

The acquisition represents both an opportunity and a gamble for Cedar Fair. Headquartered in Sandusky, Ohio, Cedar Fair owns seven amusement parks and five water parks nationwide, including Knott's Berry Farm, near Los Angeles, and its flagship park, Cedar Point, on the banks of Lake Erie between Cleveland and Toledo. Cedar Point accounted for 40% of revenues in 2005.

The five Paramount Parks that Cedar Fair is buying are spread far and wide. They include Canada's Wonderland, near Toronto; King's Island, near Cincinnati; Kings Dominion, near Richmond, Va.; Carowinds, near Charlotte, N.C.; and Great America, in Santa Clara, Cal. The new additions, says A.G. Edward's Conder, means that Cedar Fair's financial fortunes will depend less on parks in the slow-growing upper Midwest. He also notes that all of the new markets have higher projected population growth rates than the cities served by Cedar Fair's current lineup. The acquisition also includes nearly 1,000 acres of undeveloped land that will allow the company to expand parks or add hotels.

In the first quarter of 2006, Cedar Fair reported that sales decreased 4%, to $23.9 million, from the year-earlier period. The company said that while attendance improved at Knott's Berry Farm, sub-par performance at the company's indoor water park resort, Castaway Bay, dragged down overall sales. Dick Kinzel, president and chief executive officer, says new attractions and lower prices at two parks bode well for the 2006 summer season. Kinzel predicts that revenues this year will rise 3% to 5%, from $569 million in 2005.

Conder set a 12- to 18-month price target of $32 for Cedar Fair's units. But Robert Routh, an analyst at Jefferies Co., kept his hold rating on the stock. He agrees that the deal "likely represents the greatest long-term opportunity for unit holders," but he wants to see more of the financial terms before recommending the stock.

--Katy Marquardt