Apollo Assumes Resort Co.’s Restrictive Capital Structure In All Equity Deal

Apollo Global Management is investing all equity and essentially stepping into Great Wolf Resorts’ complicated capital structure as part of the firm’s agreement to take the company private for about $703 million.

The New York-based firm agreed on March 13 to buy all outstanding shares of the Madison, Wis.-based company for $5 a share, a 19 percent premium to the closing price on its stock the day before. Apollo Global is committing a total of $190 million of equity for the deal.

Great Wolf operates 11 resorts featuring indoor water parks and other entertainment, such as restaurants, spas and miniature golf. The investment fits nicely into Apollo Global’s growing portfolio of what its executives refer to as “out-of-home entertainment,” which includes casino company Caesar’s Entertainment Corp., Norwegian Cruise Line and AMC Entertainment Holdings Inc., among others.

Such businesses tend to offer a reliable, attractive source of recurring revenue which can be used to pay down debt and pay dividends. Not surprisingly, Apollo was one of dozens of suitors that looked that participated in the auction for Great Wolf run by Deutsche Bank.

“These businesses tend to be relatively stable, relatively predictable,” a source close to Apollo said, when asked why the firm would be attracted to Great Wolf. “They tend to generate a reasonable amount of cash flow.”

But Apollo is taking on a fair amount of risk given restrictive capital structure of Great Wolf, which already is leveraged at 6.7x its $76.9 million of EBITDA as of Dec. 31, 2011, according to Capital IQ.

The company’s various debt agreements contain provisions that limit its ability to raise debt and restrict its ability to make investments, which makes it very difficult for Great Wolf to finance or invest in new development projects or complete acquisitions. Further, a refinancing of $230 million of Great Wolf’s 10.87 percent senior secured notes due in 2017 would require a prohibitively expensive make-whole payment, as the bonds are not yet in their call period.

Apollo executives believe the company would have more leeway to work around this structure as a private company with access to Apollo’s ample capital and expertise in the sector, the source close to Apollo said. Nonetheless, the source said, “There’s a lot of risk” that Apollo is taking on. “It’s a very uncertain macro environment.”

Despite the slow economic recovery, the company performed well in 2011, according to Standard & Poor’s, which said the company likely benefitted from its position as an affordable destination that families can drive to. The company generated just under $300 million in total revenue for 2011, according to Capital IQ.

“For 2012, we expect revenue per available room at Great Wolf to grow in the low-single-digit percentage area,” which is in line with the agency’s expectations for the lodging industry, Standard & Poor’s said in a report following the deal’s announcement. The agency did not change the company’s B rating with a stable outlook. 

The investment will come out of Apollo’s seventh fund, which tallied almost $15 billion in commitments from investors back in 2009. The fund is more than halfway invested, the source close to Apollo said.

Some Great Wolf shareholders are reportedly pushing back against the deal, which was unanimously endorsed by the company’s board, arguing that Apollo’s bid wasn’t high enough.