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Published: Thursday, 5/25/2006

To buy Paramount Parks, Cedar Fair steps up debt

BY JON CHAVEZ
BLADE BUSINESS WRITER

Known for its hair-raising thrill rides, Cedar Fair LP found a new way this week to scare some of its investors: spending $1.24 billion on five amusement parks and arranging to borrow up to $2 billion.

"They took a tremendous risk," Doug Schaller, head of Schaller Investments, of Winston Salem, N.C., said of the Sandusky company's decision to buy Paramount Parks Inc.

"I think they mortgaged the company to buy Paramount," said Mr. Schaller, who said he unloaded his Cedar Fair shares a day after Monday's announcement of the acquisition.

Other analysts said they haven't finished evaluating the deal.

Stacy Frole, head of Cedar Fair investor relations, said the company's intentions are to borrow $1.75 billion to $1.8 billion, which will be used to buy Paramount, pay shareholder dividends, and maintain operations until 2009, when, it believes, it will maximize profits from the new parks.

But that still will leave Cedar Fair with more than three times its current debt - $545 million at the end of the first quarter. Ms. Frole said $325 million is in term debt, the rest in revolving credit. The company has no bonds or notes sold to the public.

By comparison, chief rival Six Flags Inc. has over $2 billion in debt and, struggling with that and declining revenues, is attempting to sell properties.

How Cedar Fair will handle $1.8 billion is unclear, but analyst Robert Routh, of Jefferies & Co., said, "I seriously doubt they'll want to keep that much debt on their balance sheet."

Ms. Frole said the firm is considering its options, but could offset the debt by issuing new shares or public bonds or notes.

But analysts don't expect more stock to be issued, and because the company has never sold debt to the public, it has no debt rating. A sale of debt to the public could be risky and bring high interest rates for the company.

"It's not going to be 'A' rated, but this isn't going to be a junk bond issue, either," said Rick Munarriz, an analyst with the Motley Fool online investment service.

If the company borrows money and keeps its regular term debt, it would incur a lot of interest expenses, which would be compounded by the need to pay its quarterly dividend as well as pour money into rides and park improvements, Mr. Schaller said.

Mr. Munarriz, however, said the total debt isn't extraordinary for a firm that, after the Paramount purchase, would have nearly $1 billion in annual revenues.

"I'm not concerned with them choking on the debt," he said. "My only concern is it's a bad time to be getting in that much debt with interest rates rising."

The new debt likely will bring interest payments to $130 million, an amount that the firm can handle, especially if it can increase revenues from the Paramount parks, Mr. Munarriz said.

Contact Jon Chavez at:

jchavez@theblade.com

or 419-724-6128.



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