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Published: Sunday, 4/3/2011 - Updated: 3 years ago

Amusement-park firm riding own roller coaster

Big investor, management in battle for Cedar Fair

BY SHEENA HARRISON
BLADE BUSINESS WRITER

SANDUSKY -- The past year has been anything but fun for Cedar Fair LP.

The Sandusky amusement park operator has been engaged in a battle of wits since early last year with Q Investments, made up of a pair of Texas hedge funds and a private businessman that collectively own 18.1 percent of the company.

The investment firm has successfully pushed for numerous changes in Cedar Fair's operations while vocally expressing its discontent with Cedar Fair Chief Executive Officer Dick Kinzel and the company's financial leadership.

Now, Q Investments is calling for Mr. Kinzel and several other board members to step down from Cedar Fair and is pushing to nominate its own candidates for the Erie County firm's board.

The knock-down, drag-out fight has enormous ramifications for one of northwest Ohio's stalwart firms and a prime player in the national recreation industry.

KEY POINTS OF CONTENTION

Early 2010: Cedar Fair management and board push a takeover of the firm by Apollo Global Management at $11.50 a share, but Q Investments strongly opposes it and garners enough support to force Cedar Fair to cancel the takeover.

Spring 2010: Q Investments seeks the right to nominate Cedar Fair board members, but a lawsuit is settled when Cedar Fair agrees to add two board members supported by the investment funds.

Fall 2010: Q Investments asks fellow shareholders to split the chairman and CEO roles held by Dick Kinzel and asks Cedar Fair to renegotiate its debt agreement so it can pay a higher dividend. Cedar Fair board and management strongly object, and a special shareholder vote is held. The first proposal passes; a second receives wide support but doesn't pass. Cedar Fair this year splits the chairman and CEO positions and renegotiates with its lender to pay a higher dividend in 2011.

This year: Q Investments calls for a special meeting -- and later sues Cedar Fair to set it up -- for shareholders to vote on whether to allow stockholders to nominate board members. Cedar Fair opposes the issue but is expected to hold a shareholder meeting May 24. It has developed its own proposal to allow shareholder nominations of board candidates.

At stake is the makeup of the board, which could be altered substantially and potentially could overturn the current management.

For the shareholders, it could produce a dramatic swing in the stock price, either up or down, depending on the Wall Street perception of whether the company is headed in the right direction.

The company owns 12 amusement parks, including Cedar Point in Sandusky, and five water parks, in the United States and Canada.

What the outcome will be and how long the skirmishing will last between the big investor and the company is uncertain. But industry experts say Q Investments isn't likely to let up on Cedar Fair any time soon.

"What they ultimately want is a higher price on their units, and they're willing to take Machiavellian tactics to get there," said Rick Munarriz, senior analyst at the Motley Fool.

The combative history between Cedar Fair and Q Investments began in January, 2010, when the investor became the company's largest investor. The company immediately contested a proposed deal to sell Cedar Fair to Apollo Global Management LLC of New York City for $2.4 billion, or $11.50 a share. Cedar Fair ultimately called off the Apollo deal in April, 2010, saying the transaction did "not have the required level of investor support."

Since then, Q Investments, led by Texas businessman Geoffrey Raynor, has leveraged its weight in other ways. That includes successfully lobbying to separate the chairman and CEO roles held by Mr. Kinzel, pushing for the ability to nominate Cedar Fair board members, and fighting for increased shareholder dividend payouts. The firm has called two special shareholder meetings and has taken Cedar Fair to court at least three times to push for its changes.

The funds' nearly one-fifth share of ownership in the publicly traded company -- ticker symbol FUN on the New York Stock Exchange -- is enormous by most standards and gives it a huge stake with which to demand action in regard to Cedar Fair's operations.

Q Investments representative Scott McCarty said the Texas fund group is outspoken because it has lost faith in Cedar Fair's ability to make decisions that align with shareholder interests.

"This is not our preferred path," he said. "But when we see this level of mismanagement, we're left with very little choice"

Cedar Fair spokesman Stacy Frole said the company has worked to reach an understanding with its largest investor.

"We don't believe in doing business with lawsuits and special meetings," she said. "Unfortunately, that's the action that Q Funding has taken, and we'll continue to meet our obligations."

Mr. Munarriz said Q Investments has been able to secure the "lion's share of attention" from other Cedar Fair investors by being vocal in its push for higher shareholder returns. "Investors sort of like it because it does increase the anticipation that change will happen," he said. "Change tends to be something that investors look at favorably."

However, public bickering between Cedar Fair and Q Investments could cause other investors to question whether the fighting will ultimately damage Cedar Fair's performance, said Dan Dalton, founding director of the Institute for Corporate Governance at Indiana University-Bloomington.

"You're going to make your investors nervous," Mr. Dalton said. "They're going to ask themselves, 'Do I still want to be an investor?' "

Q Investments has tried to influence Cedar Fair's operations through changes to the company's board. The hedge funds sued Cedar Fair last year for the right to nominate new board members. Cedar Fair acquiesced by agreeing to add two new directors, each of whom was recommended by Q Investments.

Last fall, Q Investments persuaded shareholders to vote in favor of splitting the chairman and CEO roles held by Mr. Kinzel, saying the move would "distribute some of the concentrated power that Mr. Kinzel currently enjoys." Cedar Fair named C. Thomas Harvie, a current board member, as its nonexecutive chairman in January.

Cedar Fair is expected to hold a shareholder meeting May 24 to consider another Q Investments proposal, which would allow Cedar Fair shareholders to nominate board candidates.

Q Investments expects its latest proposal to pass, even though it will require support from at least 80 percent of shareholders.

"Right now, we're three for three," Mr. McCarty said of battles it has won with Cedar Fair. "With this last issue being so clear-cut, such a basic fundamental right of good corporate governance, we're confident that we'll get overwhelming support again."

Although Q Investment was successful in defeating the takeover and getting the chairman/CEO role split passed, it fell short on its proposal that would have made paying dividends a higher priority than paying off debt.

Mr. Dalton of Indiana University said it's common and legal for private-equity firms to try to place directors on company boards. However, he said, businesses need to be savvy about managing conflicts that could arise, such as if the board member's investment firm tries to acquire the company.

"The question that is raised is to whom do you have a loyalty," Mr. Dalton said.

Ms. Frole would not speculate on the possible motivations behind the changes Q Investments has sought. But in a December presentation to Institutional Shareholder Services, a corporate governance advisory firm, Cedar Fair said it believes Q Investments doesn't have the company's sustained health at heart.

"We believe Q Investments' true intentions are to get in, make a quick profit, and get out -- with no regard for what's best for long-term investors," Cedar Fair said.

In addition to the ability to nominate directors, Q Investments wants a majority of Cedar Fair's board ousted. A private arbitration panel ruled in February that the company wrongfully terminated Jacob "Jack" Falfas, the former chief operating officer who left suddenly in June after three decades with the firm.

Cedar Fair said Mr. Falfas resigned, giving no other explanation for his departure. However, the arbitration panel ruled that he was "terminated for reasons other than cause" and called for Cedar Fair to reinstate Mr. Falfas to his job as well as reimburse him for back salary and other costs.

Q Investments demanded last month that seven Cedar Fair board members, including Mr. Kinzel and Mr. Harvie, step down in connection with the arbitration ruling, which Cedar Fair plans to contest.

Cedar Fair's share value has risen 20 percent since Q Investments came on the scene, according to a December filing from the park operator. For 2010, the company reported a loss of $31.6 million, or 57 cents a share, on revenue of $977.6 million. That compares with a profit of $35.4 million, or 64 cents a share, on revenue of $916 million in 2009.

Last year's results were negatively affected, in part, by $10.3 million in costs related to Apollo's failed acquisition bid, but revenues were boosted by an 8 percent increase in attendance for the year.

Paul Ruben, an editor at Park World magazine, said Cedar Fair's attendance and revenues been helped by Mr. Kinzel's penchant for "bringing the best rides in the country" to the company's parks.

"My sense is that he has his hand on the pulse of the thrill-seekers," Mr. Ruben said. "He knows what thrill-seekers want better than I think any other park operator."

Analysts seem relatively upbeat about Cedar Fair's projected performance for this year.

Scott Hamann of KeyBanc Capital Markets said in a February report that he is encouraged by Cedar Fair's fourth-quarter 2010 results, its debt restructuring, and "the company's ability to generate significant cash flow."

Mr. Munarriz said some investors may not care too much about the quarreling between Cedar Fair and Q Investments, as long as Cedar Fair's share value appreciates.

"So what if mommy and daddy don't get along," he said. "It's still a nice place to live."

Contact Sheena Harrison at: sharrison@theblade.com or 419-724-6103.



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