Battle for control of Cedar Fair goes to shareholders this week


SANDUSKY — Cedar Fair LP, a company known for white-knuckle thrill rides, could be in for a twisting, stomach-churning time this week.

Its adventure is a shareholders vote Tuesday that pits the Sandusky amusement park company against its largest shareholder, a pair of Texas investment funds and a private businessman known collectively as Q Investments. The group owns 18 percent of the company's stock.

It has pitched two proposals, both of which Cedar Fair opposes, to stockholders.

One would require Cedar Fair, a $2.5 billion limited partnership that operates Cedar Point and 10 other amusement parks and seven water parks, to hire an independent board chairman and no longer allow the chief executive officer to hold that position. That would remove CEO Dick Kinzel as chairman. The other proposal would require the company to make payment of dividends a higher priority than reducing its $1.6 billion debt.

In such skirmishes between management and shareholders, "it usually ends up with everybody losing," said Cindy Schipani, a business professor who specializes in corporate governance and shareholder rights at the University of Michigan's Ross school of business.

"Unless the company is being run poorly and the shareholders have some clout in getting changes made, most shareholder issues usually don't pass," she said.

The outcome of the two votes is uncertain, but even Q Investments admits that garnering majority support from Cedar Fair's 55.3 million shares will be difficult. "Fifty percent of all shares — it's a tremendous task," said Scott McCarty, portfolio manager at Q Investments. And if the proposals do pass, they are not binding on the company's board, which has opposed the issues publicly.

Still, the results should reveal how Cedar Fair's shareholder base, once a docile group more interested in the latest thrill rides than management issues, feels about the current leadership.

For example, the Knott family of California, which owns 3.6 percent of Cedar Fair stock, has quietly had issues with Cedar Fair management. It opposed a management-backed private equity takeover of Cedar Fair a year ago — the deal was aborted — and Knott family patriarch Stephen Knott said last week the northwest Ohio company "is really a mess right now. The management at Cedar Fair has not helped out the shareholders very much with some of the antics they've done the past year." He declined to say, though, which way on each proposal the family has cast its votes by proxy.

Don Alter, a shareholder from Elmore, said he plans to vote for Q Investments' proposals. He has questions about decisions made by Cedar Fair management, including its backing of the Apollo Global Management takeover and then its last-minute cancellation of the shareholders meeting to vote on it.

"There were people that flew in from all over the country for that meeting," he said. "There was no consideration given for all those people who came in from all over."

The corporate winds swirling about Tuesday's meeting may be less about dividends versus debt and who is chairman than about how much say Q Investments will have in the direction of Cedar Fair.

Q Investments has become active since it acquired its stock after Cedar Fair announced in December, 2009, that it had agreed to be acquired by Apollo Global Management for $11.50 a share and assumption of its existing debt.

Q Investments urged management to seek a higher buyout price. When the price didn't change, the investor group publicly sought to kill the deal.

The night before the deal was to be presented to shareholders last April, it was called off. Then, Q Investments negotiated to get two board members named, and it asked to be involved in Cedar Fair's talks with its lenders to restructure its $1.7 billion in debt, incurred when it acquired Paramount Parks in 2006. Next, Cedar Fair obtained new loan agreements that Q Investments opposed, in part because the agreements restricted the amount of dividends the company could pay.

After Cedar Fair announced a 25-cent dividend payout last fall — compared with the $1 paid out for the year prior to the Apollo proposal — the Texas investor called it paltry. Q Investments then sought a special shareholders meeting, which it had the clout to demand under the company's bylaws, to make paying higher dividends a priority over paying off debt and to prohibit the chairmanship being held by the CEO or other officer of the firm.

The investor group said the splitting of the positions was good governance and would result in more ideas flowing to board members. It said the company's financial picture was on par with what it was two years earlier, when it paid a higher dividend, so it contended the new loan agreements should be renegotiated to allow higher dividends.

Mr. McCarty, of Q Investments, said the funds' officers want sound corporate governance at Cedar Fair and believe the firm needs an independent chairman who can hold the CEO accountable.

"The company has made a lot of mistakes in our view," he said, citing the failed Apollo sale. "We think it's because there has been too much concentrated power at the top."

Cedar Fair, however, contends it has plenty of ideas at its board meetings and it does not want to be restricted on who can be chairman. And Mr. Kinzel has said he will retire by the end of this year.

It also maintains that the company is "thriving" while its competitors are "merely surviving," and that paying off its debt is crucial to making its stock more attractive to investors. Still, a spokesman said, paying dividends has been a priority for the firm.

Spokesman Stacy Frole said the company wishes to accommodate its largest shareholder but has a fiduciary responsibility to all its shareholders and therefore is against the proposals.

Even Q Investments' two selected board members, Eric Affeldt and John Scott, voted to oppose the two issues.

The company said Q Investments has declined to meet with management to discuss company moves and that Q's primary investor, Geoffrey Raynor, has declined its invitation to take a seat on its board.

Q Investments' Mr. McCarty said Mr. Raynor declined to serve on the board because qualified candidates within the industry were available to do that. "We're not looking to run the company and we don't want to be accused of trying to run this company," he said. "By [Mr. Raynor's] not being on the board, that argument is off the table."

Cedar Fair seemed to have a strong year in 2010. It said attendance of 22.8 million at its parks set a record. It hasn't released its earnings for last year, but for the first nine months of 2010 it had a profit of $31.6 million on revenues of $488 million. For all of 2009, it had a profit of $35.4 million on revenues of $916 million. Its stock is trading at $16.50 a share now, up from $9 a year ago before the Apollo deal was announced but down from $26 before the Paramount purchase 4 years ago.

Q Investments has criticized Cedar Fair for increasing Kinzel's base pay 23 percent since the Paramount deal, which weakened the company by incurring large debt and noted that the company's stock price has dropped 48 percent and its annual dividends have fallen 90 percent. Mr. Kinzel received $1.3 million in base pay and $1.2 million in bonus in 2009, the most recent figures available.

Cedar Fair counters that its stock price has risen 83 percent since before the Apollo deal was announced, the result of its management shoring up its balance sheet and restructuring its loan agreements.

Scott Hamann, an analyst with KeyBanc Capital Markets, said that the special shareholders meeting looks like "a waste of time and resources that could be counterproductive in the end."

Asked about whether the Texas hedge fund is pushing its proposals so it can receive a quick return on its investment rather to achieve long-term betterment of Cedar Fair, he said the proposals appear "short-termed focused." However, he said, Cedar Fair's overall shareholder base has changed so much that it is unclear whether investors are aligned with Q Investments or have faith in the company's management.

"It's one thing that they all went against the company in the merger but it's another thing to talk about ousting [Mr. Kinzel] and implementing a change in the distribution policy," he said.

Still, "anytime you get an activist shareholder involved people kind of perk their ears up, and [Q Investments] is clearly going to rattle the cage," Mr. Hamann said.

Three of four major proxy advisory firms supported Cedar Fair's opposition to the dividend-over-debt issue, but three of the four advisory firms backed Q Investments on splitting the chairman and CEO jobs.

The UM business school's Ms. Schipani said having an independent chairman is good governance but, she added, "that is something for their board to decide."

Putting dividends ahead of debt makes less sense, she said. "The current sitting board really has the fiduciary obligation to all the shareholders, not just an 18 percent shareholder. To have dividends come ahead of the debt is not how most companies operate."

Industry analysts Tim Conder of Wells Fargo Securities and Jeffrey Thomison of JJB Hilliard Lyons wrote in reports to investors that the shareholder proposals aren't likely to have much effect either way, noting that Cedar Fair has begun a search to replace Mr. Kinzel and that the lenders are unlikely to agree to new terms to allow higher dividends.

Q Investments' Mr. McCarty said the group will decide after the vote how to proceed.

Ms. Frole of Cedar Fair would not say what the company's board might do if the measures pass. But she indicated it would be unlikely the board would endorse the proposals. Cedar Fair "has to make decisions not only in the long term but also for what is best for all our shareholders," she said.

Contact Jon Chavez at:

or 419-724-6128.