Shareholder activism on the increase

Q Investments swooped in on Cedar Fair

2/26/2012

Blade Illustration/Wes Booher

In late September of 2009, officials at Cedar Fair LP foresaw a gloomy future for the century-old amusement park chain.

Cedar Fair, owner of 11 amusement parks including its flagship Cedar Point in Sandusky, was struggling mightily to digest its 2006 acquisition of Paramount Parks for $1.24 billion.

Knowing that its third-quarter earnings would be dismal and its flexibility limited by the financing terms of the Paramount deal, management secretly opened talks with Apollo Global Management in hopes of convincing the private equity firm to buy Cedar Fair for $635 million, or about $11.50 per share.

At the time, management felt the price of the deal, announced on Dec. 17, was a sweet one for shareholders because in mid-November Cedar Fair stock was trading for just $6.01 a share, an ocean away from its historic high of $44.40 in October, 1997.

But before shareholders could be sold on the deal's merits, an activist shareholder -- a pair of Texas hedge funds named Q Funding III and Q4 Funding and led by Fort Worth businessman Geoffrey Raynor -- swooped in January-February 2010 and bought an 18.1 percent majority share of Cedar Fair, and lobbied shareholders to vote against the Apollo deal.

Q Investments, as the group of funds were called, argued that $11.50 a share was a "bargain basement" price well below the stock's inherent value, and that if the deal were to be voted down by shareholders, Cedar Fair's stock price had "every chance of returning to the same unit valuations it achieved before the recession."

Faced with rising shareholder disapproval, led by Q Investments, the deal was called off in April, 2010.

And two years later Cedar Fair's stock is trading at over $28 a share, well above the $17 price it was at as the recession began in December, 2007, and three and a half times the price when the Apollo deal was announced.

Q Investments didn't stop with killing the Apollo deal. Filing lawsuits and calling special shareholder meetings, it pushed for and got now-retired Chief Executive Dick Kinzel removed from his dual role as chairman, got two independent director candidates it favored appointed to the Cedar Fair board, and got the company's rules changed to allow shareholders to nominate board candidates.

It failed to secure a pledge from the company to make dividends a priority over debt repayment, but it had talks with Cedar Fair about the issue.

Before Q Investments, shareholder activism was mostly unknown among northwest Ohio's publicly traded firms. But Paul Hodgson, a corporate-governance expert, said activist shareholders emerged in the 1990s, have been growing in number, and have become involved anywhere they see potential opportunity.

Shareholder activism "is a fairly standard way for hedge funds to increase the value of their investment as they see it," said Mr. Hodgson, a senior research associate at GMI, a firm that does research on corporate governance.

"If they look at something and say, 'This really should be making money but it isn't,' they'll say, 'Lets take a closer look at why.' Then they'll jump in and force changes," Mr. Hodgson said. "Afterwards, they don't always bail out completely. They'll hold a much smaller position, but they usually stay in for a year or two to make sure their changes remain or that the board members they appointed retain their seats. But they usually reduce their positions."

True to form, Q Investments in January notified the Securities and Exchange Commission that it had lowered its stake in Cedar Fair from 18.1 percent to 12.8 percent. It claimed it did so to maintain balance in its portfolio.

The move made independent asset management firm Neuberger Berman Group LLC Cedar Fair's largest shareholder with 14.6 percent.

Marathon Petroleum

A second northwest Ohio firm, Marathon Petroleum Corp. of Findlay, also felt the pressure of an activist shareholder recently.

Marathon Petroleum, which was spun off from Marathon Oil in July, was notified in mid-January that hedge fund Jana Partners LLC had bought a 5.5 percent stake in the refining and marketing firm.

Jana immediately contacted Marathon management about their "business strategy, corporate and asset structure, capitalization, dividend and repurchase policy, governance, and related matters" with the stated intention "to bring about changes to increase shareholder value as well as pursue other plans or proposals that relate to or would result in any of the matters set forth."

Analysts said Jana's interest in Marathon was likely to force it to form a master limited partnership to control some or all of its 9,600 miles of pipelines or its chain of Marathon and Speedway gas stations.

Weeks later, Marathon said it was considering a spinoff of its pipeline assets. Marathon's stock price surged nearly 10 percent on the news, rising from $38 a share to $41.68.

Two weeks after Marathon's announcement, Jana announced it had reduced its stake in the company to 4.5 percent.

In its SEC filing, Jana indicated it had paid an average of $32.28 for its Marathon shares, and sold about 18 percent of its stake for about $43.63 per share.

Mr. Hodgson said that, on balance, shareholder activism by a large investor is a good thing for the stock market, and more often than not is a good thing for a company.

"I don't recall too many cases of involvement by an activist shareholder where there aren't improvements," he said. "There are usually benefits for the public shareholders, although there might not be many benefits to the employees of the company, as we've seen with what Mitt Romney and Bain Capital did to several companies.

"Groups like Bain, they'll go in and take a position and [if they] decide that if the company's not working, they'll shut it down," he said.

Effects on companies

The effects of Jana's moves on Marathon are too recent to gauge properly.

But analysts said Q Investment's moves, while occurring in a very public way through lawsuits and special shareholder meetings, probably did little to drive Cedar Fair's share price to its new levels despite that being Q Investment's stated goal.

"The one thing that Q did was effectively block the Apollo deal. If that had happened, then investors would have taken that money and invested somewhere else, but the money they would have got likely wouldn't have seen as great a return," said James Hardiman, an equity analyst with Longbow Research.

"Since the deal got nixed almost two years ago [Cedar Fair] stock is up 154 percent," said Mr. Hardiman, who last week estimated Cedar Fair's share price to hit $33 by year's end.

"By comparison, the S&P has only increased by 23 percent, so it would have been tough to match that had the deal gone through. So to a certain degree you could give [Q Investments] credit for blocking that deal, but beyond that I wouldn't give them that much credit at all."

Rick Munarriz, an analyst for the Motley Fool investor Web site, agreed that the Texas hedge funds deserve praise for blocking the Apollo deal, but Cedar Fair management gets the credit for restoring its share price to pre-2007 levels.

"If Q doesn't show up, maybe Cedar Fair gets bought out at a low price. That Cedar Fair's still here is attributable to Q Funding," Mr. Munarriz said. "But right now Cedar Fair is being valued for the merits of the company … and the moves by management."

Q Investments declined to comment.

Dividend return

Jeff Thomison, an analyst with Hilliard Lyons, said a part of Cedar Fair's rising share price is probably because of the return of mom-and-pop investors who are happy to see the share price at $28, but even happier to see Cedar Fair restore its dividend, which it suspended during most of 2010 because of high debt, lower earnings, and loan covenants restricting the paying of dividends.

Cedar Fair paid a dividend of $1 per share last year, will pay $1.60 this year, and has said it will pay $2 or more in 2013.

"The return and the increase of the cash distribution has been well received and the business is doing well," Mr. Thomison said.

Hilliard Lyons recently raised its projected price of Cedar Fair stock to $32 a share by 2013.

Meanwhile, Scott Hamann of KeyBanc Capital Markets was even more optimistic with a target price of $35 a share.

"We are confident that the strategy of new management will drive further growth and believe the substantial [dividend] growth presents a compelling value proposition for investors," Mr. Hamann wrote Tuesday.

Small investors return

One thing that Q Investments suggested in early 2010, which Cedar Fair planned to do anyway, was refinance its debt.

John Maxwell, a bond analyst with Jefferies & Co., said that move helped Cedar Fair in numerous ways. "Given where the debt trades for the company, they're trading well above par on their debt issues," he said.

He said fixing the debt issue allowed Cedar Fair to reinstate its dividend, which in turn brought back small investors who sold their shares when the dividend was canceled.

Now that the debt is manageable, the share price rising, and investor confidence back, the company's new management, led by former Disney executive Matt Ouimet, can focus on taking the company even further, Mr. Maxwell said. "They continue to execute the plan that management's laid out. They had management turnover, but they brought in experienced operators who I think will continue to move the company forward," he said.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.