You could call it a “whale” of an initial public offering: SeaWorld Entertainment, the home of Shamu, will be taken public by Blackstone Group. The private equity firm didn’t disclose a date for the planned stock sale in its regulatory filing today.
The private equity firm bought the chain of aquatic parks at the end of 2009 — a year that the company lost $58 million. This year, the parks have been raking in revenue. Profits totaled $86 million in the nine months ended in September, nearly double last year’s earnings.
The dramatic turnaround makes it sound like a great investment, and it may be. But — no pun intended — it’s what’s below the surface of this planned IPO that prospective shareholders might want to watch.
Private equity firms don’t just borrow money to build the business, they also add debt to pay themselves. SeaWorld was $1.8 billion in debt at the end of September, at least a third of that to pay dividends to Blackstone.
James Krapfel, an analyst at Morningstar, says there’s been a resurgence in such debt-laden deals, which are known as “dividend recapitalizations.” He says investors should be mindful of debt levels when they decide whether to buy a stock, even when a company appears to be doing well.
“The profitability looks fairly strong, but the leverage of the company is also higher, so that is counteracted, at least somewhat,” Krapfel explains. “If you get in a recession or you get a tough period for a company for any given reason, then high debt level could really limit their ability to continue to grow and to make investments that they need to make for the future.”
The interest payment burden could also crimp the company’s profits, says Motley Fool analyst Jason Moser. “If investors don’t know that,” Moser cautions, “then they may be getting a company that doesn’t have as much earnings power as they thought it may.”
On the other hand, SeaWorld’s private owners sank a lot of money into improving the company’s 11 U.S. theme parks, which also include Busch Gardens and Sesame Place. Theme parks in general have been doing well lately.
Even with all the debt, “it’s not necessarily a horrible investment,” says market writer and commentator Rich Smith. He’s quick to add that “it’s simply a great investment” for Blackstone.
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