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Great Wolf Resorts Gets Private Premium (Update 1)

Updated with Apollo financing, PWK Partners letter and additional information throughout

NEW YORK (TheStreet) -- The bidding war between KSL Capital Partners and Apollo Management (APO) for Great Wolf Resorts (WOLF), has both private equity firms poised to pay a premium for the struggling water park and hotels chain.

In March, Apollo opened the Great Wolf Resorts sweepstakes with a $5 bid, which was a premium to bargain basement share prices that reflected the company's struggles amid losses and a large debt load. However, in April the emergence of KSL as a bidder has raised the price of Great Wolf Resorts to $7 a share, making what once looked like an opportunistically priced takeover poised to be consummated at a premium priced valuation.

Multiple calculations value the high end of Great Wolf Resorts business and its assets at roughly $8 a share, signaling that if Apollo or KSL were to emerge a clear victor in hunt for Great Wolf Resorts, they would likely have to meet or exceed a premium valuation.

After opening the bidding for Great Wolf Resorts at $5 a share, KSL raised the stakes to $6.25 last week. Over the Easter weekend bankers and bidders hammered out revised bids with Apollo raising its offer to $6.75, which Great Wolf Resorts accepted. However, late on Sunday, KSL threw a second wrench in Apollo's takeover of the Wisconsin-based operator of 11 water park themed resorts with a $7 bid. To be seen is whether Apollo will raise its tender offer, which expires on April 20, or if Great Wolf Resorts will accept KSL's $7 bid, which values the company at $234 million, excluding its debt.

Already, there are signals of how much more Apollo is prepared to bid for Great Wolf Resorts. When boosting its bid earlier in April, Apollo increased its equity commitment to the takeover to $250 million from $170 million, according to regulatory filings. Tullett Prebon special situations analyst Sachin Shah calculates in a Monday note that the extra funds could support a 60 cent bid increase to $7.35 a share. In a separate note reacting to Apollo's initial March bid, Shah said that Great Wolf Resorts' core operations, its net operating losses [a tax benefit for a profitable acquirer] and its majority equity stake in Creative Kingdoms are worth $8 and $8.60 a share.

Separately, Great Wolf Resorts' financial adviser Deutsche Bank (DB) noted that the company could be worth between $3.74 and $7.98 a share, according to court filings stemming from a shareholder lawsuit regarding takeover bids.

Currently, investor expectations signal that a higher bid by either Apollo, KSL or a third party may yet emerge. Great Wolf Resorts shares were up over 12% to $7.42 in late afternoon trading, adding to an over 100% year-to-date gain.

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In assessing its next move, Apollo may reflect on a failed $11.50 a share bid for Cedar Fair (FUN) that it launched in December 2009. While management accepted the offer price, Tullett Prebon's Shah noted that large shareholders like Neuberger Berman and Q Investments didn't support the tender offer, which was withdrawn in April 2010.

Since then, Cedar Fair's earnings have exceeded management expectations, according to Shah of Tullett Prebon and its shares have spiked to nearly $30 on improving financials and dividend payments.

One of Great Wolf Resorts largest shareholders, PWK Partners, said in an April 3 letter that the company is worth $10 as a result of forecasts that it can earn $40 million in free cash flow in 2013. As a 4.2% shareholder, PWK Partners asked for Great Wolf Resorts to withdraw its tender offer, while noting that it didn't believe "selling the company to a private equity buyer is the best avenue to maximize shareholder value in the current environment."

For investors and potential acquirers, the value of Great Wolf Resort may rest on whether bidders focus on company's free cash flow earnings abilities over earnings per share losses that stretch back to 2004.

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