Great Wolf Buyout Game Needs High Roller All-In Bet

NEW YORK (TheStreet) - The bidding war between private equity firms KSL Capital Partners and Apollo Global Management (APO) for theme park and hotels operator Great Wolf Resorts (WOLF) has been a typical drama about how buyout firms take public companies private. It's also amounted to a terrible poker game.

Great Wolf Resorts shareholders are less focused on a sale process that may be a case study in the conflicts that arise in corporate buyouts, than they are on the lack of high-roller stakes at the bidding table.

Late on Wednesday, Great Wolf Resorts accepted a $7 per share bid by Apollo that matched a previous bid by KSL announced earlier in April. A Thursday morning $7.25 per share bid rebuttal by KSL, a quarter raise in poker parlance, continued a slow rise in Great Wolf's takeover price, fueling shareholder objections in what has been described as a challenged private equity sale process.

Shareholders want Apollo and KSL to raise the stakes in a Great Wolf Resorts showdown.

"It this were a game of Texas Hold-em, they should be raising the blinds," says a Great Wolf Resorts shareholder, who didn't want their name disclosed. In poker, the blind is a mandatory bet made before any cards are dealt, either in addition to or instead of an ante, and forces the stakes for each player to go up as the game progresses.

A sale process that began with a $5 per share bid by Apollo and accepted by Great Wolf Resorts in March has proven dramatic for the emergence of a competing bidder in KSL. While management has sided repeatedly with Apollo bids at $5, $6.75 and most recently $7, KSL has raised the private equity giants bid each time, with Great Wolf Resorts showing little interest in engaging a would-be 'white knight.'

The perceived favoritism is ticking off some investors and analysts. Since KSL hasn't been given access to Great Wolf Resorts finances in the same manner as Apollo, Tullett Prebon special situations strategist Sachin Shah says that the company is missing an opportunity to engage with a credible bidder who may be able to drive the company's sale price significantly higher than current levels and nearly double the initial offer that Great Wolf accepted.

"It's very unusual to see that the company hasn't allowed KSL to do a due diligence. They are basically favoring Apollo and allowing it to increase the termination fee," says Shah, who sees recent bids as still below the fair value of Great Wolf Resorts, which he pegs at between $8 and $8.60 a share. Shah says that "$7.25 is not going to do it; Apollo will either have to come in at 7.50 or walk away."

Meanwhile, the slowly rising breakup fee to be paid to Apollo in a failed bid is now at $9.33 million -- roughly 28 cents a share -- and a big cost for a company that entered February with a market cap of $128 million, adds Shah.

Large shareholders agree that Great Wolf Resorts, the Wisconsin-based owner of 11 water park themed resorts, is worth far more than Apollo's offers. PWK Partners, a 4.2% shareholder, said in an April 3 letter that the company is worth $10 per share. The investment firm also noted 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."

Other shareholders simply feel that at this stage in the bidding process, both KSL and Apollo have ample finances to up antes in the bidding showdown.

"This is playing out as expected," said the Great Wolf shareholder. "KSL could pay more because they can cut out costs, while Apollo has a lower cost of capital because of the $75 billion in assets that it manages." KSL is a real estate focused fund with large resort investments like the La Costa Resort and Spa. Apollo is one of the world's largest private equity firms.

Great Wolf Resorts shares rose nearly 4% to $7.42 in Thursday trading, putting its year-to-date gain at over 150%.

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