Private Equity Predators Circle Great Wolf in Bidding War

NEW YORK ( TheStreet) - KSL Capital Partners has topped a March bid by private equity giant Apollo Management ( APO) for struggling water park and hotels chain Great Wolf Resorts ( WOLF).

Great Wolf Resorts is now set to face a private equity bidding war as the buyout funds circle the company's water park resorts as an investment, driving its share higher.

On Thursday, KSL bid $6.25 a share, or $879 million for Great Wolf Resorts when counting the company's debt, upping by 25% a previous $5 a share offer from Apollo that had been approved by Great Wolf Resorts's board. However, that price and the company's use of a "poison pill" to thwart a hostile takeover attempt prompted a flurry of shareholder lawsuits.

KSL's $6.25 a share bid throws another wrench in that sale process, as some investors expected. Since the March 13 offer was first announced, Great Wolf shares have traded over 10% above the $5 offer price. In Thursday morning trading, Great Wolf shares rose over 12% to $6.42, topping KSL's unsolicited bid.

After Great Wolf Resorts board unanimously agreed to Apollo's $5 a share bid, the Madison, WI-based operator of 11 water-park themed resorts faced pressure by shareholders to conduct a more full sale process to draw a higher-priced bid. In accepting Apollo's offer, Great Wolf Reports agreed to a "no-solicitation" provision that would prevent the company from shopping for a higher priced takeover. Meanwhile, it also enacted a "poison pill" to prevent an investor from snatching more than 12.5% of the company's shares.

Still, Great Wolf's sale process allowed for new parties to make higher unsolicited offers, such as KSL's $6.25 a share Thursday bid.

KSL, a resorts-focused private equity fund with investments in Squaw Valley and San Diego's La Costa Resort and Spa, appears to be joining the Great Wolf sweepstakes after what Great Wolf claims was an extensive sale process that took the better part of a year, but culminated with bids of just $5.

With Deutsche Bank ( DB) as a financial adviser, Great Wolf Resorts Chief Executive Kimberly Schaefer told Bloomberg News that the company reached out to 38 prospective bidders and 11 entered confidentiality agreements to review the company's finances. Deutsche Bank's analysis of Great Wolf Resorts noted that the company could be worth between $3.74 and $7.98 a share, according to a shareholder lawsuit. Nevertheless, in the nine-month sale process, only three bids emerged at a value of roughly $5, according to Bloomberg, paving the way for the board's approval of Apollo's offer.

"After a thorough assessment, we concluded that the proposal put forth by Apollo is the best way to maximize value for shareholders, who will receive a substantial and immediate cash premium for their shares," said Schaefer when recommending Apollo's offer to shareholders.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Prior to Thursday's bid, Great Wolf shares have risen nearly 100% year-to-date on M&A expectations and a narrowing of the company's losses. In fourth quarter earnings, Great Wolf resorts lost over $13 million, trimming its quarterly loss by over 50% on improving revenue. Much of Great Wolf's financial stress results from a debt burden that's over $500 million. While the company has turned operating profits in recent years, its near $50 million in annual interest expense has driven overall losses.

In spite of a string of losses stretching back to 2004, Great Wolf Resorts is an attractive target for a private equity buyer, as KSL's bid indicates. According to Bloomberg calculations, Great Wolf Resorts has over $143 million in total tax losses as of 2011, which could be worth $1.62 a share in future tax benefits to an acquirer. Amid a sea of losses, the company also managed to generate positive free cash flow in recent years -- a key for private equity investors -- though cash was negative in 2011.

Meanwhile, Great Wolf Resorts owns and licenses many of its 11 resorts, which featuring indoor water parks and family styled suite lodging and restaurants. The company was founded in 1997 in Wisconsin, and has expanded into eight other U.S. states and Canada.

In a press release, Great Wolf Resorts said that its board of directors will consider KSL's $6.25 a share bid, "consistent with its fiduciary duties and in consultation with its independent financial and legal advisors."

For more on deal trends, see 5 deal ready stocks loved by hedge funds portfolio's. See five stocks that could be trampled by a share overhang, for more on private equity backed IPO's.

Deutsche Bank will continue to advise Great Wolf Resorts, while Morgan Stanley, UBS, and Nomura Securities acted as financial advisers to Apollo's March bid.

-- Written by Antoine Gara in New York

More from Mergers and Acquisitions

10 Questions for PayPal Ahead of Its Big Investor Day

10 Questions for PayPal Ahead of Its Big Investor Day

Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave

Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Square Shares Shake Off Concerns About PayPal's Deal for iZettle

Square Shares Shake Off Concerns About PayPal's Deal for iZettle