NEW YORK (TheStreet) - The bidding war between private equity firms KSL Capital Partners and Apollo Global Management for theme park and hotels operator Great Wolf Resorts 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%.
In spite of its loss-making ways, Great Wolf Resorts is an attractive target for a private equity buyer. Amid a sea of losses, the company has managed to generate roughly $20 million in free cash flow in recent years -- a key for private equity investors. Meanwhile, Great Wolf Resorts owns and licenses many of its 11 resorts, which featuring indoor water parks and family-styled suite lodging and restaurants.
In a March research note, Shah of Tullett Prebon 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 up to $8.60 a share.
Separately, Great Wolf Resorts' financial adviser Deutsche Bank 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.
In 2011, Great Wolf Resorts saw its annual loss narrow by roughly 50% to $25 million on rising sales and overall operating profits. Still, much of Great Wolf Resorts financial stress results from a debt burden that's over $500 million. While the company turned an operating profit in 2011, its near $50 million in annual interest expense drove overall losses.
In assessing its hunger for Great Wolf after KSL's $7.25 bid, Apollo may reflect on a failed $11.50 a share bid for Cedar Fair that it launched in December 2009. While management accepted the offer, large shareholders like Neuberger Berman and Q Investments didn't support it and Apollo withdrew in April 2010. Neuberger Berman and Scepter Holdings currently have 5.9% and 3% stakes in Great Wolf Resorts and above 12% stakes in Cedar Fair as its shares have surged to over $30 on improving financials and dividend payments.
For investors and potential acquirers, the value of Great Wolf Resorts may rest on whether bidders focus on the company's free cash flow over earnings per share losses that stretch back to 2004.
Great Wolf Resorts lack of a high roller bidding drama also coincides with some new high stakes corporate battles, including the takeover campaign launched by European drugs giant GlaxoSmithKline for Human Genome Sciences, a failed hostile Roche bid for Illumina and Carl Icahn's first 2012 activist win.
For more on deal trends, see 5 deal ready stocks loved by hedge funds portfolios. 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 have acted as financial advisers to Apollo's bid.
-- Written by Antoine Gara in New York