'Rotten' deal raises concern

SANDUSKY — The way one investor sees it, the proposed merger of Cedar Fair and Six Flags is something akin to an old saying: "If you're going to do that to me, you might think about kissing me first." Rachlin The Cedar Fair board and Cedar Fair CEO Richard Zimmerman aren't in any kissing mood, however, and the group of investors getting hurt badly in the proposed deal own Cedar Fair shares, according to Doug Rachlin, the managing director and senior portfolio manager at Neuberger Berman Investment Advisers in New York. Rachlin's no ordinary unit holder: He owns and manages a total of 3.4% of all Cedar Fair shares, making him one of the largest, if not the largest, single investor in the company. Rachlin concluded that the merger is a bad deal. "I've never seen such a transaction negotiated this way," he told the Register. "Cedar Fair shareholders have no voice in this transaction." What's broken? Rachlin referred to a restructuring agreement in which Six Flags paid an $85 million dividend to its own shareholders that makes it appear that Cedar Fair is acquiring Six Flags. Under that arrangement, the Cedar Fair board does not need a vote of approval from its shareholders — also called unitholders — for the deal to be approved. "How the board did this hurts Cedar Fair unitholders in the pocketbook," Rachlin said. "We're paying $85 million to Six Flags shareholders for us to have the privilege not to vote on this merger." The board also failed to structure the deal with a walkaway clause to protect the interest of unitholders, according to Rachlin, eliminating the potential that another company might make a competing offer for Cedar Fair. The proposed deal also would allow Six Flags investors to "sue for an unlimited amount of money." "Six Flags has the right to walk way, but Cedar Fair does not," he said. Cedar Point He talked directly with Cedar Fair board chairman Daniel Hanrahan, Rachlin said, and was disappointed in what he heard. "The first thing out of his mouth was, 'We followed the letter of the law,'" Rachlin said, recalling the conversation with Hanrahan. "That doesn't mean that what they're doing is ethical or in the best interest of their unitholders." The proposed merger is a bad deal for Cedar Fair shareholders in most every way, according to Rachlin. "The board's first responsibility is to serve the interests of their unitholders," he said. "Board members have obviously failed to do that here. In fact, they did the opposite and acted in a way that hurts them." This proposed merger shows "the rotting ethics inside corporate boards of directors," Rachlin complained. "These management and board of directors ethics are examples of the worst behavior." Fighting back Cedar Fair officials did not respond directly to questions, and they declined to say if there was any meeting with local unit holders planned or scheduled. One local investor said he's working to have a meeting this month at a venue accommodating up to 400 people for shareholders to meet and decide how to fight back. "As soon as we have a location, there will be an announcement," the investor, a man, said. He was one of about a dozen local shareholders who shared their concerns about the proposed merger and their frustrations with the Cedar Fair board, Zimmerman and Hanrahan. They have more questions than answers from Cedar Fair executives since the planned merger with Six Flags was announced last year. The quarterly dividend checks from the company had been consistent for many years, a No. 1 attraction for many who have invested. Dividends were paid to Cedar Fair shareholders quarterly for many years but were suspended in 2020 and resumed in September 2022 at $1.20 per share annually. It's expected that a dividend will be paid next month but not thereafter, for awhile. A company press release issued when the merger plan was announced Nov. 2 stated that dividends would be restored after the merger "once the company achieves its targeted net leverage ration." That is forecast to happen by about 2026. "Our net leverage would be 3.7 times adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) reflecting expected synergies and enhanced cash flow generation, which we expect to reduce to approximately three times within two years of close," a transcript from a call with investors on Nov. 3 states. Hanrahan That message did not translate for some local shareholders, or they weren't on that call. Let me ask you "When will dividends be restored" was a top question for local investors, but they also expressed deep concern that unitholders are being blocked out of the merger process and denied the opportunity to vote on it. "This is one of the main reasons I'm upset," one local investor said. "They are not letting shareholders vote on this. Six Flags investors get to vote but not Cedar Fair investors." "The unitholders need a two-thirds vote to strike down the deal," the investor said. "Shareholders would likely meet that threshold and vote it down. They didn't want that, for some reason." The company isn't answering questions, said another local investor who wrote to Hanrahan weeks ago asking for more information about the merger. He also said the deal was structured to "not allow Cedar Fair investors to vote." "The board, the board chairman and the CEO work for unitholders," the investor said. "We own 51% of the company. They should be answering our questions." He called it "a rotten deal" for locals. "Cedar Point is Cedar Fair's premier park. It always has been. After this goes through it will be just another park," he said. "The new company won't even bear its name." Hanrahan did not respond to his inquiry. Zimmerman Hanrahan also hasn't responded to inquiries from a reporter. The Register compiled 13 questions from what local investors said were their primary concerns about the proposed merger and wrote to Cedar Fair CEO Richard Zimmerman and Hanrahan. The inquiries sent to Zimmerman and Hanrahan were routed to corporate communications director Gary Rhodes and to Joele Frank, a financial communications and investor relations firm with offices in New York and San Francisco. Both Rhodes and the Joele Frank firm provided statements but did not reply directly to any of the questions. The following statement was provided by Joele Frank earlier this week as a response from Cedar Fair: "The Cedar Fair board unanimously determined that the merger with Six Flags is the best way to build on the company's momentum and enhance unitholder value. The transaction is structured to maximize Cedar Fair unitholder ownership in the combined company, while minimizing debt breakage costs and any potential tax impact to unitholders. Given Cedar Fair unit holders will maintain more than 51% ownership of the combined company, the transaction does not require a unit holder vote in accordance with the terms of the Cedar Fair partnership agreement." It continued: "The combined company will have an expanded and diversified footprint, a more robust operating model and a strong revenue and cash flow generation profile. We believe this strong financial foundation, together with the $120 million of cost savings and $80 million of revenue uplift opportunities we expect to achieve, will allow us to increase investments to drive profitable growth and superior returns for unitholders." Rhodes, the Cedar Fair corporate communications director, also provided a written response that partially answered two of the 13 questions. Questions from unit holders Q: Given the scale of this proposed merger transaction, the tax impacts created by the transition from a master limited partnership to a C-corp and the cessation of the quarterly distributions, why was that transaction structured in a way that denied Cedar Fair unitholders a right to vote on the transaction? Please explain. Rhodes provided the answer, briefly describing the structure of the deal: Rhodes The Cedar Fair board unanimously determined that the merger with Six Flags is the best way to build on the company's momentum and enhance unit holder value," he said. "The transaction is structured to maximize Cedar Fair unitholder ownership in the combined company, while minimizing debt breakage costs and any potential tax impact to unit holders. Given Cedar Fair unit holders will maintain more than 51% ownership of the combined company, the transaction does not require a unit holder vote in accordance with the terms of the Cedar Fair partnership agreement. Q: Has Cedar Fair undertaken any efforts to seek input from unit holders on the desirability of the transaction? Why or why not? Please explain. A: (No answer provided by Cedar Fair.) Q: Have you received any requests from unitholders to hold a special meeting related to the transaction? A: (No answer provided by Cedar Fair.) Q: Have you considered proactively holding a non-binding advisory vote — similar to the advisory votes held each year on executive compensation — related to the transaction? A: (No answer provided by Cedar Fair.) Q: Will the decision to deny a vote be reconsidered? Why or why not? Please explain? A: (No answer provided by Cedar Fair.) Q: Do you expect the transaction to close prior to the next annual meeting of Cedar Fair unit holders? A: (No answer provided by Cedar Fair.) Q: In the event the transaction is not closed prior to the annual meeting will you provide unit holders an opportunity to ask questions about the transaction at the 2024 annual meeting? A: (No answer provided by Cedar Fair.) Q: Prior to entering into the merger agreement did Cedar Fair perform an analysis of the tax impacts on unit holders related to the transition from a master limited partnership to a c-corp structure? If so, has any of the relevant information from analysis been distributed to unitholders? A: (No answer provided by Cedar Fair.) Q: Where can unit holders get more information related to the tax impacts? A: (No answer provided by Cedar Fair.) Q: When will the quarterly distribution be reinstated, if ever? A: Company representatives provided this information from a news release and presentation from the Nov. 2 announcement of the merger: "The combined company is committed to allocating capital to maximize shareholder returns once the company achieves its targeted net leverage ration." Rhodes said on Wednesday that the merger was structured with unit holders in mind. "The combined company will have an expanded and diversified footprint, a more robust operating model and a strong revenue and cash flow generation profile," Rhodes said."We believe this strong financial foundation, together with the $120 million of cost savings and $80 million of revenue uplift opportunities we expect to achieve, will allow us to increase investments to drive profitable growth and superior returns for unit holders." Q: How are costs going to be integrated for all the debt being taken on? A: (No answer provided by Cedar Fair.) Q: In terms of the projected approximately $200 million of annual synergies, that includes $120 million of cost savings within two years following the close of the transaction, what percentage of those synergies are expected to impact the finance and administrative functions that are located in Sandusky? A: (No answer provided by Cedar Fair.) Q: Could you provide a copy of the request for additional information and documentary materials from the Department of Justice (the "DOJ") received/dated Jan. 22, 2024, in connection with the DOJ's review of the merger transaction? A: (No answer provided by Cedar Fair.) Bio blast Doug Rachlin, a managing director and the senior portfolio Manager and founder of the Rachlin Group within the Neuberger Berman's Private Asset Management group. In 1996, Rachlin joined Lehman Brothers. In 2005, Rachlin formed the Rachlin Group within the private asset management division of Neuberger Berman. Rachlin has been featured as an expert in MLPs and energy infrastructure in the Financial Times, the Wall Street Journal, Barron's, CNBC and Forbes Magazine. He earned a degrees from Tufts University and the New York University, Leonard N. Stern School of Business. Doug is on the board of Trustees of Tufts University. Doug is a visiting lecturer at Tufts University teaching the course "Investing, Psychology and Human Behavior." — Neuberger Berman Note: Information in this article about when Cedar Fair paid dividends has been corrected. The "Bio blast" for Doug Rachlin also has been corrected to reflect that he continues to be a visiting lecturer at Tufts University.