Liquid Assets: Apollo Buys Indoor Waterpark Leader Great Wolf

Great Wolf Lodge
Great Wolf Lodge

How much is a chain of moderately upscale lodges with massive indoor water parks worth?

Ask Apollo Global Management and the answer will be $703 million. At least, that's how much the private-equity firm will be shelling out to acquire Great Wolf Resorts (WOLF), the leading operator of indoor water park resorts.

Apollo will be cashing out Great Wolf investors at $5 a share and assuming the lodging company's debt. You have to go all the way back to the summer of 2008 to find the last time that Great Wolf stock traded this high, but the buyout premium comes as no consolation to those who bought in when the company went public at $17 nearly eight years ago.

Water, Water Everywhere

The indoor water park craze began in Wisconsin Dells, Wis., where tourists longed for watery diversions even when the weather turned cold.

What started as a few hokey, themed inns with enclosed swimming areas transformed into a legitimate industry when the deep pockets of Great Wolf and competitor Kalahari Resorts added upscale accommodations and more than 40,000 square feet of indoor water park slides and attractions. Then, they expanded geographically. There are now dozens of indoor water parks all around the country, even in Southern states where cold weather isn't necessarily a factor.

The exclusivity of intimate water parks that are often open only to overnight guests is compelling. Parents concerned about letting small children get overexposed to the sun, but who still long to splash around, are also drawn to the resorts.

The niche is a hit, even if Great Wolf is bowing out far below its 2004 IPO highs.

Hungry like the Great Wolf

Great Wolf has grown to 11 resorts with a couple more currently in development. Why cash out now?

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Well, the company went public at a time when the real estate market was booming. Great Wolf could not only build destination resorts with huge water parks, but it could also sell many of the suites as condominiums. When it went public, nearly half of its projected profitability was supposed to come from the sale of themed multibedroom accommodations.

As real estate prices collapsed, so did that aspect of the model, and a leveraged Great Wolf's projected earnings turned into losses.

The concept still works. Bookings at Great Wolf have been strengthening in recent years, and some hospitality giants have been exploring the possibilities. Great Wolf could have probably succeeded on its own, but analysts weren't expecting Great Wolf to turn a profit until 2014 at the earliest. Cashing out now makes sense, and Apollo will have the means to bankroll headier expansion if more watery thrills are in order.

When it comes to investing, it's safe to stay away from the deep end.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article.

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