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Centerbridge Partners and Great Wolf Resorts: Buying from a Highly Regarded Competitor Case Solution & Answer

Centerbridge Partners and Great Wolf Resorts: Buying from a Highly Regarded Competitor Case Study Analysis

Introduction (Context & Background)

Great Wolf Resorts – a chain of indoor water parks was found in 1997 and headquartered in Chicago, Illinois. It was established with clear focus on providing the unforgettable and easy escape for families. The company went public in 2004,with the market capitalization of $600 million. The lodges feature the unique and compelling designs & the entertainment options and extraordinary attractions sit side-by-side under one roof. Overtime, on its strong foundation; the company began to expand its operations in several arenas across the country. With high-end accommodation and recreational activities; the company captured a significant portion of the families’ total vacation spending by offering a self-contained vacation experience to guests. Additionally, Great Wolf was recognized as a largest operator of indoor water park in North America as well as the only player of scale. Among the peers of company; the Great Wolf was second only to Disney in terms of loyalty of customer, measured by brand equity valuation, NPS, & brandloyalty metrics. Apollo saw Great Wolf as an unmanaged asset &it was believed that it could perform a turnaround & sell it to strategic buyer or re-list the company on public markets with a more enhanced outlook and favourably profitable metrics. It has three option to exit an investment, including: take the portfolio company public, sell it to another PE firm or sell it to the corporate buyer.

On the other hand, the Centerbridge – a New York based investment firm was established in 2005 by Mark Gallogly and Jeff Aronson. The strategy of Centerbridge combined one team, employing a value-orientedapproach and investing up and down the capital structure & across private and public markets. In 2014, the company raised $6.2 billion for its third PE fund, to invest in Great Wolf. Based on series of acquisition; the company leveraged its internal portfolio operations to partner with industry experts, in order to expand internationally, stabilize the business and implementthe operational efficiencies.

Analysis of the main problem or opportunity.

As of March 2015, the Centerbridge Partners is concerned about making decision of acquiring Great Wolf Resortsfrom a private equity competitor, Apollo Global Management.The case investigatesthefinanciering and strategic considerations by Centerbridge Partners, a New York based Investment Company, employing a flexible technique across investmentdisciplines; special situations, credit, private equity, real estate and distressed strategies. The decision of whether or not to acquire Great Wolf Resorts, is based on the in-depth analysis and evaluation of the company’s future cash flows and assessment ofan optimal financing structure. Additionally, Centerbridge Partners is concerned about assessing the company’s ability to execute on growth strategy and operationalimprovements.

Financial analysis

Weighted average cost of capital& capital structure

The weighted average cost of capital provides a solid foundation of assessing how much it would cost the company to raise the funds to finance the new projects. The calculation of the WACC allows the company and investors to determine the acceptable returns for the project.The cost of equity is calculated, using the CAPM approach; the expected market return is expected to be 1.5 percent.Whereas, the 30-Year Daily Treasury Yield Curve Rate is assumed to be the risk free rate of return 2.68 percent. The median of beta of comparable firms is assumed to be 1.062. The cost of equity using the CAPM approach is calculated to be 4.273 percent. On the other hand; the cost of debt is calculated by dividing the interest expense of 46.7 million by the debt of $527.8 million. In addition to this, the capital structure of the company includes debt and equity proportion of 85.2 percent and 14.8 percent, respectively. Combining all these elements, results in the weighted average cost of capital of 5.2 percent……………………………….

 

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