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Great Wolf Resorts' IPO Could Pay Off
 Big for Existing Shareholders
By Kathleen Gallagher, Milwaukee Journal Sentinel
Knight Ridder/Tribune Business News

Sep. 26, 2004 - At a water park, you can't have fun without taking a plunge.

Likewise with investments -- you can't reap rewards without taking a risk.

Existing shareholders at the fast-growing, Madison-based water park hotel developer and operator Great Wolf Resorts Inc. have figured out both concepts, according to documents filed with the Securities & Exchange Commission related to the company's upcoming initial public offering.

Great Wolf shareholders have personally guaranteed nearly $193 million of debt they hope to repay or refinance with proceeds from the $273 million offering, the documents filed with the SEC last week indicate.

"To have your financial net worth tied up in personal guarantees in leveraged hotel deals -- that's a risky place to be," said Richard P. Imperiale, president of Uniplan Inc. in Waterford and portfolio manager of the Forward Uniplan Real Estate Fund.

Such risk-taking could pay off handsomely for Great Wolf's initial investors if the proposed IPO is successful and the company sells 16.1 million shares at a maximum price of $17 each.

Not only would they be released from their personal guarantees, but the partners in Great Wolf's hotel properties who sell their interests would receive as much as $66.6 million, the documents say. Great Wolf has financed its resorts by creating partnerships that borrowed money from private investors.

Partners who choose to retain their investment would receive a total of 7.9 million shares, according to the documents. That's about $134 million worth of stock at an IPO price of $17 a share.

Two top Great Wolf executives will receive lump-sum payments -- $2 million for chief executive officer John Emery and $200,000 for James A. Calder, chief financial officer -- for them to use to buy shares in the IPO, the documents say.

It's not clear from the documents how much money the existing shareholders initially invested in Great Wolf, but there are clues about the size of the bump in value they expect to see.

Those clues are based on the book value per share established by Great Wolf. The book value, or net asset value, of a company is an indicator of the ultimate value it might have in liquidation. It can be important with real estate-related stocks (such as this issue) because it reflects the value of the properties.

The company calculated the book value of the existing investors' shares at $2.68 as of March 31. The company is estimating that the book value will rise to $4.89 after the IPO, which would give existing shareholders an 82 percent increase in book value.

New shareholders, on the other hand, will see the opposite effect. A new investor who pays $16 per share, for instance, would have an investment with a book value of $4.89 per share. Such "dilution" is common for investors in IPOs, but the size in this case is somewhat high, Imperiale said.

Eric Lund, Great Wolf's senior vice president of sales and marketing, declined to comment about the offering because the company is in a "quiet period" due to the upcoming stock offering. Great Wolf has not yet scheduled a date for its IPO, according to Los Angeles, Calif.-based IPO Monitor.

Imperiale said Great Wolf's management team is experienced in the hotel industry, "really knows and understands the business," and have done a good job expanding the company.

He said the structure of the IPO deal is "pretty clean and straightforward."

Investors in the IPO will have to take risks, just as the existing investors did.

Management and the existing shareholders will essentially control the company because they'll have about 50.3 percent of its shares.

Great Wolf, which began developing its hotels in 1995, has five resorts in Wisconsin Dells; Sandusky, Ohio; Traverse City, Mich.; Kansas City, Kan.; and Sheboygan. The company is developing three more that will open in 2005 in Williamsburg, Va.; Pocono Mountains, Penn.; and Niagara Falls, Ontario. It is also evaluating eight to 10 more markets and negotiating for sites in four of them, the SEC documents say.

The existing hotels have what Imperiale said is a "quite respectable" average occupancy of 63.9 percent, according to the documents.

"The financial performance on properties up and running and stabilized looks pretty good," Imperiale said.

The risk is whether management will be able to retain that kind of profitability on the new properties. In 2005, Great Wolf will add 1,105 rooms, and a year from now will have 2,430 rooms, according to the SEC documents.

Two of the three new resorts -- in the Poconos and Niagara Falls -- are about one-third bigger than any of the company's existing resorts, the documents say.

"If the hotels under development do as well as the existing properties, shareholders should do just fine," Imperiale said.

-----To see more of the Milwaukee Journal Sentinel, or to subscribe to the newspaper, go to

(c) 2004, Milwaukee Journal Sentinel. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail

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