PWK PARTNERS Expresses Serious Concerns with Proposed Acquisition of Great Wolf Resorts by Apollo Global Management

CHICAGO, March 19, 2012 /PRNewswire/ -- PWK PARTNERS ATLAS FUNDS, LLC, a significant shareholder of Great Wolf Resorts, Inc. (Nasdaq: WOLF), announced today that it delivered a letter to the Board of Directors of the Company expressing its serious concerns with the proposed acquisition by Apollo Global Management LLC of all the issued and outstanding shares of the Company at a price of $5.00 per share in cash.

The full text of the letter follows:

March 19, 2012

Board of Directors
Great Wolf Resorts, Inc.
525 Junction Road, Suite 6000 South
Madison, Wisconsin 53717

Dear Board Members of Great Wolf Resorts, Inc.:

As a significant shareholder of Great Wolf Resorts, Inc.  ("WOLF" or the "Company") we are writing to express our serious concerns with the proposed acquisition by Apollo Global Management LLC ("APO" or "Apollo") of all the issued and outstanding shares of the Company at a price of $5.00 per share in cash (the "Proposal").  We believe the proposed consideration of $5.00 per share is woefully inadequate and is not in the best interest of the Company or its shareholders. Apollo did not earn its reputation as a savvy investor by delivering sub-par returns to their investors. We believe WOLF's assets are worth over $1 billion based on management's own projections of the Company's earning power.  In our opinion, as the Company's balance sheet leverage is reduced over the next several years, the Company's equity value should be multiples of the Proposal's offer price.  Accordingly, we believe that it is incumbent upon the Board of Directors to immediately withdraw its recommendation of the Proposal and endeavor to take all necessary actions to protect the interests of shareholders to ensure they receive full and fair value in any proposed transaction.

It is our hope shareholders are not anchored to the recent share price performance of the Company. Shortly after the Company's initial public offering in December 2004, analysts forecasted price targets that exceeded $25 per share and touted the Company's growth prospects. Subsequently, investor sentiment reversed.  Sentiment will reverse once again. It is important to remember that price is what you pay and value is what you get. When evaluating the Proposal, it is important to look at the full history of the Company, its earnings power now and in the near future, the rapidly improving balance sheet and the Company's potential to return significant cash flow to shareholders.

(Photo: http://photos.prnewswire.com/prnh/20120319/NY72134-a )

We estimate that the Proposal values the equity at 5x free cash flow. In our experience, businesses that trade at comparable multiples tend to be in severe distress, at risk of obsolescence or belong to an industry that is in secular decline (i.e. printing, lower tier retailer etc.).  We do not believe this to be the case with WOLF. The midpoint of management's 2012 EBITDA guidance is $86 million, EBITDA would have to be 36% below this estimate before the Company would be strained to pay its debt service or maintain its properties provided that maintenance capital expenditures aggregate $10 million. If one assumes the high end of RevPAR "flow through" of 2:1x, RevPAR would have to decline by 18% to generate this 36% EBITDA decline. During the Great Recession of 2008 and 2009, WOLF's total RevPAR only declined 7.4% and that was with unemployment starting at 6% and increasing to 9%.  In the event of another recession in the near future, we believe the delta on consumer behavior would be less than when unemployment went from 6% to 9% during the Great Recession given the higher starting point for unemployment. We believe that if there is another severe shock to the economy WOLF would still be able to cover its fixed charges.

In addition, the Company outperformed the lodging industry during the Great Recession with an approximate 8% decline in same store RevPAR compared to a 16% decline for the hotel industry based on data from STR Global. The Company's outperformance during this timeframe demonstrated the recession resistant nature of the Company's business model. Furthermore, we believe the Company is ideally positioned for a difficult consumer environment as its resorts provide an affordable leisure option for families looking for a convenient vacation or weekend getaway. The fact that the Company's drive-to markets are generally less impacted by economic cycles, because they are less expensive and more convenient than locations that require air travel, adds to the Company's margin of safety.

PwC's lodging outlook published in January 2012 anticipates industry RevPAR will increase 6.5% this year after increasing 8.2% in 2011. This compares to WOLF's guidance of 4%-6% RevPAR growth this year and a 9.3% increase in same store RevPAR in 2011. Our conclusion from this analysis is that the Company's RevPAR keeps pace with the lodging industry in good economic times and outperforms during bad economic times.  We do not believe a business with these characteristics should trade at a 20% free cash flow yield, especially when the 10-Year Treasury Note yields 2.3%.

We believe WOLF is a great company with a suboptimal balance sheet with significant opportunity for cost savings. The table below demonstrates potential savings from refinancing the Company's $230 million 10.87% debt that is callable in April 2014 at 105 (First Mortgage Notes). We acknowledge that the following analysis is based on our estimates and assumptions, including with respect to future interest rates.

In this analysis we conservatively assume that all the current debt balances remain static, although there surely will be some amortization. Also, our analysis assumes that the interest rates stay static for all but the $230 million 10.87% First Mortgage Notes, and we have assumed that the interest rate on the $66 million mortgage on Traverse City increases from 7% to 9% given the distress at that property.  In addition, we note that the Trust Preferreds (Trups) will be floating at LIBOR + 300 bps in 2015, which at current rates would save the Company another $3 million in expense. We are not taking into account any savings from the Trups or a more favorable workout on the Traverse City loan in our analysis.

As shown above, we believe there is significant opportunity for material value creation in refinancing the $230 million 10.87% First Mortgage Notes that currently trade at 113. Prior to the announcement of the Proposal, the bond market was demonstrating that the Company could refinance the First Mortgage Notes on a 5-year basis at 7.7%.  If we assume that upon calling the 10.87% First Mortgage Notes in 2014 the principal is reduced by $60 million through free cash flow generation over the next 2 years and the balance is refinanced at 8.5%, the interest savings would approximate $10 million in 2015. This would result in a virtuous cycle as increased free cash flow accelerates the deleveraging process, converting increasing amounts of value from the debt to equity holders.

Based on management's own projections of revenue and EBITDA we have detailed our estimates of free cash flow over the next four years. Please note that our estimate of interest expense differs from the Company's estimates and assumes the refinancing of the $230 million 10.875% First Mortgage Notes that are callable in April 2014.

As previously stated, we estimate that the Proposal values the Company's equity at 5x 2012 free cash flow (20% equity yield) and 3x 2015 free cash flow (34% equity yield). We will let potential investors and shareholders determine the appropriate multiple but we believe that given the current level of interest rates and cap rates a 10% yield is appropriate.

We question whether this is the right time to sell the Company. It appears that WOLF is being sold not only at a trough multiple but also close to trough earnings given that lodging is likely early in the recovery cycle.  Cowan and Company's lodging analyst stated this in its November 21, 2011 research report: If history is any guide, we believe it is still early innings for this recovery in lodging fundamentals. From trough to peak, the recoveries in the early 1990s and 2000s lasted 111 and 70 months, respectively. The current recovery has been underway for 23 months (as of March 2012). See chart below using data from STR Global.

(Photo: http://photos.prnewswire.com/prnh/20120319/NY72134-b )

Another way to consider the current recovery is in terms of cumulative RevPAR growth from the cycle trough. The early 1990s recovery resulted in 49% RevPAR growth from trough to the subsequent peak. The early 2000s recovery resulted in 37% cumulative growth in RevPAR from the trough. Since the most recent recovery began in 2010, RevPAR has increased by 13% from its trough – again suggesting that we are in the early innings of a recovery.

Finally, WOLF's price action since the Proposal has been telling. Approximately 15 million shares have traded at a premium to the $5 per share offer price since the announcement of the Proposal.  This is close to 50% of the Company's float. The market has spoken.

For the reasons discussed above, we believe the Proposal significantly shortchanges WOLF shareholders. We therefore call upon the Board to immediately withdraw its recommendation for the Proposal and redeem the poison pill, which was adopted pursuant to the merger agreement with Apollo. We believe the poison pill is contrary to the best interests of shareholders.  We are completely comfortable if an offer that fully values the Company does not materialize and we are prepared to accept Board representation in order to assist the current directors in maximizing shareholder value.  Please do not hesitate to call me to discuss.

CONTACT:
Patrick Walsh
312 334 7300
Managing Partner
PWK PARTNERS ATLAS FUNDS, LLC

SOURCE PWK PARTNERS ATLAS FUNDS, LLC

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