US and Chinese Governments Investigate Parent Companies of Marine Life Parks

The DOJ logo is pictured on a wall after a news conference in New York

On Friday June 23, SeaWorld Entertainment released a short statement. The company has expressed that this is the only comment it currently has on the matter:

In June 2017, the Company received a subpoena in connection with an investigation by the U.S. Department of Justice concerning disclosures and public statements made by the Company and certain executives and/or individuals on or before August 2014, including those regarding the impact of the “Blackfish” documentary, and trading in the Company’s securities.  The Company also has received subpoenas from the staff of the U.S. Securities and Exchange Commission in connection with these matters.  On June 16, 2017, the Company’s Board of Directors formed a Special Committee comprised of independent directors with respect to these inquiries.  The Special Committee has engaged counsel to advise and assist the Committee.  The Company has cooperated with these government inquiries and intends to continue to cooperate with any government requests or inquiries.

The Security and Exchange Commission (SEC) and the Department of Justice did not provide comment on Friday when approached, but one thing is clear: in the United States, the government entity that investigates potential infringements of securities law is the SEC.  Investigations can originate within the agency, through whistle-blowing, or through a public complaint. How this particular investigation began has not been publicly disclosed.

If the SEC determines that laws or rules have been violated, its enforcement arm can take one of three actions.  It can rule on an administrative proceeding, basically a “cease and desist” order; it can file a civil enforcement action in a Federal Court, which could result in civil penalties; or if the SEC determines that criminal law has been broken, the case will be handed over to the Department of Justice as a criminal investigation.  In such cases, it is not uncommon for a simultaneous civil action to be pursued by the SEC.

Although it appears per SeaWorld’s statement that the Department of Justice is investigating potential criminal violations of securities law, a search through Federal Court filings does not show that any charges have yet been filed, meaning that at this time, the Department is still investigating the facts and that a determination of action has yet to be made.  Current SeaWorld CEO Joel Manby would likely not be a person of interest in this investigation, unless evidence shows that he was aware of the claims and their alleged invalidity after his hire in April 2015 and failed to take action to rectify the situation.

The August 2013 date corresponds to August 13, 2013, when SeaWorld’s second quarter revenue was announced at US$40 million less than anticipated, resulting in a stock selloff and subsequent drop in price of 33% over the course of the day. Two days later, the company announced its largest investment to date, the since abandoned Blue World Project killer whale exhibits.

In the same announcement on June 23, 2017, SeaWorld confirmed that Board Chair David D’Alessandro had been voted off the Board of Directors by shareholders and had tenured his resignation.  The Board has since requested and D’Alessandro has agreed to stay on as Chair another six months, through December 31 of this year.  According to the company:

. . . the Board took into account the potential impact of Mr. D’Alessandro’s immediate departure on the Board’s and the Company’s ability to successfully address certain challenges that the Company now faces . .

Although the company specifically mentioned the Department of Justice subpoena as one specific reason, others come to mind, from refinancing deals to potential acquisitions and international expansion.

One unknown in the equation is private investment firm Hill Path Capital, which raised US$303 million for its debut fund in January of this year. The firm has been purchasing SeaWorld stock, increasing its ownership substantially. In May, filings with the SEC showed that the company had acquired a 7.7% stake in SeaWorld. According to the most recent filing, on June 6, Hill Path’s ownership stake has now increased to 14.2%. Hill Path was founded by former Apollo Global Management manager Scott Ross, who was instrumental in Apollo’s acquisitions of Chuck E Cheese and waterpark resort chain Great Wolf Lodge. Ross also spearheaded the failed attempt to acquire theme park chain Cedar Fair (owner of Cedar Point and Knott’s Berry Farm, among others). Whatever the long term intentions, Ross and his management have met with the SeaWorld board and executives to address short term issues, such as governance, cost cutting, and immediate revenue streams.

Then there’s Zhonghong, the Chinese real estate and tourism company that now owns 21% of the company and has two of its executives seated on the Board of Directors.  As the final member of the Board with deep ties to Blackstone (he was appointed as Board Chair in 2010 when the company was a private Blackstone holding), D’Alessandro undoubtly had a role in negotiating the sale of Blackstone’s stock to Zhonghong and the deals with Zhonghong for design and development of Asian parks attraction, a number of which are expected to be animal-based in nature.

D’Alessandro has quite a bit of work ahead during the next six months with regards to Zhonghong’s intentions – Whether that be a vast increase in Zhonghong ownership of SeaWorld, as the Chinese company recently did with its stake in luxury tour company Abercrombie and Kent, outright acquisition, or the complexities of negotiating for new animal parks overseas, such as he did with Dubai, Abu Dhabi, and Village Roadshow (and consider these all speculative reasons for him to stay on).

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Zimbabwe’s Minister of the Environment, Oppah Muchinguri, shares her support for Chimelong at its Qingyuan elephant holding facility, December 2015

To date, Zhonghong competitor Chimelong has been developing strong tourism partnerships tied in with animal acquisitions. Its Australian exhibit at Chimelong Safari Park endorses tourism to Australia’s Northern Territory. It’s acquisition of elephants, lions and other animals from National Parks in Zimbabwe for a new conservation-themed park in the mountains of Qingyuan was done in full cooperation with the African nation.  Final Days has learned that Zhonghong’s acquisition of Abercrombie and Kent included the purchase of four leading safari lodges in Botswana and expect that a Chinese park similar to Busch Gardens Tampa Bay may tie in with Abercrombie’s luxury African tour products.

Meanwhile in China, five major companies that have been investing heavily overseas are under investigation by the China’s banking regulators. Their holdings include either full or majority ownership of football team AC Milan, the AMC and Carmike theater chains in the United States, Club Med, Cirque du Soleil, and Hilton Hotels.

One of the companies, Dalian-Wanda Group has been building aquariums and dolphinariums throughout China, located within or adjacent to its mega-malls.

When news broke on June 22 of the investigation, stock value in Wanda’s only publicly traded stock, Wanda Film Group, which includes the company’s film studio and production group, US blockbuster film producer Legendary Entertainment, and the world’s largest collection of movie theater screens – in Australia, North America, China, and Europe – dropped by 10% by end of day. Wanda immediately responded by blaming the drop on lies spread on the internet.

This new scrutiny on uncontrolled debt in the purchase of overseas assets is part of a new initiative by the Chinese government to crack down on the practice.  As a result, the first quarter of this year saw an 80% drop in foreign acquisitions by Chinese companies.

At the same time, the Chinese government is becoming more welcoming to foreign investment, especially in the theme park sector. In eighteen free trade zones, seven of them newly designated in March, foreign developers will be able to build and operate theme parks for the first time without partnering with a local company. For example Shanghai Disney Resort is 57% owned by a Chinese consortium with close ties to the government. Under the new rules, Disney would be able to retain 100% ownership in the free trade zones of future parks and resorts. The new regulations are especially appealing to regional park chains such as Parques Reunidos, owner of Marineland Antibes and the Miami Seaquarium, who to date have had to partner with a Chinese company to enter the market.

Overall in China, there is a long standing joke about looking left (as in reforms), but turning right (as in staying with the party line). As Castor Pang, head of research at Core-Pacific Yamaichi HK, told Bloomberg:  “The most important factor of doing business in China is the company’s political stance. It is important for the company to ‘stand at the right side.’”

There’s a small company fully owned by Zhonghong that’s housed in the London offices of Abercrombie and Kent. It was through this company that Zhonghong purchased its majority stake in SeaWorld Entertainment. The little company is called Sun Wise. There’s a reason for that. Sun Wise in Mandarin is 向右转地, which also translates as “Turn Right.”

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