My finance view

Stephen Schwarzman is rapidly becoming the king of the thrill ride.

The chief executive of Blackstone Group, one of the most powerful private equity firms in the world, is betting that theme parks will deliver strong returns as the economy slowly climbs out of the hole.

Earlier this month, Blackstone bought Anheuser-Busch Inbev’s 10 U.S. theme parks for $2.7 billion, and it has now become the second-largest company in the business behind Walt Disney Co.

Schwarzman isn’t alone in wagering on roller coasters, water slides and animal shows. JPMorgan Chase & Co and a host of hedge funds are among those jostling for ownership of bankrupt regional theme park operator Six Flags Inc, which owns 20 parks in North America.

Schwarzman last week explained why he finds the $10 billion industry so appealing.

“There’s usually room in the theme parks business for efficiencies on the cost side and new investment, which drives traffic,” he said in an interview while attending a conference in Dubai.

“And there’s also a cyclical rebound which occurs when an economy goes from a severe recession to a more normal environment.”

He said Blackstone examines every opportunity to buy theme parks.

Analysts and consultants say the business is a perfect hunting ground for investors. The cash flow tends to be steady when the economy is in reasonable condition and the high initial cost of building a park creates barriers to entry, allowing parks to retain pricing power.

Even in 2008, when traffic fell for many of the world’s 25 top theme parks, more than 185 million people streamed through their gates.

Mind you, the cyclical nature of parks can also be their downfall. Park attendance tends to ebb and flow with the health of the economy and lower attendance, when coupled with the high cost of maintaining the parks, can easily dent profitability.

“Although attendance has held up pretty well thus far, any material slippage in attendance levels can generate quite significant declines in EBITDA (earnings before interest, taxes, depreciation and amortization) or in cash flow,” said Fitch Ratings analyst Mike Simonton.

Dennis Speigel, president of theme park consulting firm International Theme Park Services, forecasts attendance will be down as much as 9 percent in 2009. This will hurt not only sales of admission tickets, which accounts for half of theme park revenue, but also food and beverage revenue, which tends to offer high margins.

That has forced theme park operators to discount heavily to draw guests.

“You see Disney right now and it’s discounting more deeply, more broadly than they ever have in their history,” Speigel said. 

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