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.

LEVERAGING LOW MULTIPLES

Blackstone has seen a robust return on earlier theme park investments.

It previously valued its 2005 investment in British-based Merlin Entertainment at $308 million, according to documents provided to investors. By the end of December 2008, it valued that holding at $817 million.

Theme park consultants marveled at the unusually low multiples in the Anheuser-Busch deal, which gives Blackstone ownership of three of the most heavily visited theme parks in the world: two SeaWorld parks in Orlando, Florida, and San Diego, California, and one Busch Gardens park in Tampa, Florida.

They captured it at least $1 billion under market value, said Speigel. If this deal had gone to market two and a half years ago, it would have been about a 10 times multiple.

Consultants said there may be one or two new theme parks in the future, but the industry has largely matured. Development is unlikely to reach the fevered pitch of the 1960s and 1970s.

It's an industry that isn't growing with new development anymore, said Ray Braun, senior vice president of AECOM ERA, formerly called Economic Research Associates, which was involved in the Blackstone deal. It's the reshuffling of portfolios.

Other companies could sell parks, potentially at distressed prices, because of high debt levels or the need to shed assets.

For example, Cedar Fair , still grappling with its $1.24 billion purchase of Paramount Parks, said in March that it would put up three of its amusement parks for sale and sell excess land to pay down its debt.

Meanwhile, a battle in bankruptcy court is heating up for ownership of Six Flags, the debt-laden theme park operator that filed for Chapter 11 in June. Under Six Flag's plan, JPMorgan and six hedge funds could wind up with 92 percent of the company, a deal that would be highly lucrative for them, analysts have said.

Consultants widely believe the industry is poised to rebound alongside the economy, which means Blackstone and Six Flags' potential owners could benefit handsomely from their investment.

Here is a company that generates almost $1 billion in revenues, just saddled with the debt load, Speigel said of Six Flags. Under the right situation it has a great cash stream and 20 parks with a tremendous asset base.

(Reporting by Deepa Seetharaman in New York and Megan Davies in Dubai, additional reporting by Diane Bartz in Washington D.C.; Editing by Steve Orlofsky)

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