Funding Thesis
Six Flags (NYSE:SIX) is without doubt one of the most tasty small cap conditions available in the market right now. It’s hated by buyers of all stripes, after failing to execute on a buyer transition, seeing attendance fall by double-digit percentages, and having its inventory worth lower in half over the previous 24 months. Layer on an unsightly steadiness sheet with 5 turns of leverage and it is simple to see why few on Wall Avenue are large followers.
Regardless of the dangerous press, a re-rating is quick approaching, as basic catalysts within the type of an attendance restoration, agency pricing, execution towards a merger, and a significant EBITDA inflection in 2024/2025 materialize. Month-to-month authorities information on the business, steadiness sheet evaluation, and administration commentary corroborate this view.
There is a path to $1.4 billion of EBITDA by 2025, confirmed by the proxy, which is over $175 million forward of consensus. As expectations revise upwards and administration executes, there is a clear path to 50%+ returns over the subsequent 12 months, escalating as much as 100% by the top of 2025.
Background
In November, Cedar Truthful (NYSE:FUN) and Six Flags, amusement park operators who collectively run 51 properties and generated $1 billion of LTM adjusted EBITDA, introduced that they’d be merging. The financial worth of the deal can be cut up evenly, with Cedar Truthful shareholders proudly owning a slight majority of the NewCo fairness, with SIX shareholders receiving the remaining fairness and a $1 particular dividend.
A lot has already been written concerning the deal and I might direct you to SIX’s investor presentation and press launch for particulars, however the primary rationale is that by combining, FUN and SIX can lower overhead and share institutional data, finally leading to extra earnings energy than in the event that they operated independently. The foremost factor to notice is that buried on web page 91 of SIX and FUN’s joint Type S-4 proxy, which gives intensive particulars concerning the merger, is a desk detailing the “NewCo’s” purpose of reaching $1.5 billion of EBITDA by 2026.
I created a mannequin for the NewCo earlier than the S-4 was finalized, and administration’s steering confirms my very own work. The remainder of the article discusses my diligence of a number of catalysts and the implications for the NewCo’s earnings energy.
Catalyst #1: Materials Attendance Restoration on the Horizon
Within the amusement park business, there are two key efficiency indicators that drive income: attendance and per capital visitor spend. Each Six Flags and Cedar Truthful’s top-lines are largely decided by the equation: (attendance × per capita visitor spend = income).
Over the previous a number of years, SIX and FUN have taken completely different approaches to rising income. Six Flags, beneath CEO Selim Bassoul, has opted to emphasise per capita visitor spend on the expense of attendance, whereas Cedar Truthful has taken a extra balanced strategy, aiming for LSD progress in each classes.
Sadly for Six Flags, Selim’s technique has largely failed, with the corporate backtracking on high-priced ticket gross sales over the previous a number of quarters, as attendance plummeted and a rise in visitor spend was inadequate to make up the shortfall. As I learn the state of affairs, SIX’s choice to tie the knot with FUN was pushed by a recognition of Selim’s failure to successfully improve income … however the previous is the previous, and there are tell-tale indicators that attendance is poised to inflect over the subsequent 12 months, supporting a powerful 2024 efficiency.
Google Tendencies Knowledge Supportive of Materials Uplift
The general public shift within the notion of Six Flags will be seen in Google Tendencies information, which demonstrates a 30% lower in peak search curiosity since Selim stepped into the motive force’s seat (a time highlighted in pink), as radically larger costs dissuaded guests from spending time at Six Flags.
monsitj SIX curiosity over time (Google Tendencies)
The relative stability of curiosity within the “amusement park close to me” search time period, which is already constantly assembly pre-pandemic ranges of search frequency, highlights the diploma to which Six Flags has alienated their guests–but additionally the chance for SIX to seize a prepared buyer base, nonetheless excited by SIX’s experiences.
Google Tendencies
Trying again on the evolution of Six Flags’ strategy, it will probably finest be summarized as “an excessive amount of, too quickly,” as administration made the error of elevating costs similtaneously they improved the expertise, as a substitute of enhancing the expertise, then elevating costs as soon as clients understood the improved worth add that was being supplied.
In my diligence, I stumbled throughout the Reddit discussion board r/rollercoasters and a typical gripe was costs going up and not using a commensurate improve in high quality. The submit under sums up sentiment fairly effectively:
Reddit
Importantly, individuals wish to go to Six Flags … constant searches for the park earlier than Selim Bassoul arrived and a Reddit discussion board filled with passionate clients affirm that. It is simply that over the previous 12 months, friends have felt like they’re getting ripped off.
So why am I optimistic about an attendance restoration? 4 causes.
Motive #1: High quality is Catching as much as Value
On condition that Six Flags is currenting run ranking at $165+ million per 12 months in capex, in comparison with upkeep capex ranges of ~$100 million, it is clear that the corporate is investing rather a lot of their aspirations for shaded areas, inexperienced house, up to date rides, and high quality eating choices throughout their parks. Briefly: making up for investments that ought to have been made years in the past however have been foregone by a previous administration group dedicated to maximizing short-term free money circulation. As capital enchancment initiatives wind down and the visitor expertise improves in 2024/25, attendance ought to observe an enchancment in sentiment, as as a substitute of merely claiming to be “premium,” by the point Q2 and Q3 of 2024 roll round, Six Flags really can be.
Moreover, Six Flags has been discounting tickets similtaneously they’ve been rising the standard of their providing, driving a 16% YoY improve in attendance final quarter alone. Extrapolating that power ahead into subsequent 12 months helps a powerful 2024 for SIX, notably as they lap simple comps from final 12 months, and word-of-mouth and on-line opinions drive elevated visitation.
Administration at each Six Flags and Cedar Truthful highlighted on their joint investor name in connection to the merger that enhancing the shopper expertise was a chief concern for them and I count on additional emphasis on friends to drive enhanced attendance.
Motive #2: Deferred Income Indicative of a Rebound
Except for extra intangible proof, akin to cleaner parks and a greater visitor expertise, there’s proof on the steadiness sheet that is supportive of a powerful restoration in 2024 for Six Flags. Over the previous a number of quarters, deferred income (income acquired for /service not but delivered), a proxy for season go gross sales, is monitoring up 17%, versus a decline of 28% final 12 months as clients balked at larger costs.
And though season ticket gross sales oscillate greater than whole admissions income in response to cost adjustments, because the worth level of a season go begins ~100% larger than a day go, and thus is extra delicate to adjustments in buyer sentiment, on a directional foundation, it has been correlated to total income progress pre-pandemic (0.67 correlation coefficient).
Creator’s personal work; SIX 10-Ok
Cedar Truthful’s CFO commented on a rebound in deferred income on FUN’s Q3 name, as effectively, highlighting that the rebound is broad-based at each firms:
The rise in deferred revenues has been pushed by an impressive begin to fall gross sales of 2024 Season Passes and associated all season merchandise. By way of this previous week, mixed gross sales are pacing up 24% or roughly $30 million over the identical time final 12 months. We’re assured that our Season Move technique and excellent begin place us effectively for an additional robust season in 2024.
Motive #3: Cross-Promoting Alternative Helps Attendance Development
Season passholders represent 55% of FUN and SIX’s attendance, however solely attend 1-2 parks of their space. Selim Bassoul referenced this on the decision, however it’s a remarkably related set-up to the ski business just a few a long time in the past earlier than Ikon and Epic rolled up dozens of unbiased operators into two nationwide behemoths with an unparalleled worth supply for shoppers. Finally, that roll-up has pushed larger attendance throughout the community, as skiers have been prepared to frequent extra mountains, extra typically, because of the pliability enabled by a nationwide season go.
From a aggressive positioning standpoint, the merger of Cedar Truthful and Six Flags positions each firms effectively, as administration has guided to the creation of this actual season go program à la Epic. When instituted, this supply of full entry to 42 amusement parks and 9 water parks will additional assist to distinguish Six Flags and Cedar Truthful’s properties from regional rivals, who merely do not have the footprint to compete nationally. This dynamic will finally be supportive of additional attendance progress long-term, as friends are pushed into the arms of essentially the most value-adding operator close to them.
The NewCo’s S-4 quantifies that this could act as a ~$90 million EBITDA tailwind (probably $150+ million income affect) over the subsequent 5 years alone. There’s probably extra upside optionality to that projection, given shoppers’ love of every little thing “limitless.”
Motive #4: Capability Is There
It is a primary level. Administration at Six Flags has been clear: They goal to have 25-27 million friends per 12 months by 2025, versus 20.4 million final 12 months. In comparison with pre-pandemic ranges of greater than 32 million, that concentrate on is achievable, notably within the context of decrease costs and an improved visitor expertise. SIX additionally has 700 acres of undeveloped land, which, if developed, might develop their parks’ footprints by 12%.
The affect of this tailwind to the top-line is troublesome to understate, as hitting simply the low-end of that vary at 25 million friends implies annual income progress of seven% per 12 months … and that is earlier than layering on escalating ticket and concession costs.
Catalyst #2: Per Capita Visitor Spend Stabilizing, On Observe to Enhance in ’24/’25
After a tough begin to 2023, characterised by a low single-digit drop in SIX’s visitor spend per capita, dragged down by discounted admissions, 2024 is poised to see a stabilization in visitor spending, as in-park pricing stays agency, because of a macro backdrop characterised by inflation, on the similar time admissions income normalizes.
As I wrote earlier, the 2 determinants of an amusement park’s income are attendance and per capita spend. Going ahead, progress within the latter can be simply as necessary as attendance progress with regards to rising shareholder worth long-term.
However reasonably than simply capturing at midnight about the place per capita spend will find yourself subsequent quarter, it is instructive to have a look at different information units. FRED, a knowledge aggregating web site run by the Fed, helpfully sweeps admission and concession worth information each month as a part of formulating their producer worth index, giving us a way of the place admission and in-park pricing is month-to-month.
Whereas not predictive sufficient to base quarterly assumptions off, since Six Flags has completely different exposures than the business writ massive and leans extra into season passes, which supply extra constant pricing, once I layered the FRED information over a desk of the change in in-park and admission spending per visitor, it is evident the information is directionally correlated.
FRED; SIX 10-Ok
And what it exhibits over the previous a number of months is an acceleration in pricing not seen since earlier than Covid, with costs throughout the amusement park business ramping up 7.5% since August alone.
Six Flags and Cedar Truthful are uniquely poised to profit from this dynamic, as regardless of being acquainted to most Individuals, their costs are in step with these of unknown native gamers. Whereas the incomes of their core demographic stop SIX and FUN from taking costs too excessive, it is simple to see pricing slowly creep into the excessive $30s over time from the low $30s the place they’re now.
Catalyst #3: EBITDA Inflection Pushed by Attendance, Pricing, and Synergies
Concurrently the NewCo will notice larger income progress from attendance and pricing progress, there is a main alternative on the price entrance as effectively.
From a extra primary degree, there’s the three-year $120 million EBITDA synergy goal highlighted by administration of their investor deck, however that quantity can probably go a lot larger, because the proxy assertion forecasts a $200+ million alternative by 2027, which is simply 4 years out. Round two-thirds of that comes from company cuts within the back-office, whereas one other third comes from the cross-selling alternative defined above.
Moreover, it is necessary to grasp that amusement parks function in a set value business, the place marginal prices are very low and incremental margins are very excessive, as as soon as a $25+ million amusement park is open and staffed, even a big improve in attendance will not drive a significant improve in OpEx.
Quantifying the Attendance and Per Capita Influence at Six Flags
Six Flags’ steering for 25 million friends by 2025, mixed with low single-digit progress in each admissions and in-park spending per capita helps common annual income progress of ~8% over the subsequent three years. With incremental EBITDA margins within the 50%-60% vary as OpEx and SG&A are leveraged over a set value foundation, there is a clear runway for SIX to hit $600+ million of EBITDA by the top of 2025.
Creator’s personal work
Administration guided for $630 million of EBITDA within the proxy, in comparison with the Avenue at $560 million in 2025. Trying even additional forward, Six Flags sees a 5-year alternative for $800+ million of annual EBITDA. As a fast sanity test, Selim Bassoul’s compensation when he was introduced on in 2021 was tied to hitting $710 million of EBITDA in 2025 – a goal he would not have agreed to if it weren’t throughout the realm of risk. Making simply $100 million greater than that over one other three years is not a monumental enterprise.
CopperSteel Type S-4
However regardless, consensus numbers are simply to this point behind the ball, that even lacking their very own projection by $100 million or extra would nonetheless have the NewCo’s inventory worth appreciating meaningfully.
Influence of Attendance and Per Capita Spending at Cedar Truthful
FUN is much less fascinating with regards to a top-line inflection, as administration wasn’t out on a limb with their pricing technique, so there isn’t any actual course-correct to profit from. Over time, they’ve realized 3-4% income progress at 50%+ incremental margins, permitting them to compound EBITDA at 7% per 12 months for over a decade.
The place issues get fascinating for FUN although is within the margin image, as EBITDA margins are nonetheless 750 foundation factors under pre-Covid ranges. However as is the case with Six Flags, as pricing, the price base, and attendance normalize, EBITDA margins will inflect materially larger.
Administration at FUN guided to one thing related on their most up-to-date earnings name:
First, generate larger demand ranges with the purpose of recapturing attendance disrupted by climate earlier within the 12 months. And second, aggressively seize upon value financial savings alternatives that do not – not solely enhance our near-term working margins, but additionally put us on a path to return to pre-pandemic margin ranges over time.
Creator’s personal work; FUN 10-Ok
Whereas a fast search by way of FUN’s monetary statements counsel they’ve already returned to pre-Covid margin ranges, that does not account for a $155 million one-time acquire on a sale leaseback of one in every of their properties. So, on a normalized foundation, there’s nonetheless an incremental $130+ million margin alternative, which is supportive of FUN’s standalone purpose of hitting $625 million of EBITDA by 2025.
CopperSteel Type S-4
Earnings Energy and Valuation
In terms of valuation, I take a near-term and mid-term strategy to assessing worth, with a deal with how my fashions match up towards consensus. Given non-public fairness’s exercise within the house, I will additionally go over some go-private comp multiples.
2024 Valuation Framework
Upon completion of the merger, the NewCo could have an $8.5 billion enterprise worth and $1 billion of trailing EBITDA, for an EV/EBITDA a number of of 8.5x. In comparison with their friends, that form of valuation is pretty in-line.
However, the place issues begin to get fascinating is whenever you go from wanting on the previous 12 months, and ahead into 2024, the place attendance at Six Flags begins to inflect and Cedar Truthful’s margin image begins to enhance.
LSD income progress at FUN and HSD income progress at SIX in 2024 – figures validated by each deferred income evaluation and FRED information – mixed with 50%+ incremental margins, will drive >12% of EBITDA, leaving stakeholders with $1.15 billion subsequent 12 months.
So, on a ahead foundation, we’re taking a look at a a number of of simply 7.4x EV/EBITDA for the NewCo.
Creator’s personal work
Normalizing as much as 9.0x – the blended a number of of SIX and FUN pre-merger and a determine in step with growth-adjusted peer comps (see scatterplot) – helps fairness upside of ~50% subsequent 12 months alone. And whereas merger prices will depress reported EBITDA as the majority of one-time bills circulation by way of the earnings and money circulation statements subsequent 12 months, sell-side fashions will regulate to a better base of earnings energy, and the inventory worth ought to reply accordingly.
2025 Valuation & Past
Profitability on the NewCo ought to proceed to develop robustly in 2025 on each an adjusted and GAAP foundation, as attendance at Six Flags reaches their 25 million visitor goal, the primary $100 million of synergies are realized, and one-time merger bills do not repeat.
Within the S-4 proxy, administration at “CopperSteel,” the short-term title for the brand new SIX and FUN firm, requires almost $1.4 billion of EBITDA in 2025, and I am at an analogous determine in my very own mannequin. A lot of the EBITDA progress is coming from SIX as they take pleasure in each HSD/MSD income progress along with 50%+ incremental EBITDA margins, whereas FUN is restricted to LSD top-line progress.
Template from Alta Fox Capital; Creator’s personal work
The Avenue is not absolutely appreciating the OpEx leverage that may be gained by SIX and FUN, therefore their pre-synergy estimated EBITDA is ~$70 million decrease than me in 2025.
By way of valuation, the NewCo ought to generate one thing on the order of $1.4 billion in EBITDA in 2025. At 9.0x EV/EBITDA and factoring in money accumulating on the steadiness sheet, we’re taking a look at an $85 share worth (when it comes to Cedar Truthful), versus FUN’s present worth of ~$39. That is over 100% upside for each SIX and FUN shareholders from present ranges over the subsequent 24 months.
We will quibble about whether or not the NewCo ought to commerce at 8.0x or 9.0x EBITDA, however even at 7.0x EV/EBITDA, we’re nonetheless taking a look at 50% upside over two years (see sensitivity evaluation desk under).
Creator’s personal work
Crucially, even within the occasion of a significant miss in synergy realization and attendance progress, which drives the a number of all the way down to 7.0x and slams EBITDA progress, fairness holders nonetheless make out even. Briefly, the basic “Heads I win; tails I do not lose a lot” state of affairs.
Go-Non-public Valuation
Given amusement parks’ predictable money flows and asset heavy steadiness sheets, which lend themselves to leverage, they have a tendency to draw consideration from non-public fairness. And though most offers are struck on the regional degree, the acquisition of Merlin PLC echoes that of the NewCo.
Merlin is a theme park operator based mostly within the UK. In 2019, it was acquired by a consortium that included Blackstone and the LEGO founding household for $7.5 billion, or 12.5x EV/EBITDA. Merlin was going through related headwinds to FUN and SIX on the time: attendance was down, and some huge cash wanted to be invested to revive friends’ belief. Whereas its leverage was low at 1.75x EBITDA and its operations have been uniquely necessary to among the sponsors, a a number of anyplace close to 12.5x for the NewCo would drive 200%+ returns for shareholders.
Given the leverage on the NewCo’s steadiness sheet, an acquisition over the subsequent two years is unlikely, although as internet debt steps all the way down to ~2.0x in 2026, one thing might materialize.
Implications for Leverage
As I said on the outset, leverage at each Six Flags and Cedar Truthful is immense. When the deal closes the NewCo can be leveraged to 4.4x internet debt/EBITDA … however the kicker for fairness buyers is that similtaneously EBITDA inflects and free money circulation technology ramps, internet debt to EBITDA will drop quickly.
It will not be instantly apparent, however because the gross debt degree of the NewCo can be fastened at $4.65 billion, as EBITDA will increase, the efficient gross debt/EBITDA a number of will drop. What’s extra, the NewCo goes to be producing numerous FCF, that means on a internet (i.e., debt minus money) foundation, leverage can be dropping even quicker.
Creator’s personal work; CopperSteel Type S-4
The gorgeous factor about this dynamic is that it helps ensures some extent of returns for fairness holders, no matter market gyrations, since administration can simply shift the composition of their enterprise worth to be extra fairness heavy as they pay down debt, successfully driving appreciation within the inventory worth as they accomplish that. For example the enormity of the chance right here, for each one flip of debt administration pays down, the fairness appreciates 25%.
Decrease leverage additionally has the additional benefit of securing decrease rates of interest, as fastened earnings buyers are prepared to trade a decrease yield for much less threat. Contemplating the blended rate of interest on the NewCo’s debt can be north of seven%, or $345 million/12 months, there is a clear path to their curiosity expense falling by tens of tens of millions of {dollars} over the subsequent couple years as they refinance at decrease charges and pay down gross debt ranges.
Dangers to the Thesis and Their Implications
I might group the dangers to my funding thesis into three teams: operational, monetary, and regulatory.
Operational
Dangers on the operational entrance are principally tied to administration’s potential incapacity to execute towards merger synergies, improve attendance, and drive per capita spending.
Nevertheless, provided that round two-thirds of merger synergies are coming from slashing company bills, there should not be an excessive amount of threat on that entrance.
In my eyes, the one materials threat is clients not responding to the decrease costs on Six Flags and/or abandoning Cedar Truthful for unknown causes. I’ve already gone over numerous information supportive of fabric progress in 2024 and 2025, however a recession (which appears more and more unlikely, given the Fed’s steering for slicing charges in ’24) might cut back these numbers.
Monetary
Peter Lynch as soon as stated, “It is troublesome for an organization with no debt to go bankrupt.” On the flip facet, it is simple for an organization with numerous debt to go bankrupt, and the NewCo will definitely have numerous debt.
Leveraged 4.4x and going through $345 million a 12 months in annual curiosity expense, on the face of issues, debt looks as if it might be a problem. Nevertheless, provided that EBITDA is constantly averaging north of $1 billion/yr., the trailing curiosity protection ratio is at a cushty 2.9x, and as EBITDA inflects because of the litany of things already described, it ought to improve as much as 4.4x by 2026.
On an EBITDA minus Capex foundation, issues get a bit extra burdened, though even throughout a time of excessive charges and capital funding in 2023, curiosity protection was nonetheless 1.93x, leaping as much as 2.2x subsequent 12 months, and three.35x by 2026.
Creator’s personal work; CopperSteel Type S-4
Regulatory
On the regulatory entrance, the Federal Commerce Commissions beneath Lina Khan has confirmed fairly hostile to mergers that leads to the massive getting larger. Whether or not it’s Amazon (AMZN) trying to purchase iRobot (IRBT), Microsoft (MSFT) pursuing Activision Blizzard, or Amgen (AMGN) going after Horizon, the FTC has been fairly prepared to flex its regulatory muscle.
Given the plain implications for shoppers of two gigantic amusement park operators combining, there’s an opportunity this deal winds up in courtroom.
But, even within the occasion of the FTC suing to dam the deal, I believe the merger nonetheless goes by way of, as given the minimal overlap between SIX and FUN’s footprints, in addition to the diploma to which the amusement park business is fragmented, it is troublesome to craft a reputable argument for critical client hurt.
Further Optionality
As I wrap up, I assumed it price mentioning two different levers for inventory worth appreciation over the medium-term.
Lever #1: Six Flags Actual Property Alternative
Six Flags owns an incredible quantity of actual property beneath their parks, and over the previous year-and-a-half, the activist hedge fund Land & Buildings has been partaking with administration a couple of plan to spin off their actual property.
Land & Buildings
The story hasn’t actually modified since I final wrote about L&B’s involvement, so I will embrace the brief excerpt I wrote final 12 months:
The essential math behind the transaction is that if Six Flags have been to spin-out the true property they personal (i.e., their theme parks and the land beneath them) in a REIT and lease the properties again to the working firm, paying $205 million per 12 months as a part of the deal, the newly-formed REIT could be price $2.8 billion at a 7.25 % cap price (or 13.8x EBITDA).
By Land & Buildings’ calculations the PropCo and OpCo would have a mixed enterprise worth of $5 billion and an fairness worth of $2.6 billion, versus SIX’s present $1.9 billion market cap.
By way of how that is related for the NewCo, Cedar Truthful has signaled a willingness to pursue such transactions, most not too long ago with their California’s Nice America amusement park, which they bought in a sale leaseback deal in 2022 for $310 million. It is believable to see them pursuing related transactions–possibly with some non-core property, like marinas, campgrounds, or sports activities facilities–as a part of their plan to deleverage and create worth for shareholders.
Lever #2: Further Synergies
This second lever for added progress is a less complicated one. On the investor name discussing the transaction, it was implied that the $120 million EBITDA synergy goal is extra of a place to begin, and the proxy confirms this, with its purpose of $200+ million of EBITDA synergies by 2027.
There may be most likely extra upside is on the income. That is one thing we’re actually enthusiastic about. However as , that takes a bit of bit longer. Generally get to these income synergies, there’s numerous system integration that has to occur. So, I believe that could be the place there’s extra upside, long run.”
– Cedar Truthful CFO
The chance to attain synergies, which Six Flags and Cedar Truthful administration estimated might attain or exceed $200 million yearly by 2027.
– Type S-4
Each incremental $10 million of synergies, capitalized at 9.0x EV/EBITDA, provides $90 million to the market cap (+2%).
Takeaway
The NewCo fashioned by the merger of Six Flags and Cedar Truthful represents probably the most enticing funding alternatives available in the market right now, as short-term considerations over attendance, per capita spending, and leverage dissipate with the taking part in out of three key catalysts.
There is a foreseeable path to 50%+ returns over the subsequent 12 months, advancing as much as 100%+ in 2025 and past.