2023-11-03 15:17:27 ET
Summary
- Six Flags Entertainment and Cedar Fair have agreed to an all-stock merger to create a large standalone theme park operator.
- The new entity will have 42 parks and nine resort properties spread across 17 states, Canada, and Mexico.
- The merger aims to generate significant cost savings and additional value for shareholders, with the transaction expected to close in the first half of 2024.
- This is a reasonable deal based on all of the data made available at this time.
The little big world of theme parks has just gotten a little smaller. When I call this a little big world, what I mean is that there are very few players in what is a very large market. This is especially true when you only focus on those companies that are publicly traded. The reason for this change is that two of the firms, Six Flags Entertainment ( SIX ) and Cedar Fair ( FUN ) just announced an all-stock merger that will create a rather massive standalone theme park operator that aims to generate significant value for its investors in the years to come. Usually in transactions like this, it becomes clear that one player is getting more than the other in the transaction. But that doesn't appear to be the case here. Although I do consider Cedar Fair to be the more appealing of the two prospects, relative to both cash flows and overall corporate size, the terms of this merger are reasonable for both parties.
A look at the deal
*Attendance in Thousands
In the not-too-distant past, I have written articles about both Six Flags and Cedar Fair . The latter of these I found to be more appealing because of recent attendance data and per capita spending. That led me to rate the company a 'buy' in the article that I published about it on September 1 of this year. In comparison, the article that I published about Six Flags only five days later pointed out some of the weaknesses that the company had experienced, namely with attendance figures falling short of what its rival achieved and shares trading at levels that were a bit pricier. That led me to rate the company a 'hold'.
*Per Capita Spending
Despite this difference in sentiment, the idea of a merger between the two firms has crossed my mind. After all, they are very similar from an operational perspective. They are also similarly sized and leverage is not materially different from one company to the other. Individually, they cannot compete all that well with a behemoth like The Walt Disney Company ( DIS ), but together they can create additional value compared to what they could on their own. It would appear as though the management teams of both firms agree with this view. That's because, on November 2, news broke that the two firms had agreed to merge in an all-stock deal.
Combined, the new entity will have a portfolio that will consist of 42 parks and nine resort properties. These assets will be spread between 17 different states, as well as parts of Canada and Mexico. There are other ways to look at these assets. For instance, we can break them down by park type. You have the standard amusement parks that will number 27 in all, with Cedar Fair bringing in 11 to match up with the 17 owned by Six Flags. You also have 15 water parks, 11 of which currently belong to Six Flags. While Cedar Fair might fall short when it comes to both of those types of assets, it does lead the way with hotels and resort properties at seven compared to the two owned by Six Flags. It also has five campgrounds, two sports facilities, and three marinas. By comparison, Six Flags owns two safari/animal experience properties.
Geographically, there's a decent amount of overlap for these assets. In California, for instance, Cedar Fair owns four properties while Six Flags also owns four. In Texas, the two companies combined own 10 different parks. And throughout the Midwest, they own 10 total. There is more to the picture than just size. With size comes the potential first significant cost savings. According to management, the company aims to cut annual expenses to the tune of $120 million in the span of two years. 55% of that reduction will be in the form of corporate costs, some of which will be redundant when you have one company as opposed to two. It expects to get 25% of those savings from unspecified operating efficiencies and the remaining 20% from things like procurement, advertising, and technology. 65% of these savings will be realized within the first year of the completion of the merger. Management is also targeting another $80 million in incremental EBITDA within three years stemming from things like expanding its IP portfolio, improving food and merchandise offerings, optimizing certain in-park programs, and more.
Management expects the transaction to close sometime in the first half of the 2024 fiscal year. Upon closing, shareholders of Cedar Fair will receive one share of the new company for each Cedar Fair share that they own. The picture for investors in Six Flags is a little different. They will receive 0.58 of a share of the new company in exchange for each share of Six Flags that they currently own. But they will also receive two other things. First, they will get a one-time special dividend of $1 per share, amounting to $85 million in all, from Six Flags. Second, shareholders will receive distributions that match, relative to ownership of the collective firm, whatever Cedar Fair pays out between now and the time that the transaction is consummated.
In terms of whether or not this deal makes sense, my argument is that it does. Upon completion of the deal, shareholders of Cedar Fair will end up with 51.2% ownership over the combined company, with the remaining 48.8% of ownership belonging to Six Flags. Management provided some of their own calculations to demonstrate they're thinking of why this deal makes sense. But I have a slightly different method. Whereas they use trailing 12-month data, I decided to project out the final quarter of each company's 2023 fiscal year. I also did not calculate the deal to include expected synergies. And that's because, even though synergies are very likely to occur, they are not guaranteed and they will take time to come to fruition. In my thinking, if the deal makes sense without synergies, then it definitely makes sense with them.
Based on my estimates, Cedar Fair should generate around $522 million worth of EBITDA this year. That is slightly lower than the $552 million generated last year. By comparison, Six Flags should generate about $467 million worth of EBITDA in 2023 compared to the $465 million it generated in 2022. When you run the numbers together, you see that Cedar Fair is bringing about 52.8% of the combined EBITDA to the table while shareholders get 51.2% ownership in the combined company. But the picture is slightly different when you factor in the aforementioned distribution. At the end of the day, using the enterprise value of both firms at the time the deal was announced, Cedar Fair is bringing 50.2% of the value to the transaction and it is bringing 52.2% of the operating cash flow. These numbers are all fairly close and more or less match the ownership of the combined company that its investors will capture.
Takeaway
From all that I can see, this transaction between Cedar Fair and Six Flags seems reasonable. I don't see one player or the other walking away with a massive win. Naturally, if synergies do go on to be realized, the upside for shareholders could be attractive even above a scenario where the companies remain independent of one another. As for my view of each individual firm leading up to the merger, I still prefer Cedar Fair over Six Flags. In the latest quarter for which data was just announced, it managed to report attendance of 12.4 million people compared to the 9.3 million seen by Six Flags. And per capita spending of $61.65 came in higher than the $56.37 reported by its rival. In the event that the deal would fall apart, I would argue that Cedar Fair would be better off than Six Flags would be. But I don't view either of the companies in a negative light.
For further details see:
Six Flags And Cedar Fair Decide To Ride Together