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Six Flags and Cedar Merger: Great Business Model, but Very Overvalued

Published 05/23/2024, 10:36 AM
Updated 05/24/2024, 08:54 AM

Six Flags Entertainment Corporation (NYSE:SIX) and Cedar Fair, L.P. (NYSE:FUN) signed a merger agreement to create one of the larger theme park operators in the world. The merger is certainly a good idea considering the total amount of debt, and profit margin declines reported by both SIX, and FUN.

With that, I would sell both SIX, and FUN shares, and I would not buy the combined entity, which is expected to have a total enterprise value of $8 billion, and total net debt of more than $4 billion. The PE ratio of both entities is significantly larger than other companies in the same sector. Besides, SIX appears to be trading at more than 70x earnings, and negative book value.

Six Flags Entertainment, And Cedar Fair

Six Flags appears to run the largest regional theme park operator in the world with 27 regional theme parks in the United States, Mexico, and Canada. The parks appear to be well diversified, and offer different attractions like water attractions, themed areas, concerts and shows, but also restaurants, and other types of experiences. The following map from the company’s website offers relevant information about the geographic diversification of the portfolio that may be relevant for the merger.

Source: Company’s Website

Cedar Fair Entertainment Company appears to be one of the largest regional resort operators in the world with 13 properties. The company also reports resort accommodations with more than 2,300 rooms and more than 600 luxury RV sites. Cedar Fair’s parks are located in Ohio, California, North Carolina, South Carolina, Virginia, Pennsylvania, Minnesota, Missouri, Michigan, Texas and Toronto, Ontario. Given their location, I do not think the resorts reported by Cedar Fair Entertainment could represent a problem with regards to competition.

Valuation Multiples: SIX Reports A Large PE Ratio

In order to understand the potential fair valuation of the combined company, I took a look at other companies operating in the consumer space. A list of 439 companies operating in the consumer sector, and offering positive earnings show a PE ratio between 0.1x and 85x, with most companies trading at between 4x and 21x. I can pride the list of companies, and the calculations for readers interested.

Many of the companies checked operating in very different spaces, however revising their PEs would most likely not harm.

FUN currently trades at close to 18x earnings, and SIX trades at about 82x. I would not say that FUN is very overvalued, but SIX does seem to trade a bit expensive. In my view, the merger of equals included a stock exchange because SIX does not trade at a cheap valuation. In my view, mergers that include cash to be paid to one of the parties are overall more undervalued than stock for stock transactions.

Once we have seen the PE ratio of the parties, in my view, I assumed the following PE ratios. In the bull case, base case, and bear case, I used a PE ratio of 7x,11x, and 13x.

Synergies Expected, And Valuation Of The Combined Entity

The terms of the transaction are shown in the lines below. There are several entities that are expected to merge, but, in my view, the most relevant is taking into account that the merger is expected to be a merger of equals. Holders of Cedar Fair Units are expected to own close to 48.8% of the combined entity.

On November 2, 2023, Holdings, Cedar Fair, CopperSteel and Copper Merger Sub entered into the Merger Agreement, providing for a merger of equals. (i) each issued and outstanding unit of limited partnership interest in Cedar Fair (each a “Cedar Fair Unit” and collectively, the “Cedar Fair Units”) will be converted into the right to receive one (1) share of common stock, par value $0.01 per share, of CopperSteel (the “CopperSteel Common Stock”), as may be adjusted pursuant to the Merger Agreement (the “Cedar Fair Exchange Ratio”), together with cash in lieu of fractional shares of CopperSteel Common Stock, without interest and (ii)each issued and outstanding share of Holdings common stock, par value $0.025 per share (the “Six Flags Common Stock”) will be converted into the right to receive 0.58 shares of CopperSteel Common Stock (as the same may be adjusted pursuant to the Merger Agreement, the “Six Flags Exchange Ratio”), together with cash in lieu of fractional shares of CopperSteel Common Stock, without interest. Following the completion of the Mergers, it is anticipated that holders of Holdings Common Stock and holders of Cedar Fair Units immediately prior to the Mergers will own approximately 48.8% and 51.2% of CopperSteel Common Stock, respectively, on a fully-diluted basis.

Source: 10-k

In the last quarterly report, Six Flags Entertainment noted total revenue of $142 million with park admissions of $76 million, park food, and merchandise of $52 million. Quarterly revenue increased y/y, which is beneficial. However, I do not think that net sales growth is sufficient to explain the current PE ratio.

From 2016 to 2023, median growth of park admissions revenue was close to 1.12%, and park food, merchandise revenue was about 3.7%. Total median revenue growth stood at close to 3%. Profit margin declined from 11% in 2016 to less than 3% in 2023. The median profit margin stood at 10%, which I decided to use in 2024, 2025, and 2026.

My projections for Six Flags are given in the table below. Other analysts may offer different numbers but I do not think their figures would be that different from mine. 2026 Park admissions would stand at $661 million, and total revenue would be $1205 million. Using a profit margin of 10%, 2024 net income would stand at $123 million, and 2026 net income would be $120 million.

My projections for Cedar Fair, L.P. are given in the table below. I assumed a profit margin of 9%, and double digit total revenue growth in 2025, and 2026. I tried to be optimistic about the future of Cedar because Cedar did report better financial figures than Six Flags. In 2022, total revenue growth stood at 35%, and 2023 revenue growth was equal to -1%.

According to the press release related to the merger agreement, the merger could bring $200 million of annual synergies, and the merger is expected to be accretive to EPS within the First 12 Months Following Close.
Approximately $200 Million of Annual Synergies, Including $120 Million of Cost Savings Anticipated Within Two Years Following Close. Expected to be Accretive to EPS for Cedar Fair Unitholders and Six Flags Shareholders within the First 12 Months Following Close. Source: Merger Press Release

The combined company, with a pro forma enterprise value of approximately $8 billion based on both companies’ debt and equity values as of October 31, 2023, will be a leading amusement park operator in the highly competitive leisure space with an expanded and diversified footprint, a more robust operating model and a strong revenue and cash flow generation profile. Source: Merger Press Release

Putting everything together I obtained a combined 2025 net income of close to $269 million, and 2026 net income of $291 million.

With the previous net income obtained, and a PE ratio of between 7x and 13x, I obtained 2025 bull case valuation of $6 billion, and 2025 bear case of $3 billion.

The company gave several estimates with regards to future net debt figures that we could use for our financial figures. The company expects to report $1.2 billion in Adjusted EBITDA, and 3.7x net debt/Adjusted EBITDA, which means that total net debt would stand at around $4.4 billion. In sum, under my bull case, total enterprise value could reach more than $10 billion, or be close to $7 billion under the bear case.

Over the last 12 months, through the third quarter of fiscal 2023, Six Flags and Cedar Fair collectively entertained 48 million guests, and, as a combined company, would generate pro forma $3.4 billion in revenue, $1.2 billion in Adjusted EBITDA2, and $826 million of free cash flow, reflecting run rate cost savings of $120 million and revenue uplift resulting in $80 million of incremental EBITDA. The transaction is expected to be accretive to earnings per share for Cedar Fair unitholders and Six Flags shareholders within the first 12 months following transaction close. The combined company is also expected to have a pro forma leverage ratio of approximately 3.7x net debt to Adjusted EBITDA, inclusive of synergies, with a path to reduce the leverage ratio to approximately 3.0x within two years of transaction close. Source: Merger Press Release

Balance Sheet Of The Combined Entity

The pro forma combined entity would report $8.4 billion in total assets including properties worth $4.1 billion, and goodwill of $2.7 billion. The most valuable assets are represented by the property and equipment. However, it is worth noting that the total amount of long term debt is larger than the total amount of property and equipment.

The list of liabilities include the current portion of long term debt of $56 million, and deferred tax liabilities of $403 million. As said, the total amount of debt is significant.

My Opinion About The Future Valuation

Management noted that total enterprise value could reach $8 billion, which I think is fair. My financial model includes a valuation of between $7 and $10 billion, $8 billion appears reasonable. Having said it is worth noting that we are talking about a company with total net debt/Adjusted EBITDA of close to 3.7x. It is not a small amount of debt. Even if the company promised to lower its net debt/Adjusted EBITDA ratio to close to 3x, the debt level is still a risk. I do not see that the combined entity appears to be a bargain with an enterprise value of $8 billion. I could buy shares if the total enterprise value reaches $5.4 billion, but not at the enterprise value proposed by the company. In my view, a market capitalization of about $1 billion would be a good entry point. In a recent communication, the companies noted that they would report a share count of close to 100 million after the merger. Hence, we would be talking about a target price of $10 per share.

Risks: FTC, And DOJ, And The Total Amount Of Debt

Six Flags Entertainment, and Cedar may not merge if certain regulatory bodies in the United States don’t approve the transaction. The companies received a second request from the DOJ, however in April, 2024, Cedar Fair and Holdings reported substantial compliance with the Second Request. The Federal Trade Commission is also expected to provide their approval for the merger, which may take some time, but I do not think it would present a lot of problems.

On January 22, 2024, Holdings and Cedar Fair each received a request for additional information and documentary materials (a “Second Request”) from the DOJ in connection with the DOJ’s review of the Mergers. The effect of a Second Request is to extend the waiting period imposed by the HSR Act, until 30 days after each of Holdings and Cedar Fair has substantially complied with the Second Request issued to it, unless that period is extended voluntarily by the parties or terminated earlier by the DOJ. On April 19, 2024, Cedar Fair and Holdings certified substantial compliance with the Second Request. Source: 10-Q

The rules promulgated thereunder, the Mergers cannot be completed until the parties to the Merger Agreement have given notification and furnished information to the Federal Trade Commission ("FTC") and the Department of Justice ("DOJ"), and until the applicable waiting period has expired or has been terminated. Source: 10-Q

Shareholders of both the different entities involved in the merger will also have to provide their approval. I do not think that shareholders may block the transaction because of the total amount of debt of both entities. I think that the companies need the transaction to be able to negotiate with debt holders. Large shareholders of Six Flags also signed support agreements in favour of the merger.

On March 12, 2024, at a special meeting stockholders of Holdings (the “Special Meeting”) called to consider and adopt the Merger Agreement., the stockholders of Holdings approved the Mergers. Source: 10-Q

Six Flags’ largest shareholder, which owns approximately 13.6% of Six Flags’ shares outstanding, has signed a voting and support agreement to vote in favor of the transaction. Source: Merger Press Release

Key Takeaways

Six Flags Entertainment, and Cedar Fair report a significant amount of debt, and their profit margins declined substantially in the last ten years. In both cases, long term debt appears larger than the total amount of property, and equipment. I do not think that their PE ratio of more than 18x is reasonable. Six Flags is also trading at more than 60x earnings. I would not buy shares of both entities, and I would even sell them at the current price mark. According to recent communications, the combined entity is expected to have a total amount of debt of more than $4 billion, and 2026 net earnings would most likely not reach $400 million. Hence, I do not think that the proposed pro forma enterprise value of $8 billion would make sense. I would be buying shares at a price of no more than $10 per share because I think that the business model is quite profitable in the long term.

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