Description

This is a straightforward idea: good business, with excellent management, that's trading on a below-normal multiple on below-normal earnings due to short-term earnings pressures and confusion over new management's strategy. We see a base case return of 115% over 3-4 years (24%) IRR, assuming 17x 2026E EPS / 6% unlevered FCF yield.

INVESTMENT SUMMARY

Business
• Six Flags is the largest regional theme park operator in the US, with 27 regional theme parks and water parks.
• Its major parks have been open for >50 years on average and operate in generally stable competitive markets.

Thesis
• Six Flags is a quality business with predictable economics.
• CEO Selim Bassoul has been among the most successful CEOs of the past two decades and is likely to drive meaningful performance improvements at Six Flags.
• With a recovery in demand and good execution under Selim, we expect strong earnings growth over the next few years.

Variant View
• Quality/ robustness of the assets.
• Likelihood of profit improvement under excellent management.

Why Now?
• Appointment of Selim Bassoul as CEO (announced November 2021).
• Strong evidence of demand recovery underway. Very strong trends for theme park operators, with Disney, Six Flags, Universal, and Cedar Fair seeing strong demand recovery and record per capita spending.

Pre-Mortem
• Economic recession + leverage.

BUSINESS OVERVIEW & ASSESSMENT OF MOAT

Business Description
Six Flags owns and operates regional theme parks and water parks. Its 27 parks are geographically dispersed and serve the top 10 designated market areas by population in the US. The company had >30m visitors in 2019, and no single park contributed more than 11% of total attendance. Theme parks (vs. water parks) account for most of the visitors, revenue and asset value in the business.

Revenues are generated primarily from admissions (~$29/visitor) and in-park spending (~$24), including parking, food & beverages, and other products and services.

Relevant History
Six Flags started its operations in Texas in the early 1960s and eventually expanded across the US, both organically and via acquisitions. The company changed ownership hands many times over years, including ownership by the Pennsylvania Railroad, Bally Manufacturing, Wesray Capital and Time Warner.

Time Warner sold the business to rival Premier Parks, a theme park and real estate roll-up, in 1998 (Premier Parks took the Six Flags name in the deal). The transaction was meaningful in the history of Six Flags as it granted the combined businesses exclusivity rights on some Warner IP like Looney Tunes and DC comic characters for use at the theme parks. The transaction also resulted in the business becoming heavily leveraged, with >$1.9bn of debt. The integration and international roll-up strategy performed poorly, and the business struggled to manage its debt obligations.

Despite asset sales and the arrival of an activist board in 2005, Six Flags entered the GFC heavily levered (>8x) and entered into a prepackaged bankruptcy in 2009. Current 10% shareholder H Partners purchased debt during the restructuring and converted its interest into a >30% equity stake upon re-organization.

Under the management of Jim Reid-Anderson (CEO until 2019), Six Flags achieved a successful turnaround. The company exited some non-core businesses, cut costs and improved operational efficiency. This led to a meaningful improvement in EBITDA margins, from 30% to 38%. This also supported significant growth in FCF, with the company repurchasing >$2bn of stock from 2012-2018 (current market cap is $2.5bn).

While profitability and free cash flow significantly improved, attendance growth and spending per capita started to lag the industry, necessitating a greater investment in the guest experience. During Reid-Anderson’s tenure, the company was also distracted with international licensing deals and partnerships, and these largely ended in failure, with counterparties walking away from Six Flags and defaulting on obligations.

With weak results and the need to abandon Anderson’s profit targets, Six Flags brought in Mike Spanos from Pepsi as CEO in late 2019. Soon after, H Partners increased its stake in the business to 8% and re-joined the Board. Six Flags also added Selim Bassoul (now CEO) and Ben Baldanza (now Chairman) to the Board in early 2020.

Dissatisfied by the pace of the turnaround under Spanos, the board named Selim Bassoul as CEO in November 2021.

Quality Assessment
Regional theme parks are good, not great, businesses. These assets make attractive returns on capital (>20% returns on tangible capital) and produce solid cash flows under normal operating conditions. However, there is also a persistent need for capital investment, and earnings are cyclical.

There are barriers to entry, though they are modest:
• Supply constraints are the most durable of the advantages in this business. Simply, regional theme parks developed in an era when land prices were low. Rapid urbanization over the past several decades, combined with land price appreciation, has crowded out potential for large amusement parks in the vicinity of most major metro areas (and any new entrant would face competition from the incumbents).
• Economies of scale are low, except there are some fixed costs like IP licenses and technology investments that can be spread over multiple parks. There are also learning economies.
• Demand advantages are low. There is some advantage from heritage, as parents take their children back to the parks where they went when they were kids. This gives incumbents an advantage and acts as a small deterrent to entry, though this advantage must be maintained with continual investment in the experience.
• The above advantages, combined with high upfront capital costs (Legoland in NY cost >$500m), have meant capacity growth has been very low for a long time.

Limited supply growth in the US
• Our work indicates there has been a net reduction in capacity over the last 20 years and that theme park openings peaked in the 1970s.
• We’ve studied the top 20 theme parks in the US, and they have an average age of >50 years. The newest among this group are extension parks by Disney and Universal (and those are both >20 years old and are using land banks acquired long ago).

Six Flags footprint faces limited new competition
• Six Flags has 27 parks, including 12 Six Flags-branded theme parks that contribute much of the total attendance and revenue. These parks are an average of >50 years old, and the newest was opened in 1992.
• Our analysis of the top 10 of these parks indicates only 1 has faced a major competitive opening in the last 20 years.
• Lead times on new parks are estimated to be at least 4 years, so we should have pretty good visibility into any major competitive threats coming in Six Flags’ markets.

Reflections on the business
• While barriers to entry may be lower, Six Flags has a relatively high degree of long-term predictability:
• Demand is well-established. Overall spending on theme & amusement parks has been stable to rising as a percentage of GDP for decades. For all the major parks we’ve studied, attendance has been stable to steadily rising for a long time.
• There are limited technological disruptive threats, though we’ll need to be on the lookout for superior experiences from gaming and/or AR/VR in the future.
• Supply growth is very low and there’s a long lead-time to it.
• No individual park accounts for more than 11% of total attendance, meaning any competitive park opening (or natural disaster) is unlikely to cause an unbearable disruption to earnings.
• Simply, this business has robustness, and is the kind of business we’d be happy to own privately. The opportunity to buy this good asset at a good price with a great new CEO excites us today.

MANAGEMENT & GOVERNANCE

Key Actors
Six Flags has an excellent CEO and Board, and so we expect this quality business to have strong operational performance and smart capital allocation.

Selim Bassoul, CEO, has been one of the most successful CEOs of the last couple decades. He turned around Middleby and grew it into be the #1 food equipment manufacturer in its markets, delivering a 28% compounded share price return over his 18 years as CEO. Selim is still assembling his team at Six Flags, with an active CFO search in progress.

H Partners has increased its stake from 6% to 10.4% since early 2020 (at an average price near $33-34/share), when it rejoined the board. Since they’ve joined the Board, Six Flags recruited Ben Baldanza and Selim Bassoul to the Board, and then subsequently made Selim CEO. The incentive structure has also been changed, emphasizing Performance Stock Units that are aligned with clear targets- EBITDA, unlevered free cash flow, guest satisfaction and growth of food & beverage spending.

Ben Baldanza has become Chairman. Ben is credited with turning around Spirit Airlines and then rapidly growing the airline while championing the ultra-low-cost-carrier model. He oversaw a 10-year period with dramatic earnings growth and strong stock price performance post IPO in 2011.

Incentives
We like the team, and incentives are highly aligned.

Upon joining as CEO, Selim purchased $10m of stock in the open market, which was matched by the company. He’s also been granted a package with the potential to earn 50k to 1.2m shares based on EBITDA targets for 2022-2024. To earn the top end of the range, Six Flags must earn $710m of EBITDA in 2024 (our base case is $645m), and we estimate this would be worth >$100m to Bassoul.

H Partners, which sits on the Board, also owns >10% of the company.

RISKS

Cyclical
Attendance and spending are vulnerable to recessions. Six Flags’ attendance declined 5% and revenue declined 11% during 2009, leading to a 26% decline in Parks EBITDA. Disney’s Domestic Parks & Resorts segment also saw EBITDA decline by 25% during the GFC.

While there was a sharp decline during the GFC, these businesses performed better during earlier recessions. Six Flags’ EBITDA declined 4% organically from 2000-2002. Cedar Fair had generally stable EBITDA from 1989-1991 and a 6% decline in 2002.

For our downside case, we assume a 10% cyclical hit to EBITDA vs. our 2022 estimate.

Leverage
Six Flags is levered >4x and has a maintenance covenant of 3.75x in Q3’23. While Six Flags could violate this covenant in a recession scenario, our view is that Six Flags would very likely be able to amend its covenants, given it would have no solvency issues and would still likely be comfortably FCF positive. The company was able to amend covenants multiple times during 2020, which gives us some confidence of lender support.

In the near-term, we expect Six Flags to further pay down debt (it has excess cash today) and refinance its 2024 maturities.

Accident/ liability
There are inevitably safety risks with Six Flags given it welcomes large crowds and operates mechanical equipment. The risk of serious injury is very low, estimated at 0.05 serious injuries per 1 million rides in 2019 (industry data point). The company has a good safety record over its history and maintains general liability insurance. We can’t rule out an issue, but believe this is an acceptable risk given the insurance policy and longstanding operating history.

VALUATION

Base case: 115% return over 3-4 years on 17x 2026E EPS. Implies 6% unlevered FCF yield. also implies 10x EBITDA- note past average of 12x and that Merlin was acquired by Blackstone and the family owners of Lego for 10-11x.

Risk case: 40% loss over 1-2 years on 12.5x 2023E EPS / 8x EBITDA. Assumes 10% recessionary hit to EBITDA in 2023. Implies significant discount to replacement cost.

MODEL & ASSUMPTIONS

Key assumptions. Attendance of 25m in 2022, growing 1-2/yr. Spending per guest of $63 in 2022, growing 4%/yr. Implies 2026 revenue of $1.95bn. 37% management EBITDA margins (average from 2017-2019). CAPEX at 9% of revenue. leverage paid down to 3x ND/EBITDA, with remainder of FCF to buy-backs.

Implied EPS / FCF:
2022e: 1.86 / $200m
2023e: 2.28 / $229m
2024e: 2.68 / $244m
2025e: 3.15 / $252m
2026e: 3.66 / $269m

Catalyst

PERFORMANCE IMPROVEMENT PLAN

Re-set culture and drive operational efficiency:
• This is an area where Selim’s track record at Middleby was excellent.
• We expect he is driving for cost savings, while also improving the pace within the organization.
• He has already reduced the number of management layers from 7 to 3, downsized the corporate office and given more autonomy to park leadership.
• We expect that he is setting clear, demanding targets and figuring out which people are capable of performing. We expect there to be turnover, as those that can't handle the pressure are let go.

Improve the customer experience
• Selim brings a customer-obsession mentality to his work, but this is a very different type of business and customer than he dealt with at Middleby.
• We expect there’ll be a lot of experimentation at the parks, with greater use of technology.
• Introduction of a parks mobile app can drive a better guest experience, allowing guests to anticipate wait-times, pre-order meals (and readily purchase upgrades). The company is also rolling out digital signage.
• One area Selim expects to make fast improvements is in food, which should also drive higher spending levels. Food & beverage spending is included as a KPI in his incentive plan.

Premiumization / value-based pricing
• We expect technology improvements to not only improve the guest experience, but also to result in higher spending per guest.
• With a mobile app, guests will be able to quicky purchase express passes on the most popular rides, skipping queues.
• With a shift towards online sales, Six Flags should be able to have more dynamic pricing, increasing prices during busier periods. This should also allow them to better anticipate attendance, potentially resulting in labor cost savings during slower periods.

Will the yield / volume strategy work?
• With the Q1’22 results, Selim guided that Six Flags expected attendance levels would fall by approximately 20% vs pre-pandemic. Six Flags is making a deliberate trade-off to limit attendance, reducing access to discounts and promotional membership plans. This is in contrast with past management focus on driving higher attendance.
• We believe that this attendance decline is self-inflected, rather than a sign of competitive, structural or cyclical pressures. This is evidenced by absence of competitive openings, as well as very strong demand trends at other theme park operators.

Therefore, the question is whether this new strategy will work to drive higher profits. We are optimistic Six Flags will succeed at driving higher spending per guest and higher profitability:
(1) We can already observe it. Spending per guest increased 25% on an underlying basis in Q1. Profit margins also improved significantly.
(2) The industry backdrop is favorable.
a. No major new theme parks causing a competitive impact.
b. Our analysis indicates that Six Flags’ ticket prices are discounted 20% on average vs. peers in their geographic areas.
c. Other theme park operators have strong attendance while also driving higher per capita spending, suggesting an absence of pricing competition.
(3) There is strong precedent. Disney has followed a yield vs attendance strategy over the past 10+ years. Attendance grew only 1-2%, while guest spending increased 6% per year, taking margins from mid-teens to mid-20s (>30% recently). Disney management believes there remains a lot of further opportunity for yield management, and we expect Six Flags to emulate this approach.
(4) Great management in place. Selim has already outlined a clear set of actions that should improve guest experience and spending per capita.
(5) Lower, and higher-quality, attendance should also lead to cost efficiencies.