By Erica Chan, Hunter Pang, Jonathan Liu, Lasheeka Ramesh (LSE). In collaboration with Alexandre Megrelis, Jules Donzelot, Loïc Meunier, Mathis Grandchamp (McGill University)
Photo: Daniel Lloyd (Unsplash)
Overview of the deal
Implied Equity Value: $3.6 billion
Total Transaction Size: $8 billion
Closed date: 2Q24E
Target advisor: Goldman Sachs (financial), Kirkland & Ellis LLP (legal)
Acquirer advisor: Perella Weinberg Partners (financial), Weil, Gotshal & Manges LLP, Squire Patton Boggs LLP (legal)
In a deal set to reshape the entertainment landscape, Cedar Fair Entertainment Co. is acquiring rival Six Flags Entertainment, birthing one of the largest theme park operators in the Americas.
This strategic move positions the combined company to operate an impressive portfolio of 27 amusement parks, 15 water parks, and nine resorts across the US, Canada, and Mexico. The synergy aims to solidify their standing against industry giants like SeaWorld Entertainment Inc. and Walt Disney Co.
The merger is not just about thrills and rides; it's a financial rollercoaster with expected annual savings of $200 million within two years and an immediate EPS boost. Cedar Fair CEO Richard Zimmerman will helm the new venture, with Six Flags' Selim Bassoul stepping in as executive chairman.
While the deal faces regulatory hurdles and requires shareholder approval, including dissent from Land & Buildings Investment Management LLC, this mega-merger anticipates a closing in the first half of 2024. With potential transformative deals and collaborations forecasted for 2024, this merger sets the stage for an exciting year in the theme park industry, promising investors and enthusiasts alike a wild ride ahead.
Company Details (Acquirer - Cedar Fair)
With over 27 million guests annually, Cedar Fair (NYSE: FUN) stands as a leading owner and operator of amusement parks in North America.
As one of the largest regional amusement park operators globally, Cedar Fair is present in 13 markets, boasting entertainment properties that include amusement parks, water parks, and resort facilities. These are dispersed coast-to-coast in the lower 48 states, as well as in Toronto, Ontario, Canada.
In 2022, their 15 parks generated record levels of net revenues and Adjusted EBITDA. The robust attendance and demand at all of Cedar Fair’s parks during these times of volatility strengthen investor confidence in FUN’s ability to weather the cycle. In fact, despite the COVID-19 turmoil, Cedar Fair has consistently delivered strong operating performance through the recessions of the early 1990s, 2000s, and even the 2008 Global Financial Crisis, when disposable income per capita was hit the hardest. Their business model, characterized by robust free cash flow generation, provides a foundation for consistent levels of reinvestment.
This has supported FUN’s inorganic growth strategy, exemplified by notable additions including Worlds of Fun (1995), Knott’s Berry Farm (1997), Michigan’s Adventure (2001), Paramount Parks (2006), Schlitterbahn, and Sawmill Creek Resort (2019).
Founded in: 1870
Headquartered in Sandusky, Ohio, United States
President and CEO: RICHARD A. ZIMMERMAN
Number of employees: 53,400
Market Cap: $1.99 bn (as of 14/01/2023)
EV: $4.21bn
TTM Revenue: $1.79 bn
Adjusted EBITDA: $503,02M
EV/Revenue: 2.35x
EV/EBITDA: 8.65x
Recent Acquisition: $261 million acquisition of two Schlitterbahn water parks in Texas
"The strength and resiliency of our business model was on full display during our peak attendance and revenue months, as we delivered another strong performance and positioned Cedar Fair for a great finish to 2023. " – Richard A. Zimmerman, President and CEO (Cedar Fair)
Company Details (Target - Six Flags)
Six Flags (NYSE: SIX) is a North American amusement park corporation with 27 locations across the United States, Mexico and Canada. Its parks cover 5,850 acres of land and contain 940 rides and over 140 roller coasters. There are numerous attractions, such as thrill rides, water attractions, shows, restaurants, game venues and shopping outlets. Moreover, the park offers food and beverage stalls, alongside merchandise stands.
Founded in 1961, headquartered in Arlington, Texas
CEO: Selim Bassoul
Number of employees: 1,450 full time and 40,000 seasonal
Market Cap: $2,090,000,000 (As of 29/01/23)
EV: $4,430,000,000
LTM Revenue: $1,358,236
LTM EBITDA: $460,880
LTM EV/Revenue: 3.3x
LTM EV/EBITDA: 9.6x
Projections and Assumptions
Short-term consequences
The two titans’ merger is expected to be accretive within 12 months after closing. The new company, which will keep the name Six Flags and trade under the ticker symbol “FUN,” will operate theme parks across the North American continent, with a stronger presence across both US coasts, Texas, and the Midwest.
Aside from the expanded and complementary geographic footprint less susceptible to industry-season-led cyclicality, the merger will result in $3.4 billion in revenue, $1.2 billion in adjusted EBITDA, $826 million in FCF, and a 36% modified EBITDA margin. The previous numbers reflect the $200 million of expected annual synergies; $120 million is expected to occur within the first 2 years through cost cutting focusing on redundant administrative positions and high fixed costs; and $80 million will derive from revenue uplift within 3 years post-close.
Cedar Fair CEO Richard Zimmerman will lead the new company as Selim Bassoul of Six Flags becomes executive chairman. The new consolidated Board of Directors will consist of six members from each company, and the company will be headquartered in Charlotte, NC, remaining present in Sandusky, OH.
Overall, Six Flags shares rose 6% to $22.25 post-announcement, and Cedar Fair’s were down 1.4% to $36.98. Both shares are up as of January 22, with Six Flags’ hovering around $24.4 and Cedar Fair's at $39.34, indicating positive sentiment on behalf of the market.
Long-term Upsides
This merger of equals will bring together two iconic North American amusement park operators, providing various strategic and financial opportunities for the combined entity in the medium to long term after the initial integration period.
Strategically, this transaction allows the two companies to provide new and improved experiences for the amusement park-goer. The combined company will be able to provide additional perks in terms of an integrated loyalty programme, and guests will be able to benefit from the combined IP of the new entity, including fan favourite Looney Tunes, DC Comics, and PEANUTS, which could spark the development of new attractions and enhance customer immersion. The expanded company portfolio of 42 parks and resorts is more geographically and thematically diversified, which Selim Bassoul, CEO of Six Flags believes will be instrumental in improving earnings stability and reducing dependence on any particular region.
In terms of financials, increased free cash flow should allow more flexibility in capital allocation, which management has indicated is likely to lead to investments in new attractions and broader service offerings. Free cash flow is expected to reach a 70% conversion rate which is a 2 and 11 percentage point improvement to Six Flags and Cedar Fair respectively. Management is committed to deleveraging with a 2 year 3.0x Net Debt/EBITDA target from the pro-forma 3.7x. Looking further ahead, management is optimistic that this merger will be value accretive to both shareholders and guests, creating an industry leading company with a focus on the holistic customer experience.
Risks and Uncertainties
Despite the potential synergies and benefits the merger will bring, there are also risks. Firstly, although there had been a surge in demand for theme parks in the post-pandemic era, it has cooled down, evidenced by the lack of visitors to Disney World and Universal Studios in Orlando this summer. Indeed, the economic uncertainties in the US, with inflationary pressures, potential recessions, and high interest rates pose problems for the merger as consumers cut back on discretionary expenses like theme park visits. Additionally, with less competition in regional markets, the parks may increase ticket prices to boost revenue. However, this may drive consumers away in the current macroeconomic environment and result in losses of revenue.
Furthermore, both companies entered the merger weighed down by significant debt. The combined entity would face a staggering $4.4 billion pro forma net debt, severely limiting its financial flexibility. Servicing this debt will consume substantial cash flow, potentially starving investments in park maintenance, new attractions, and employee wages. This would cause the company to mainly focus on cost synergies, rather than generating long-term revenue synergies such as innovation in the areas of virtual and augmented reality, and fall behind its competitors. The focus on cost synergies also leads to uncertainties surrounding the potential closures of underperforming and redundant theme parks which leads to job losses and dissatisfaction amongst the company’s employees. This uncertain financial picture, particularly amid economic turbulence, raises concerns about the merged entity's ability to weather unexpected storms and invest in future growth.
“Together, we will have an expanded and complementary portfolio of attractive assets and intellectual property to deliver engaging entertainment experiences for guests. I have great respect for the Six Flags team and look forward to joining forces as we embark on this next chapter together.” – Richard Zimmerman, President and CEO (Cedar Fair).
Sources:
EBITDA is calculated by S&P Global Market Intelligence using methodology that may differ from that used by a company in its reporting