Six Flags (NYSE:SIX) operates theme parks and water parks in the United States, Mexico, and Canada. The company is looking to merge with Cedar Fair (NYSE:FUN), an amusem*nt park, water park, and hotel operator. In the proposed merger, looking to be completed within the first half of 2024, Six Flags’ shareholders look to own around 48.8% of the new company, HoldCo, with Cedar Fair’s shareholders owning 51.2% of the new company. The new company will be named Six Flags, but will take Cedar Fair’s ticker.
Both Six Flags’ and Cedar Fair’s stocks have performed modestly prior to the Covid pandemic that disturbed the companies’ operations completely. As the pandemic disturbed earnings, the stocks have been left at lower levels. Both companies have historically paid out dividends, but with the pandemic, the companies quit payments to secure the financial position. While Cedar Fair has resumed dividend payments at a lower level, Six Flags hasn’t done so.
I have previously written an analysis on Cedar Fair, published on the 31st of August prior to the merger announcement, with a hold rating. Since, the stock has had a total return of 5%, slightly lower than the S&P 500’s appreciation of 15% in the same period.
Combined Financials
The Covid pandemic disturbed Six Flags’ and Cedar Fair’s operations with the extensive lockdowns. The combined entity’s, HoldCo’s, revenues decreased by -81.8% in 2020 as a result. Since, revenues have recovered well, though, and HoldCo’s pro forma CAGR from 2003 to 2023 stands at a fairly good level of 3.8%. More recent growth has been carried mostly by Cedar Fair’s CAGR of 5.9% from 2018 to 2023, as Six Flags’ revenues have been stagnant over the same period. Total revenues for HoldCo stand at $3225 million for 2023.
Operating margins have been great for both companies, and combined, HoldCo has an operating margin of 21.4% in 2023. The margin still trails from the pre-pandemic level. The companies anticipate significant synergies as the merger is completed, though; the margin is highly likely to rise as the merger’s synergies are implemented.
Targeted Synergies
Six Flags and Cedar Fair target significant synergies with the merger. The companies anticipate $120 million in run-rate cost savings from corporate costs, advertising, IT, procurement, and other operating efficiencies within two years of the merger being completed. In addition, the companies expect $80 million in incremental EBITDA from an improved offering. Season passes and fast lane programs are enhanced with the combined offering, and the parks’ offering is enhanced with extended combined intellectual property, as well as improved food & merchandise offerings.
The total targeted synergies of $200 million provide great earnings upside for shareholders - in 2023, the Six Flags' and Cedar Fair's combined net income only stood at $164 million. While the synergies aren't as massive when compared to current operating income, both companies' heavy interest expenses leverage the synergies' value to shareholders.
Many geographically complimentary theme park locations offer the opportunity to enhance the combined offering. Still, I believe that some caution about the targeted $200 million in total synergies is reasonable – the incremental $80 million in EBITDA from an enhanced offering seems to be based upon a significant number of assumptions and could prove to provide less benefits than currently anticipated.
Combined Valuation: Synergies Pose Upside
To estimate a fair value for the stocks, I constructed a discounted cash flow model with combined financials. In the DCF model, I estimate the growth to be quite good as the sales synergies are acted upon, with 2024-2026 annual revenue growth of 5%. Afterwards, I estimate the growth to slow down, first to 3.5% and gradually into a perpetual rate of 2.5%. The total CAGR of 3.4% from 2023 to 2033 is quite in line with the companies’ long-term growth rate.
I also estimate good margin leverage from the targeted $120 million in cost synergies – eventually, I estimate the combined company’s EBIT margin to rise into 28.0% from a figure of 21.4% in 2023 and 24.2% in 2024 as synergies are realized. The company should have a fairly good cash flow conversion, although the growth should take up some capital investments. Six Flags also pays out a minority interest, with $47.5 million paid in 2023. In my DCF model, I estimate the minority interest as worsening the new company’s cash flow conversion. The special dividend of $1.00 for each Six Flags share has been added to the value of the stock and subtracted from the combined company’s cash balance.
With the mentioned estimates along with a cost of capital of 8.03%, the DCF model estimates Six Flags’ stock’s fair value at $38.68 and Cedar Fair’s stock’s fair value at $65.17. The Cedar Fair stock seems to have slightly more upside at around 58% with the assumed ownership structure of 48.8% for Six Flags and 51.2% for Cedar Fair. Both stocks seem to have a good amount of undervaluation with the anticipated synergies, with Cedar Fair being the slightly better deal at current stock prices.
The used weighed average cost of capital is derived from a capital asset pricing model:
In Q4/2023 Six Flags & Cedar Fair had $76.4 million in combined interest expenses. With the companies’ current amount of interest-bearing debt, Six Flags’ annualized interest rate comes up to 6.57%. The companies have a heavy debt burden; as such, I estimate a high long-term debt-to-equity ratio of 80%. The companies plan to deleverage the balance sheet after the merger, but I believe that deleveraging will take quite a long time.
For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 4.40%. The equity risk premium of 4.60% is Professor Aswath Damodaran’s latest estimate for the United States, updated on the 5th of January. Six Flags’ five-year beta is currently estimated very high, which I assume to be mainly due to the Covid pandemic that Six Flags suffered from extraordinarily highly. In the pre-pandemic market, the company’s beta was estimated at 1.28, which I estimate to be a more fair assumption. Cedar Fair’s beta currently stands at 1.42 according to Yahoo Finance, quite near Six Flags’ pre-pandemic level, but I use the estimate of 1.28. Finally, I add a small liquidity premium of 0.25%, creating a cost of equity of 10.52% and a WACC of 8.03%.
Takeaway
Six Flags and Cedar Fair are looking to complete the companies’ merger. The combined HoldCo will have a history of constant modest growth with great margins, and space for good growth through an enhanced offering and margin expansion through cost synergies. While the targeted $200 million in total synergies should be taken somewhat critically for the time being, I believe that the synergies provide great room for upside for shareholders. The DCF model estimates good current upside for both stocks, although Cedar Fair seems to be the slightly better deal at current stock prices. For the time being, I have a buy rating for both stocks.
Caffital Research
I write mostly about small cap companies in the United States, focusing on a thorough explanation on valuation. My investment philosophy revolves around the DCF model, and analysis that leads into my assumptions used in the model. The approach doesn't limit my investment philosophy into either growth or traditional value investing - rather, I factor in both into my thesis, revolving my theses on a large-scale picture instead of single catalysts.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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