Customers are social distancing on rides like Wonder Woman: Lasso of Truth at Six Flags Great Adventure in Jackson, New Jersey.
Company: Six Flags Entertainment (SIX)
Business: Six flags is the largest regional theme park operator in the world and the largest operator of water parks in North America. They generate revenue primarily from the sale of tickets to their parks and from the sale of food, drink, merchandise and other products and services within the parks.
market value: $1.9 billion ($23.25 per share)
Activist: Land & Buildings Investment Management
Percentage ownership: approx. 3.0%
average cost: n / A
Activist Comment: Land & Buildings is a property-focused long-short hedge fund that will seek to work on friendly terms with management if it sees high value. He invests in heavily discounted real estate on the public markets and in selected corporate commitments. The company’s positions are often below the 5% 13D notification threshold. It is ready to nominate directors and has received board seats at American Campus Communities, Brookdale Senior Living, Felcor Lodging Trust, Life Storage, Macerich, Mack-Cali (now Veris Residential), and Taubman Centers.
On December 21, Land & Buildings released a presentation detailing a potential operational and strategic turnaround for Six Flags Entertainment, which includes monetizing the company’s real estate assets and considering a sale-leaseback.
Land & Buildings (“L&B”) is a real estate focused investor and it is primarily a real estate business. The company is proposing to Six Flags to segregate its real estate holdings, which L&B believes are worth more than the company’s current enterprise value. L&B has extensive knowledge and experience in this area. In 2015, the hedge fund launched an activist campaign at MGM Resorts International, which ultimately led to the creation of an MGM Real Estate Investment Trust, which was acquired by VICI Properties, and a significant margin increase at the operating company. Recent private transaction comparisons for gaming real estate, as well as public gaming REIT valuations, suggest a 6% to 7% cap rate and a mid-teens multiple for assets like theme parks. L&B assumes that there would be many interested parties.
In its analysis, L&B assumes a cap rate of 7.25% and a real estate value of USD 2.8 billion. A sale-leaseback of the properties could reduce earnings before interest, taxes, depreciation and amortization from $520 million to $315 million, and assuming a 7x EBITDA multiple (SIX’s current multiple is 8- fold), the operating company would have an enterprise value of 2.2 billion US dollars. With $2.8 billion in cash and $2.4 billion in debt, that would equate to an asset, or market cap, of $2.6 billion. With 83 million shares outstanding, that would equate to a share price of $31.32, or a 34% increase over Six Flags’ current share price (47% increase over the company’s unaffected share price prior to the release of the L&B plan). L&B performed the same analysis on its 2024/2025 EBITDA targets, which resulted in a value of $6.8 billion and a 150% upside potential. Additionally, the hedge fund’s analysis assumes the $2.8 billion remains on the company’s balance sheet. If it’s used to buy back stocks where they’re trading now, the return would be even greater.
L&B believes a sale of Six Flags’ properties would allow the company to increase share buybacks, reintroduce its dividend (which was scrapped at the start of the Covid pandemic) and pay down debt. Additionally, it is a shareholder base with many like-minded investors (HG Vora, H Partners, Long Pond Capital) and a relatively new CEO (November 2021) who may be open to such a plan.
Implementing a plan like this would buy the CEO plenty of time and capital (both real and figurative) to do what really needs to be done – fix the operational problems. When Selim Bassoul was appointed CEO of Six Flags in November 2021, he pursued a strategy to try to improve the guest experience and create a more profitable, higher-margin business by migrating to a more affluent, family-oriented customer base. This new strategy, which included the elimination of several customer benefits, resulted in a significant drop in visitor numbers, alienating many existing customers and resulting in underpricing to competitors. However, it is still unclear whether it works. If there are higher visitor numbers at higher prices in 2023, then it worked and nothing needs to be done operationally. However, if attendance continues to lag into 2023, Bassoul may need to start returning many of the perks he took away, such as B. Modified meal passes. He may even have to consider lowering prices to previous levels. Without stabilizing operations, the real estate strategy can only create limited shareholder value. However, optimizing attendance and stabilizing operations will increase the value created by the real estate strategy.
We would expect Land & Buildings to want some form of board representation to help with this strategy. Frankly, Six Flags should want the firm’s help if they decide to monetize the properties. So it wouldn’t be surprising to see an amicable settlement for a board seat or two. However, the window for nominating directors is between January 11, 2023 and February 10, 2023. If there’s no agreement by then, L&B will almost certainly appoint directors, even if it’s just to grant the company’s rights Maintain while talking to management. Should a proxy fight ensue, the aforementioned like-minded investors — H Partners (13.5%), HG Vora (4.2%), and Long Pond Capital (5.7%) — could be potential backers of L&B.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.