There will be fewer flags flying Six Flags Entertainment(NYSE: FUN) this summer The nation’s largest operator of regional amusement parks announced Thursday the sale of seven of its underperforming gated attractions.
The division itself is not surprising. It’s been two months since trademark applications for Enchanted Parks — conveniently tethered to places where Six Flags has less-visited spots — have had amusement park fans bracing for another wave of cuts. The real surprise in the deal is the customer, the low price, and the market response.
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Properties of EPR(NYSE: EPR ) A half-dozen Six Flags amusement parks will be featured along with water parks. EPR will pay $331 million for the properties in an all-cash deal. The market responded by bidding up shares of Six Flags, which rose 5% in another soft trading day. EPR went the other way, sliding 4% on the news.
Your first reaction might be to run away with the six flags EPR. History may well bear it out, but dig deeper into the deal, and perhaps it should be EPR investors who should have been celebrated on Thursday. Pick up the wallet. Let’s go for a ride.
Things haven’t gone well since Six Flags and Cedar Fir joined forces in a deal that closed two summers ago. The joint venture — keeping the Six Flags name but Cedar Fair’s “FUN” ticker symbol — should create synergies and economies of scale. Enthusiasts hoped that the attraction of the Seder festival would capitalize on Six Flags’ branding and intellectual property. Six Flags will enhance the guest experience, reflecting Cedar Fair Park’s best practices.
It didn’t happen. Six Flags’ stock has shed more than two-thirds of its value, down 68% since the union became official. It is already cutting back on its fleet of screaming machines. It closed six American Flags in Maryland at the end of last year’s operating season. It is decided to lose the American state of California next year.
Let’s talk about the deal that EPR is getting. The leisure and entertainment real estate investment trust (REIT) paid $331 million to collect the parks, which last year generated $260 million in revenue and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $45 million for Six Flags. I’ll get into the math, but Six Flags sells these properties at a discount.
The sale translates to just 4.5% of the Six Flags enterprise worth $7.35 billion. Parks accounted for 9.5% of the 47.4 million turnstile clicks and 5.7% of the $792 million in adjusted EBITDA that Six Flags recorded last year. Six Flags delivers a lot for less, but margins should improve as these underperforming areas are removed from its books. Focusing on these top parks should in theory improve over time.
Change had come anyway. Activists led by Jana Partners, along with a group of investors including Travis Kelce, had already broken down the doors late last year. The new CEO came in three months ago.
EPR is an interesting winning bidder here. Most of its property portfolio consists of movie theaters and dining and gaming establishments, including driving ranges and arcades. It has a very limited availability at amusement parks and waterparks.
It’s popular with income investors given its 6.2% dividend yield, but it might not endear itself to the owner of the instant chain of theme parks. As a REIT, EPR focuses on maximizing returns from its portfolio. I can’t imagine that EPR will make a dramatic investment to improve the profile of the parks it inherits, especially when they are already among the rest of the market.
EPR got a good deal because there isn’t much of a customer pool for regional amusement parks in the current climate. The country’s major theme park operators don’t go to low-volume locations. Harshend – a growing attraction operator who might have invested in the capital to improve assets – still blocked acquisitions last year. Private equity firms have good reasons to steer clear of this sloppy market. It illustrates how the investment community realizes the value of small-cap attractions when EPR gets a deep discount on a deal and those shares still move lower.
In the end, both companies will be potential winners. Six Flags is losing what it perceives as assets that have held it back. EPR makes a smart buy — even in the worst case — that could turn into a real operator in a few years when demand heats up. Now it’s just time to enjoy the ride.
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Rick Munnarez holds positions in EPR Properties. Motley Fool owns and offers positions at EPR Properties and Six Flags Entertainment. Motley Fool has a disclosure policy.
Six Flags Sells Some Parks to EPR: Who Wins? Originally published by Motley Fool
