Sorry, long post coming... but I've been following this and interested in this whole thing every since I first invested in theme park operators in 1999, and I think I've got some decent knowledge worth sharing. If you're just interested in complaining about your local park not getting new stuff, move along...
MagicMountainMan wrote:This is just a floating rumor, but apparently the bondholders are going to try and buy up the stock to get a majority share of the company and then get Six Flags to liquidate.
That wouldn't make *any* sense.
Six Flags tried to get something going with the bondholders, and they turned it down. You can read about those attempts and it was talked about on their last conference calls.
So, if the bondholders who wouldn't work for *that exact deal* before now decide to buy up all the stock to liquidate the parks, it would be like throwing bad money after worse money. They didn't want to do it before, so now they want to do it to spite Six Flags and make them close parks and sell them, so they can lose even more money? Let's face it, there aren't that many other operators out there looking to buy right now, and if a company goes bankrupt, how much do they get in a liquidation? HRP sold for what, $25 million?
That doesn't make any sense. Whomever started that idea is crazy, period.
I admit I was one that fell for their EBITDA and thought that they were doing great. However once I looked into it I now think that it's going to take a miracle to get this company back on its feet all in one piece. I just don't see Six Flags being able to pull through this without selling off parks, temporarily closing some of the parks, or subscribing to massive layoffs.
But here's the thing -- I think most people are looking at this like Circuit City or the auto industry, and it isn't like them in either way.
Circuit City had a huge debt load and tons of stores that were not making much (if any) money. Their stores were worth more closed and liquidated then they were open, so that is exactly what happened -- the Circuit City stores closed and were liquidated.
Six Flags parks are not worth more closed and liquidated or they already would have been. Astroworld for instance was liquidated because they thought that the land under it was worth a ton more than it ended up being worth. Having used rides and moving them from park to park is generally more pricey to move than you'd expect, so while there would be some savings to moving stuff from another park, it wouldn't be huge.
In the auto industry, there have been massive layoffs and plant closings while the business still operates, but I wouldn't expect to see this out of Six Flags because if the business is profitable, they wouldn't be closing it down. It isn't like GM is saying, "Man, Hummers are really flying off the shelves, but we better shut it down!" They are closing down and selling or just shuttering lines that are not making money.
The Six Flags parks, from what we know, are making money. Even if lets say that a park like SFA only makes $1 million in profit a year. If that park is shut down, how much is the land really worth? How much could you get from the rides that are on it? Probably not much. And, since it is profitable, it makes more sense to leave it open, earning its meager $1 million (no idea if that is true or not, they don't break it down like that in earning reports) a year than not.
So, I would expect just what the chain has said -- business as usual. This is an issue that is really a back of the house sort of thing, where the banks and bondholders should have never granted the money that they did when they did, but because they risked it (and that's the key thing here, anything in stocks and bonds is a risk), because they failed to do their homework, they will lose most of it. This could have all been avoided if, when Gary Story was originally on his rampage to buy every park in the world, people had said "No." and "Show us the business plan." and then studied it.
As for the EBITDA stuff, it's a measure that is used whether for good or for evil by firms throughout the world. The bigger thing to look at (which they only started reporting this year, presumably because in the past it would have really shed a light on the house of cards that EBITDA has been for them) is free cash flow. The chain reported their first ever 'Free Cash Flow' year, which was reported at $5,607,000. While that isn't a ton of money, the fact is that Free Cash Flow is looked at as the money that is distributable to bond and shareholders after everything else has been satisfied for the year, including new capital. The year before was reported this year as about a $165 million loss in free cash flow, so it was quite the turnaround.
Now, if you take out 75% of the interest payments (shown for 2008 as $167,166,000), you have a $41,791,000 interest load that you're carrying. If the parks had that, the parks would have been $130,982,000 on the free cash flow side last year, and would have only had a loss of $40,589,000. The two years together would have been a profit of over $90 million dollars. While that isn't perfect, that would give the chain the ability to pay off their entire debt (including assuming interest payments would be the same, which wouldn't be the case) in about 15 years. If they have profit like last year, it would allow them to pay it off in less than 6 years.
So, long story short, what happened here was a completely unsurmountable level of debt taken on by the Premier acquisitions, and the mismanagement of it after that point. Thanks to the fact that with the financial crunch we're in now, banks aren't just willing to toss $1.8 billion in the way of a company that hasn't been making money to cover their payments, it means that this is being dealt with by harming the people who didn't investigate the company earlier with the bonds that were made then.
This is what investing is all about, and because the core business of Six Flags (providing the service of amusement parks) makes money still and not all will be lost, Chapter 11 will allow them to reorganize like this.
In the case of Circuit City, chapter 11 led them to realize that they wouldn't make money anywhere with their business model, which caused the chapter 9 liquidation. Six Flags will have to have a lot go wrong for this to suddenly become chapter 9.
However I would be a very happy man (okay boy) to see myself proven wrong.
Hopefully, the above will help to get you to that point. They still have a ways to go (the amusement park business fluctuates SO much year to year, it is hard to sit back and have any real idea where they will land), but this is the correct first step on their road toward becoming a (potentially very) profitable operator.