Customers are socially distanced 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 The world’s largest regional theme park operator and the largest operator of water parks in North America. They primarily generate revenue through the sale of admission to their parks and the sale of food, beverages, merchandise, and other goods and services within the parks.
Stock market value: $1.9B ($23.25 per share)
Operator: Land and Buildings Investment Management
Percentage Ownership: About 3.0%
Average Cost: n/a
Activist Comment: Land & Buildings is a real estate-focused long-short hedge fund that seeks to amicably engage with management as it sees deep value. It invests in deeply discounted real estate and select corporate exposures in the public markets. Company levels are often within the 5% 13D reporting range. It is willing to nominate directors and has board seats at American Campus Communities, Brookdale Senior Living, Felcor Lodging Trust, Life Storage, Maserich, Mack-Calley (now Veris Residential) and Taubman Centers.
whats going on?
On that day December 21Land & Buildings released a presentation detailing a potential operational and strategic transformation of Six Flags Entertainment, including liquidating the company’s real estate assets and considering a sale-leaseback.
Behind the scenes
Land & Buildings (“L&P”) is a real estate investor, primarily a real estate play. The company is recommending that Six Flags divest its real estate holdings, which L&B believes is 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, this led to the creation of an MGM real estate investment trust that was eventually acquired by VICI Properties and a significant development in the operating company. Recent private transaction summaries for gaming real estate and general gaming REIT valuations indicate cap rates of 6% to 7% for properties such as theme parks and multiples in the teens. L&B believes there will be many interested acquirers.
In its analysis, L&B assumes a cap rate of 7.25% and a value of $2.8 billion for the real estate. The sale-leaseback of real estate could reduce earnings before interest, taxes, depreciation and amortization from $520 million to $315 million and assume a 7x EBITDA multiple (SIX’s current multiple of 8x), the operating company would have an enterprise value of $2.2 billion. With $2.8 billion in cash and $2.4 billion in debt, that equates to an asset value or market cap of $2.6 billion. With 83 million shares outstanding, that equates to a share price of $31.32, or a 34% premium to Six Flags’ current stock price (47% above the company’s unaffected stock price before the L&B plan went public). L&B performed the same analysis on 2024/2025 EBITDA targets, which led to a $6.8 billion valuation and a 150% increase. Also, the hedge fund’s analysis assumes $2.8 billion will remain on the company’s balance sheet. If used to repurchase stocks around the current trading position, the returns would be even higher.
L&B believes the sale of Six Flags’ real estate will allow the company to ramp up share buybacks and restore its dividend (which Removed at the start of the covid pandemic) and pay off the debt. Also, it is a partner platform with many like-minded investors (HG Vora, H Partners, Long Bond Capital) and a relatively new CEO (November 2021) who might be amenable to such a scheme.
Executing a plan like this gives the CEO plenty of time and capital (both real and figurative) to do what really needs to be done—fixing operational problems. When Selim Bassoul was named Six Flags’ CEO in November 2021, he launched a strategy to improve the guest experience and create a more profitable, more profitable business by migrating to a more convenient, family-oriented customer base. This new strategy, which included the elimination of many customer offerings, led to a significant drop in attendance, the alienation of many existing customers, and subsequent cost underperformance to peers. However, the jury is still out on whether it works. If it results in higher arrivals at higher prices in 2023, then it has worked and nothing needs to be done in the process. However, if attendance continues to lag until 2023, Bussoul will have to offer back many concessions, such as modified dining passes. He may even have to consider reducing prices to their previous levels. Without stabilizing operations, a real estate strategy can only create greater shareholder value. However, improving attendance and stabilizing operations can magnify any value created by a real estate strategy.
To support this strategy, we expect land and buildings to have some form of group representation. Obviously, if you choose to monetize Six Flags real estate, you should enlist the help of a company. So, it’s no surprise to find a harmonious solution for a board seat or two. However, the director’s nomination window is Jan. 11, 2023 and between February 10, 2023. If no settlement is reached by then, L&B is almost certain to recommend the directors. Talk to management. If it goes to a proxy fight, the like-minded investors mentioned above – H Partners (13.5%), HG Vora (4.2%) and Long Bond Capital (5.7%) – could be L&B’s potential backers.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activity, and he is the founder and portfolio manager of the 13D Activist Fund, which invests in a portfolio of activist 13D investments. Squire is the creator of the AESG™ investment model, an activist investment style focused on improving the ESG practices of portfolio companies.