Description

SIX 9.625 & 9.75% Sr. Notes Bonds

I recommend Six Flags, Inc. (“Six”) 9.625 & 9.75% Sr. Notes at 92 or better. SIX Sr. Notes offer an 11% yield to maturity, 15-25% yield to improved credit and an attractive implied purchase price of the company’s underlying assets in the event that Six is not able to meet its financial obligations.

Six Flags is the owner and operator of 27 regional parks in North America consisting of theme, water and zoological parks. In 2006 Six had over 33 million visitors attend its various parks. Six’s parks are natural (somewhat) monopoly like local entertainment businesses/unique assets. Six generates revenue from three sources: ticket sales 50%(attendance), in park spending 50%, and corporate sponsorship 3%. Six’s non balance sheet costs are primarily: labor, goods sold (including licensing fees), insurance, advertising, and capital/ride costs. Besides goods sold, Six’s costs are primarily fixed, though most costs should increase with inflation. Six’s business has a high degree of operating leverage and high incremental contribution margins - roughly 60-75% for merchandise/food sales, likely north of 90% for incremental ticket/attendance revenue and nearly 100% for sponsorship. The key to the theme park business is getting people to the park, and once there getting them to spend money. Six has been horribly miss-managed and never earned an adequate return on the capital invested in its parks or necessary to replicate its parks/attractions.

Six is in the midst of an operational and strategic transformation, including the evaluation of asset sales. In 2005 Dan Snyder and Mark Shapiro ran a successful proxy contest resulting in a change of management and the appointment of Snyder (Chairman) and Shapiro (CEO)  in December 2005. Snyder and Shapiro have built careers on successful consumer promotion/entertainment, Mr. Snyder with the Washington Redskins and Mr. Shapiro at ESPN. Under their leadership, Six is in the process of transforming its business from a low spend per guest, cheap ticket, thrill park catering to teens and young adults into a high entertainment, high promotion, higher spending per cap, family park catering to young families and children. Six’s plan is dependant on two things: 1, Making its parks family friendly; 2, Convincing families to attend and spend money. There is no certainty that Six will be able to achieve its planed operational and strategic transformation, but it is clear from past results that the old thrill/teen based strategy failed.

Six has numerous plans in place to increase attendance and spending per guest. Six has created an exclusive tie in with the Wiggles, more than doubled the concert schedule, increased advertising by 50%, added valet service at some parks, doubled corporate sponsorship revenue,  and introduced a guest code of conduct.  Six 2006 improvements include deals and promotions designed to drive high guest enjoyment, spending and attendance they include - Brunch with Bugs, a Pappa John’s Pizza deal, improved/target capital budget, new training and retention strategy and increased character presence. Six is developing and executing a new approach to a set of unique and stable assets.

Six’s cash operating costs should increase about $30mm net in 2007 from 2006 a combination of increases in labor, advertising and a decrease in capital spending.

SIX needs to generate about $330mm of EBITDA to service their capital and balance sheet needs.

At 9/30/06 ($ in millions)

Bank Debt                                                                    $685

Sr. Notes                                                                      1,835

Other Debt                                                                        7

Preferred Convertible at 20.85 per share                       287

Obligations Sr. to Equity                                               $2,500

Obligations at Sr. Note Level                                        $2,185

Common stock

Results (in millions)

            2003                2004                2005                2006E              AVE

EBITDA                      $284                $253                $293                $225                $263   

Capex                          99                     105                171                 130                 125

Net CF                                    $185                $148                $122                $95                  $138

EV at Sr. Notes Level (92%) to:

Ave. EBITDA              7.9x

Ave. Net CF                15.0x

Cedar Fair’s 2006 purchase of Paramount parks was at around 11.5x EBITDA.

Six’s cash operating costs should increase about $30mm net in 2007 from 2006 a combination of increases in labor, advertising and a decrease in capital spending.

Six’s current results more than cover the current Sr. Notes based on comparable M&A multiples.

Six needs to generate about $330mm of EBITDA to cover capex and interest exp (including preferred dividends). Such improvement in EBITDA would require a roughly 15% increase in revenue. Six has a substantial NOL and should not be a tax payer for the foreseeable future. Should Six generate $430mm in EBITDA (25% increase in revenue) it is likely the Common stock would exceed $11 per share based on a 15x free cash flow multiple.

If Six is able to improve its results, its bonds should trade at a premium to par, if such improvement were to happen in 1 year a Six bondholder would earn 25%, in 2 years 16% in 3 years 13%. If Six results do not improve, the company will be forced to sell assets &/or restructure. Based on current (relatively poor) results, the Sr. Notes are covered at par and should produce an 11% return.

Six expects to report results of a sale processes for 9 parks in the next month, should Six complete a sale, the proceeds would be used to reduce 1^st lien debt, enhancing the credit quality of the Sr. Notes. All numbers above assume Six retains its current footprint and its parks continue to operate as going concerns.

Catalyst