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Schnurman: Six Flags improving, but investors unimpressed

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Mitchell Schnurman

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Look out below at Six Flags.

The company’s stock price briefly fell to $1 a share Tuesday, just above penny-stock territory and an all-time low for Six Flags. That followed news that a key director, who was part of the group that won control of Six Flags almost three years ago, had sold 2 million shares in the past week.

And that followed last month’s restructuring of a big chunk of Six Flags debt — at an annual interest rate of 12.25 percent.

This can’t be the turnaround envisioned for Six Flags in late 2005, when Washington Redskins owner Dan Snyder won a three-month proxy battle. The new leadership has made progress at the company’s 20 amusement parks, improving the park experience, sponsorship revenue and average spending by visitors.

But the $2 billion debt load that Snyder inherited, which built the chain a decade ago, is still dragging down the company. Interest payments alone eat up 20 cents of every dollar generated by the parks, and they’re the primary reason that Six Flags hasn’t made a profit since 1998.

Since then, total losses have topped $1.4 billion, and the company isn’t expected to make money any time soon. It faces big debt payments in the next two years and will have to demonstrate positive trends in its operations to pull off the needed refinancing.

Recently, major credit-rating agencies downgraded Six Flags’ junk bonds, and media reports brazenly asked whether Six Flags will make it through the summer. One example, from Newsweek: "Can Six Flags survive the economic roller coaster?"

"We’re fine from a liquidity perspective," Chief Financial Officer Jeff Speed said in a phone interview, citing a bank line that was reworked last year. "But for investors, we’re still a show-me story."

The picture will come into clearer focus next month, when Six Flags releases results through the June quarter and talks about attendance trends in July, typically its busiest month of the year.

Six Flags had a strong first quarter, helped by the calendar (Easter fell in the period) and a 13 percent increase in per-capita spending. Spring-break attendance was especially strong in Arlington, and local turnout appears to have been solid all summer.

Six Flags is banking on an everyday value proposition, having lowered its online ticket prices and appealing to residents who can’t afford more expensive vacations. Executives believe that rising prices for gasoline, food and other necessities will prompt more people to stay near home this summer and instead visit regional attractions.

In the first quarter, they point to a spike in one-day ticket sales as evidence of that trend.

"We were going to do this regardless of the economy," CEO Mark Shapiro said about the value pricing in May. "But it’s playing into our favor with the economy."

In a downturn, he said, people will sacrifice long-distance travel and flat-screen TVs, and look for a value nearby.

That sounds sensible, unless the sting of higher prices and rising unemployment is worse than expected. Six Flags has parks in California and the upper East Coast, where the economy has been harder hit than in Texas, and a family day at Six Flags still eats up some spending.

Speed said investors are "spooked" by the overall economy and especially worried about companies with high debt loads. Six Flags was among those with the worst liquidity issues, according to a recent ranking by Moody’s.

Six Flags’ debt is more than 12 times greater than its earnings before interest, taxes and depreciation.

"If we were starting from scratch, we’d want something like six times" the leverage, Speed said.

Six Flags has sold 10 parks in the past 18 months, raising almost $400 million in assets, he said. But the key to generating more cash and paying down debt is to increase attendance and revenue.

Total attendance in 2007 was almost 4 million lower than in 2005, and the company projected roughly flat numbers through Memorial Day.

In the past, amusement parks have resisted recessions, but this one could be different, writes Kit Spring, an analyst for Stifel Nicolaus, who has a "hold" rating on the stock.

"Perhaps this recession, which is more consumer-led, may impact [Six Flags] more negatively," he wrote, citing the stock’s pros and cons.

Six Flags’ stock price, which traded at more than $6 a year ago, has been losing ground since late May. The decline accelerated last week, when Director Dwight Schar sold 2 million shares for what he called his tax planning.

Schar still holds 3 million shares, and he issued a statement Monday saying that he believes in the company, the management and the turnaround. Speed is similarly optimistic, saying park visitors have responded to changes that make the parks more family friendly.

And he said the recent debt moves will help the company’s finances.

"We feel good about where we are," Speed said.

Fair enough, but the company will have to deliver much better numbers if it expects Wall Street to get on board.

MITCHELL SCHNURMAN’S COLUMN APPEARS SUNDAYS AND WEDNESDAYS. 817-390-7821

 

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