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Six Flags Article on Front Page of Wall Street Journal Today


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No Fun for Six Flags

As Parks Face Slump

By JEFFREY MCCRACKEN

August 5, 2008; Page A1

 

AUSTELL, Ga. -- Six Flags Inc. Chief Executive Mark Shapiro looked up at Goliath, a 200-foot-tall roller coaster just outside of Atlanta, as riders roared downhill at 70 miles per hour. "Nice ride," he noted. "But we'll never get our return on investment with it."

 

Six Flags, one of the nation's largest amusement-park companies, is under serious financial strain. It hasn't posted an annual profit in years. It's weighed down by $2.4 billion of debt, and faces a $288 million payment to preferred stockholders next August.

 

Luring more customers to its 20 amusement parks during the peak summer months is essential to the New York-based company's turnaround effort. "This is the year we've got to put a number on the board that impresses," Jeffrey Speed, the company's chief financial officer, said last month. "It's a show-me story, and we've yet to perform. We know that."

 

Mr. Shapiro, the former head of programming at ESPN, has been trying to cut costs wherever he can. While competitors such as Ohio-based Cedar Fair try to lure more customers with ever bigger, more outrageous and expensive roller coasters, Six Flags is moving in an opposite, family-friendly direction. It has barred bikini tops and banned smoking everywhere but in small areas on the outskirts of the parks.

 

On Monday, Six Flags gave investors the first indication that its overhaul may be gaining traction. It posted a second-quarter profit of $94.6 million, in part due to a recent debt-restructuring deal.

 

But it's a terrible time for any company to try to pry more disposable income out of the wallets of beleaguered consumers. Consumer confidence is shaky, and sky-high gasoline prices are causing Americans to think twice about unnecessary driving. Already, several retailers and restaurant chains that cater to middle-market consumers have sought bankruptcy protection.

 

"Some theme parks held up in the last recession, but this is a different downturn, so you can't necessarily say they will hold up during this one," says John Puchella, a theme-park analyst for Moody's Investors Service. "This is a consumer-led downturn." Moody's estimates that attendance at amusement parks will drop about 5% this year.

 

At Six Flags, attendance declined 3% in the quarter, in part because Easter didn't fall during the second quarter this year. But revenue inched up 1%, thanks to management's efforts to squeeze more money from sponsorships and licensing fees.

 

Six Flags shares were down nine cents at $1.03 a share in 4 p.m. composite trading Monday on the New York Stock Exchange. They remain far below the $3.67 they were trading at one year ago.

 

 

That's bad news for two big Six Flags investors -- Washington Redskins owner Daniel Snyder, who won a proxy fight for control of the company in 2005, and Microsoft's Bill Gates, whose investment fund backed Mr. Snyder. As of March 31, Mr. Snyder, now the company's chairman, owned about 5.4% of Six Flags, and Mr. Gate's investment fund, Cascade Investments, owned 11%, the most recent securities filings indicate.

 

"We aren't where we want to be, but I think we are heading in the right direction," said Mr. Snyder in an interview in late June. Cascade declined to comment on its Six Flags investment.

 

Mr. Shapiro, who is 38 years old, says he wants to attract a family crowd with more modest roller coasters and kiddie rides. The new Dark Knight coaster at Six Flags Great Adventure in Jackson, N.J., tied to the latest Batman movie, cost about $7.5 million to build, compared with $20 million or so for giant coasters like the Goliath in Georgia. Its top speed is just 30 mph, less than half of Goliath's top speed. It's housed in a dark building, which makes it harder to notice how much smaller it is than its high-octane competitors.

 

"My strategy makes perfect sense," says Mr. Shapiro. "It's just whether we have enough money. So I need to make recognizable progress this year."

 

Six Flags was founded in Texas in 1961. Time Warner Inc. bought the company in 1991, then sold it in 1998 to Premier Parks, an Oklahoma-based park operator. Premier combined the two operations and took the company public later that year as Six Flags. The new company spent heavily on new rides, acquisitions and expansion into Canada, Mexico and Belgium. Its debt load ballooned.

 

Mr. Snyder, whose investment company was a large stockholder, began pushing in 2004 for Six Flags to bring in new management, sell off some parks, and begin going after families rather than thrill-seeking teenagers. "Stockholders would have been better off hiding their money under a mattress" than investing in the company under the existing management, Mr. Snyder wrote in a letter to Six Flag shareholders in October 2005, during the proxy battle. At the time, Six Flags shares were trading at about $7.25.

 

Raising the Price

 

After he took over as chairman, he recruited film producer Harvey Weinstein to fill a seat on the company's board, for his marketing prowess. Mr. Snyder had met Mr. Shapiro when ESPN was trying to lure the National Football League's Monday night games to the network. Impressed by Mr. Shapiro's marketing background, Mr. Snyder persuaded him to run Six Flags, and to bring a team of ESPN veterans with him.

 

In 2006, after cleaning up its parks and adding some new rides, management raised admission prices by $5 to $10, driving the ticket price to as high as $40 in some markets. But attendance dropped below 25 million in 2006, from 28.7 million in 2005. "Our lack of pricing power was really a big surprise to me," says Mr. Shapiro.

 

In 2006 and 2007, Six Flags sold 10 parks and a 100-acre lot in Houston for about $400 million, hundreds of millions less than anticipated, according to Mr. Speed, the company's CFO. Mr. Snyder had set a goal of trimming debt to less than $2 billion. But with the real-estate proceeds going to fund operations, the debt remained at $2.4 billion. Rivals such as Cedar Fair and Universal City Development Partners, whose theme parks include Universal Studios Florida, carry much smaller debt loads relative to their cash flow.

 

 

Mr. Shapiro hasn't wavered from his view that the old amusement-park formula -- build bigger and better roller coasters as often as possible -- isn't a money-maker. He says he's not overly interested in the typical teenage fans of such rides, who were once Six Flags' best customers. He is courting parents, young children and corporate groups, and is emphasizing rides tied to movies and cartoon characters, which can generate T-shirt and sweatshirt sales.

 

Six Flags used to spend $200 million or more a year on capital expenditures, mostly on new roller coasters and other rides. It has cut that figure to about $100 million a year, an amount Mr. Speed calls "sustainable."

 

The Possibilities

 

Mr. Shapiro also has been trying to boost revenue from licensing deals and movie tie-ins. One afternoon this summer at Six Flags Over Georgia, the 297-acre park outside Atlanta, employees were loudly hawking food and trying to persuade customers to buy photos. Employees have been encouraged "not to sell stuff, but to hawk it exuberantly," says one Six Flags executive based at the park.

 

Mr. Shapiro sees advertising and licensing possibilities all over the parks. Before climbing aboard the Dark Knight roller coaster, riders see a faux newscast that's partly a promotion for the movie. Elsewhere, flat-screen TVs bombard people standing in lines with advertisements for everything from Chrysler cars to Pampers diapers.

 

Sitting recently at a restaurant in the Atlanta park, he explained what he has in mind. "The umbrellas at the tables are Coke," he said. "That fits. No one complains about that. And we signed up Ben & Jerry's to sell ice cream. That fits. Disney does some of this, but they are too subtle."

 

Annual revenue from licensing deals is expected to jump to about $56 million this year, from $16 million in 2005.

 

 

Mr. Shapiro readily admits that this year is a critical one for Six Flags. Shortly before Memorial Day, in an effort to boost summer attendance, he cut ticket prices across the country by an average of about $10. Adults can now buy discounted one-day passes for about $29. He added a weekly concert series with performers intended to appeal to preteen girls, such as Vanessa Hudgens of Disney's "High School Musical" fame and English pop singer Natasha Bedingfield. He says studies show that young girls influence their parents' spending habits more than young boys do. Attendance this year, through June, is at year-ago levels.

 

The company's debt load, says Mr. Shapiro, gives it less room for error than he'd hoped. Accidents, while rare, can dent attendance. In June 2007, a Superman free-fall ride malfunctioned at a Kentucky park, severing the feet of a 16-year-old girl. Six Flags estimates that tragedy, which resulted in a lawsuit, cost it 500,000 visitors last year. In June, a 17-year-old boy was killed at the Georgia park after he jumped a fence and was hit by a Batman roller coaster.

 

To conserve cash, Six Flags has gotten rid of one of its three advertising agencies, reduced radio advertising, and cut about 300 full-time jobs at the end of 2007. Its goal is to shave operating expenses by $50 million in 2008.

 

'Interest-Free Loan'

 

Some of Six Flag's bonds have been changing hands at about 50 cents on the dollar, reflecting investors' doubts that the company will make good on its financial obligations. In June, the company gained breathing room when it struck a deal with nervous bondholders that lowers the company's total bond debt and gives it more time to pay the bondholders back, albeit at higher interest rates.

 

Next August, Six Flags is obligated to pay $288 million to preferred stockholders. On Thursday, for the second straight quarter, it suspended dividend payments to these shareholders. That will save the company $5 million, for now, but the amount will be tacked on to next summer's bill.

 

"We see it as an interest-free loan, and given this credit environment, you've got to take advantage of that," says Mr. Speed. He says the company hopes to renegotiate with its preferred shareholders, which include a Fidelity Investments fund and Silver Point Capital, a hedge fund. A strong summer, he adds, would give him more leverage in such talks.

 

Mr. Shapiro's goal for the year is simply to break even on a "free cash flow" basis -- that is, to bring in more than it spends on operations, capital expenditures and debt service. Six Flags hasn't managed that feat for any full year since going public, says Mr. Speed. "There are too many yellow flags, like weather or the broader economy, to guarantee it," Mr. Shapiro told investors on Monday. "But if current trends continue, then we can get there."

 

Walking around Six Flags Over Georgia in suit and tie, Mr. Shapiro engages in some wishful thinking: High gas prices can help his business. Cash-strapped families will still take vacations, he theorizes, but instead of flying to California or overseas, they'll take weekend trips closer to home.

 

"It's a working premise," he says. "But no one knows for sure. We've never had $4-a-gallon gas. It's obviously not the economic environment I would have chosen."

 

Brad Elster, a 40-year-old software consultant, brought his wife and two daughters to the Georgia park, lured by the discounted tickets. He says he spent $100 refueling his Mercedes sport-utility vehicle on the way to the park.

 

"The cost of filling up would never have crossed my mind in the past," he says. "But we decided this time not to buy any souvenirs or any of the pictures they try to sell."

 

Mr. Snyder said in June he was supportive of Mr. Shapiro's approach. "A lot of times it takes longer than you like, longer than you want," he said.

 

"A lot of companies that are consumer cyclical are down now," he said. "No one anticipated gas would be where it is, or this real-estate market. But we think if Mark gets the cash flow to positive, the market will reward him and us."

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I wonder if other parks see a return on $20 million ride.

 

It is not a good article to read if all you want is bigger and faster coasters, but it does look like Shapiro is thinking about how to make the company profitable, which will hopefully mean there are still parks left in the end.

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Its funny how Shaprio would like to make the parks more family friendly...but at least with Great Adventure...no matter how many family friendly rides you put in, the area surrounding the park isn't family friendly.

 

If you want to go someplace other then the park there is no place to go in the afternoon that is close-by if you want to spend some time around the pool or go out to a nice meal.

 

I don't know what other SF properties are like other then Great Adventure and Magic Mountain...but I didn't find either to be a place where I would like to spend more then a day there.

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If any parks are sold, I'm guessing that Kentucky Kingdom and Six Flags America would be the ones to go. Hopefully they don't sell them for a reasonable price, and not cheap like they have been. The parks sold to PARC Management were sold for 40 million each I believe, and SFWoA was sold at a huge loss.

 

The article was good, and I hope it works out for them. It will take some work to convince families to return, and to tell teenagers that they don't own the park. While I love large 20 million coasters as the next person, several smaller coasters can be built for the same price. Six Flags built two indoor coasters, and a great wooden coaster for just around 22 million.

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^Hmm...I don't think we are on the same page.

 

All I'm saying is that there is nothing to do in that area once you leave the park. Regarless of whether they develop the land themselves or not. Kinda like a how CP has hotels on its properties w/shuttle service or you can walk to the park/restaurants. And there are other things to do outside the park if you want to spend a few days relaxing w/family or if it rains.

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^ I'm pretty sure Cedar Point is the only one with hotels that are a "part" of the park. I don't see any of the Six Flags or CP parks somewhere I'd plan an entire vacation at, which is what I think John is trying to say. Get the people in the gate, and make sure they don't want to leave to go eat, etc.

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^Right, but what I'm saying is that in order to get people into the gate...you have to expand your park into a "resort" destination.

 

No matter how many smaller coasters you put into the park....if people aren't willing to travel a few hours with young kids in the car for a park that doesn't give them a variety other then the park. Whether SF does the development or not...they should give incentives to companies to build in the area b/c that would be what draws families in.

 

CP and Disney does so well b/c they offer more for families to do other then go to the park (Downtown Disney, indoor water parks, nice hotels, restaurants, go-carts, arcades, etc).

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Unfortunately, that requires purchasing land for the said resorts. I don't think any of the Six Flags chains have enough land for that. I'm not sure any hotel chain would want to be tied into a lease deal for such a thing.

 

Disney was in a unique situation where he purchased all the property because he wanted to build a resort. I know that wasn't Marriott's plan when they built Great America. It was just a nice day trip for locals.

 

What can you do? They'll always be local, day trip, parks. At least in my opinion.

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Correct, but, that is if the ride itself generates 500,000 extra guests. Say a park averages 3.5 million visitors a year. And let's say they add a new big attraction. If 4 million visitors go to the park that year, then the ride paid for itself in that year. Or, let's just say attendance increases by a steady 133,000 over the three years to get to 500,000 extra guests - then the ride would pay for itself in 3 years.

 

Now, you have to figure in all of the extra overhead costs of electric, maintenance etc.

 

I realize what you were doing with the simple math though. But, the only way I see a ride being worth it is if a ride brings in extra guests. Sometimes that just doesn't happen. Or, if it fulfills a need, like when Hercules was brought down and replaced by Hydra, or with The Dark Knight at Great Adventure. Sure, some of us might not think the rides are that great, but Hydra doesn't break ribs, and The Dark Knight is a fairly tame coaster that attracts a range of guests. I think both of those were good investments for the respective parks. Not to mention Dorney increased visitorship by over 200,000 in 2005 because of Hydra.

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That was a really good article. I'm taking a few business classes in college and it was pretty cool relating what I learned in those courses to the current situation of Six Flags. Shapiro looks like he knows how put the company onto a profitable road.

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Well while I applaud Shapiro for trying to make the company more money, I also kind of disagree with his approach. If it weren't for coaster enthusiasts and "young" people that ride these coasters then they wouldn't make much money. The kids part of SFOG always seems dead. Coasters don't have to be huge to be thrilling. Yes, they can spend money on kid attractions every year, but let me tell you that if a park does not get a new coaster every few years then there is no reason to go back for me. We got Goliath at SFOG in 2006 but what have we seen since? Thomas Town. And they took out Deja Vu to put in Thomas Town. IMHO, if they don't get something new next year it makes me not want to buy a season pass. I love most of the coasters we have, with the exception of GA Cyclone, but if we don't at least get a flat or another coaster, they are not giving thrill seekers a reason to come back. I don't know if he understands that. I think that families are going to take their kids to parks like Disney because the are just that, kids parks. Not Six Flags. I will probably catch hell for my post but those are my opinions.

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If any parks are sold, I'm guessing that Kentucky Kingdom and Six Flags America would be the ones to go. Hopefully they don't sell them for a reasonable price, and not cheap like they have been. The parks sold to PARC Management were sold for 40 million each I believe, and SFWoA was sold at a huge loss.

 

The article was good, and I hope it works out for them. It will take some work to convince families to return, and to tell teenagers that they don't own the park. While I love large 20 million coasters as the next person, several smaller coasters can be built for the same price. Six Flags built two indoor coasters, and a great wooden coaster for just around 22 million.

 

As much as I'd like to see SFA sold to a reputable owner like Parc management or CF it won't happen & here's why.

 

SFI knows that,should they sell SFA to a company that would,heaven forbid invest some cap ex into fixing the park up & adding new rides on a regular basis it would pose some significant competition for SFGRADV(the next closest SF park) & they sure as heck don't want that.

 

Instead they prefer to keep the park running in a just barely operable condition to make money & since SFGRADV has the higher population base of the two to draw from they figure why bother investing in the MD. park at all when the NJ park will see more of an ROI?

 

Didn't Shapiro kinda scale back his whole "family" approach last year when people at SFGRAM balked at having a kids area added instead of any adult/thrill rides?That's why he went on the offensive this season by adding the two THBS clones along with the woodie for SFSTL instead of more WW & Thomas the tank engine themed kiddie areas as he originally intended to do.

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I thought it was an interesting article, but Shapiro's approach of getting tons of money by bombarding people with advertising is one I really don't like, but I guess it's an easy way to start bringing the company back out of the red. I do completely understand why they're not planning on building any huge rides in the near future though.

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Mr. Snyder said in June he was supportive of Mr. Shapiro's approach. "A lot of times it takes longer than you like, longer than you want," he said.

 

Sorta like the Redskins, right Danno??

 

As far as the Dark Knight...dumping 7.5 million each into two over-glorified indoor mouse coasters seems like a big expense for a ride with below average reviews. Not really what I would have called a great business investment for a struggling corporation.

 

Granted, we are coaster enthusiasts here, but if teens on this site are ripping the ride, who else would find it enjoyable? Grandma and Grandpa? Mom and Dad and the giddy seven year old that sleeps with a night-light?? "Family coaster" based on a "family movie", right??? I went and saw the movie last week and the theatre was flooded with teens...maybe one or two families. My review of the movie? Okay, but over-hyped, just like the reviews I have read of the ride - Two out of four stars, and not what I would deem a "fun, family movie." Sounds like the reviews of the coaster would average about the same.

 

I wonder if Kennywood paid 7.5 mill for Exterminator, which sounds like the same ride without the Batman theme?? Five years from now, DK will be like Disaster Transport where they won't have any lights on, or (barely) any of the queue theming will be working. People will walk off the ride laughing and wondering how anyone could have been so lame for waiting 2-3 hours for the ride!

 

At least SF made one good business decision in '08 by building Evel Knievel for half a mill less...

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^ Oops! Almost forgot...they might be getting the 'Tehr-mehn-ate-ah: Sahl-vay-shun' at SFMM next year. That should make up for the losses of everyone's fave coaster: Psyclone, the mechanical flop that was Deja-Vu, and the pee-poor reviews of Batman: DK - The Ride for the SF parks!!!

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Unfortunately, that requires purchasing land for the said resorts. I don't think any of the Six Flags chains have enough land for that. I'm not sure any hotel chain would want to be tied into a lease deal for such a thing.

 

Disney was in a unique situation where he purchased all the property because he wanted to build a resort. I know that wasn't Marriott's plan when they built Great America. It was just a nice day trip for locals.

 

What can you do? They'll always be local, day trip, parks. At least in my opinion.

 

Six Flags St. Louis has hundreds of undeveloped land. They own like 500 some acres and they only use like 100.

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My opinion is first get the parks and employees back to the way it was 20 yrs ago. Clean and hard working. If a day is enjoyable meaning, not having to stand in line for over an hr for a ride when a park isnt full or walking through u know what in the restrooms to get to the toilet or see a lot of trash all over the place, then the RETURN visitors will bring in double money. The economy and lazy people who rather play bowling on a WII than actually physically bowling will make anything outside go broke.

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Six Flags St. Louis has hundreds of undeveloped land. They own like 500 some acres and they only use like 100.

 

Who the hell is going to plan a trip to St. Louis just to go to Six Flags?

 

They'll sell that land before they do anything else with it.

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