The general commercial gloom has sent many companies into insolvency, reorganization or liquidation. Where the main issue is poor capital structure instead of operating weakness, there appear to be opportunities for the enterprising investor. One example of this type is furnished by Six Flags Inc., the affairs of which are now undergoing Chapter 11 reorganization.
Earning power. Financial performance over the past four years is presented below:
|
|
2008 |
2007 |
2006 |
2005 |
| Revenue |
1,021.3 |
970.83 |
942.18 |
956.76 |
| Total Revenue |
1,021.3 |
970.83 |
942.18 |
956.76 |
|
|
|
|
|
|
| Cost of Revenue, Total |
86.46 |
81.47 |
79.99 |
83.2 |
| Gross Profit |
934.84 |
889.35 |
862.19 |
873.56 |
|
|
|
|
|
|
| Selling/General/Administrative Expenses, Total |
214.55 |
245.37 |
239.36 |
192.84 |
| Research & Development |
0.0 |
0.0 |
0.0 |
0.0 |
| Depreciation/Amortization |
139.61 |
137.91 |
131.5 |
127.66 |
| Unusual Expense (Income) |
17.69 |
39.24 |
27.06 |
33.21 |
| Other Operating Expenses, Total |
419.04 |
428.69 |
413.29 |
390.8 |
| Operating Income |
143.95 |
38.14 |
50.99 |
129.06 |
Minority interests contribute an additional $40 million to GAAP net income each year. While these undistributed earnings do not count as cash flow, they tend to be fully as beneficial to Six Flags as if they had been distributed. Altogether, the business has earned an average of $130.5 million annually over the past four years.
Debt to equity exchange. Outstanding senior indebtness is set forth below:
|
Description |
CUSIP |
Outstanding Par Val. |
Last Price |
| SIX.GJ 8.875% Senior Notes 2010 |
83001PAD1 |
$131.1 million |
$11.00 |
| SIX.GL 9.75% Senior Notes 2013 |
83001PAF6 |
$142.4 million |
$10.50 |
| SIX.GN 9.625% Senior Notes 2014 |
83001PAH2 |
$314.8 million |
$10.00 |
| SIX.GO 4.5% Senior Notes Convertible 2015 |
83001PAJ8 |
$280.0 million |
$11.50 |
| 12.25% Senior Notes Convertible 2016 |
? |
$400.0 million |
? |
The present Plan of Reorganization grants Avenue Capital 7 percent of the new equity of SFTP—a ridiculous arrangement trumped only by its former proposal of owning a majority of the new equity—and leaves all other senior unsecured noteholders with 1 percent.
Let us examine the investment prospects of the notes under these terms. Assuming that SFTP can maintain its present level of earnings while reducing capital expenditures by half, enterprise value is not much more than $4 billion. A 1 percent stake in this business ($40 million) is less than the aggregate market price of the 2010, 2013, 2014 and 2015 notes ($89.9 million). http://cxa.marketwatch.com/finra/BondCenter/AdvancedScreener.aspx
In the final analysis it must be remembered that Six Flag’s troubles are mainly financial. Its offerings have not lost their prestige, and the valuable goodwill built up by years of national advertising should be preserved unimpaired. However, instead of purchasing the senior unsecured notes I intend to wait for the issuance of new common stock.
Miscellaneous considerations. Net loss carryforwards of $1.8 billion are a substantial benefit to holders of new equity in SFTP.
The employee pension fund shows a deficit of approximately $50 million on December 31, 2008.
