Six Flags strains in steep climb

Amusement parks feel weight of debt, tough economic time

By Jeffrey McCracken | The Wall Street Journal

August 7, 2008

Chief Executive Mark Shapiro talks with employees and reporters at the park in Largo soon after taking the helm at the company in 2006. With 20 parks around the country, Six Flags is weighed down by $2.4 billion of debt. (Sun photo by Doug Kapustin / February 23, 2006)

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."

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 percent this year.

At Six Flags, attendance declined 3 percent in the quarter, in part because Easter didn't fall during the second quarter this year. But revenue inched up 1 percent, 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 Snyder. As of March 31, Snyder, now the company's chairman, owned about 5.4 percent of Six Flags, and Gate's investment fund, Cascade Investments, owned 11 percent, 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 Snyder in an interview in late June. Cascade declined to comment on its Six Flags investment.

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 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.

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, 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.

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. Snyder had met Shapiro when ESPN was trying to lure the National Football League's Monday night games to the network. Impressed by Shapiro's marketing background, 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 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 Speed, the company's CFO. 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.

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 Speed calls "sustainable."