Six Flags strains in steep climb

The Baltimore Sun

AUSTELL, Ga. - Six Flags Inc. Chief Executive Mark Shapiro looked up at Goliath, a 200-foot-tall roller coaster just outside Atlanta, as riders roared downhill at 70 mph. "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."

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 in most areas.

On Monday, Six Flags, which has a park in Largo, 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.

"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.

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, 38, said 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," said Shapiro. "It's just whether we have enough money. So I need to make recognizable progress this year."

Previous Six Flags owners spent heavily on new rides, acquisitions and expansion causing the debt load to balloon.

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.

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."

Shapiro also has been trying to boost revenue from licensing deals and movie tie-ins. He also sees advertising and licensing possibilities all over the parks. Flat-screen TVs bombard people standing in lines with advertisements for everything from Chrysler cars to Pampers diapers.

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

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. He added a weekly concert series with performers intended to appeal to preteen girls, such as Vanessa Hudgens of Disney's High School Musical. Attendance this year, through June, is at year-ago levels.

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.

Some of Six Flags' 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. Speed said the company hopes to renegotiate with its preferred shareholders. A strong summer, he adds, would give him more leverage in such talks.

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, said Speed.

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

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