When Parks Collide

Are Cedar Fair (NYSE: FUN  ) and Six Flags (NYSE: PKS  ) passing ships? After yesterday's $1.24 billion deal for regional amusement park operator Cedar Fair to acquire CBS' (NYSE: CBS  ) Paramount Parks chain, it certainly seems that way.

Six Flags has been selling off secondary parks and hiking prices, while Cedar Fair has been lowering prices at its flagship parks and snapping up more properties. One firm has been trying to tug at its gargantuan debt load, while the other is being provided with $2 billion in available debt financing to seal the deal.

Is Six Flags right, or is Cedar Fair -- a Motley Fool Income Investor newsletter recommendation -- correct? As far as I know, there's at least one company in the wrong, and its initials are C-B-S.

Prelude to a diss
Speculation about a selloff of the five Paramount Parks has been making the rounds since February of last year. That was before Viacom (NYSE: VIA  ) split into two separate media entities. I went on to write how it would be Viacom's next mistake. Whether you own a top-rated broadcasting network, youth magnets like MTV and Nickelodeon, or the legendary Paramount studio, having all-day access to 12.2 million annual parkgoers is huge.

Amusement parks have been awfully neglectful on that front. Guests waiting hours in line over the course of the day are a captive audience for marketing messages that aren't being delivered. There are plenty of ways to do so while actually enhancing the themed experience. CBS may be getting $1.24 billion in the all-cash deal, but the assets it's surrendering could have been far more valuable to a company that thrives on drawing a mainstream audience.

Because it's not selling the parks piecemeal, there's a chance that this may work. Cedar Fair is likely to keep the Nickelodeon characters at the Paramount Parks, and it's probably open to bringing them over to its existing parks, too.

The Kiddy Kingdom area for young 'uns was devoid of licensed characters beyond the Berenstein Bears during my first trip to Cedar Point in 1997. After acquiring Knott's Berry Farm, the more-recognized Peanuts franchise began moving into Cedar Fair's other parks with refashioned Camp Snoopy areas. It wouldn't be a surprise to see Nickelodeon Universe spring up through the company's existing properties as well, with SpongeBob and Jimmy Neutron reaching a younger audience far better than Woodstock and Linus do. The cost of extending Nickelodeon's characters throughout its dozen parks would probably be money well spent for Cedar Fair.

The stronger licensing property usually wins out. Six Flags is banking its turnaround strategy on the proliferation of Time Warner (NYSE: TWX  ) cartoon and superhero characters, even though it's been ages since Time Warner owned the regional operator. Can you imagine what Disney (NYSE: DIS  ) parks would look like without marquee characters?

Six Fair vs. Cedar Flags
There's little chance in Six Flags and Cedar Fair hooking up romantically, but the two publicly traded stand-alone operators will now be mentioned together in far more sentences.

Here's the Six Flags story in a nutshell: Once upon a time, Premier Parks went on a buying spree. It snapped up independent parks, occasionally beefing them up with thrill rides and slapping the Six Flags name on the front. The strategy worked well at first, but a series of factors stung the chain, leaving it shackled to more than $2 billion in debt.

Cedar Fair may be walking a mile in those cement shoes. It was a modest company at first; even the name Cedar Fair springs from its original Cedar Point and Valleyfair amusement parks. As Six Flags pigged out on the indies, Cedar Fair made smaller deals that made sense. Then it stumbled with 2004's purchase of Geauga Lake from Six Flags. This will be the Ohio park's third season under Cedar Fair's wing, and the property's performance has been disappointing so far.

Swallowing Paramount will be a material transaction. Cedar Fair drew 12.7 million guests and generated $569 million in revenue last year. Paramount Parks was good for $423 million. Add up the pieces, and you arrive at $992 million, within spitting distance of the $1.09 billion that Six Flags produced last year.

Before the deal, Cedar Fair had $544.6 million in long-term debt. Now its debt level will rival that of Six Flags. Taking on more debt at a time when interest rates have been inching higher isn't the most prudent of strategies, but there's no reason to sour on Cedar Fair just for that. Six Flags and Cedar Fair may look a lot alike after this deal, but Cedar Fair has been able to turn a consistent profit. It also expects the deal to turn accretive by 2008.

That last point is important, because Cedar Fair has also been a consistent grower of cash distributions to its unitholders. That made the investment especially appealing to Mathew Emmert when he singled out the company as an official Income Investor newsletter recommendation. The company insists that the deal won't impact the meaty distributions, but time will tell on that front. Cedar Fair conceded that it may have to take on additional debt in the near term to bankroll any payout hikes.

Cedar Fair is banking on improving operations at its five new parks -- and the Star Trek: The Experience attraction in Las Vegas -- to the level that Cedar Fair has achieved on its own.

The company has no problem paying 9.1 EBITDA for Paramount, more than it has for its single park purchases, because it's convinced it'll be able to improve margins over the next three to five years. Paramount's EBITDA margin was 26.1% last year, well below the 34.1% showing at Cedar Fair. Since the company had such a tough time on Geauga Lake, this probably means that Cedar Fair won't be a buyer of any of the Six Flags parks that may be sold off later this year.

This is ultimately a defining moment for Cedar Fair. CEO Dick Kinzel is set to step down next year. This month, the company suspended its annual perk of sending out discounted park admission coupons to its round-lot investors. The units are trading near their three-year low. Buying Paramount will add more uncertainty. Thankfully, it also presents some pretty amazing opportunities.

Let the turnstiles click.

Time Warner and Disney areMotley Fool Stock Advisorpicks.

If you plan on traveling this summer, check out our freshly updated Travel Center. If you want to see the other high-yielding investments that Mathew Emmert likes these days, check out Income Investor with a free 30-day trial subscription.

Longtime Fool contributor Rick Munarriz enjoys taking his family on coaster treks over the summer. Yes, he plans to visit a Cedar Fair and Paramount park in two weeks. He also owns shares in Disney and units in Cedar Fair. The Fool has a disclosure policy. Rick is part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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