Investing in SeaWorld Entertainment (SEAS -0.67%) these days has been like sitting in the soak zone at one of the marine life park's aquatic shows. You're close to the action up against the glass, but you're also probably going to be all wet by the end of the performance.
SeaWorld Entertainment posted disappointing financial results on Wednesday morning. Revenue declined 3% for the seasonally potent third quarter, its worst top-line showing since 2020 with the pandemic-related shutdowns. The stock itself is trading lower in 2023.
Against the backdrop of sloppy financials after back-to-back quarters of falling revenue, something interesting happened last week. Six Flags (SIX 1.06%) confirmed reports that it would be acquiring regional amusement park operator Cedar Fair (FUN 1.11%) in a merger of equals. The combination is expected to close in the first half of next year, in time for busy summer travel season. It may not seem obvious right away, but this is a good thing for SeaWorld Entertainment. Let's take a closer look at what the deal could do to help SeaWorld's rudderless ways.
Releasing the kraken
The combination of Six Flags and Cedar Fair may not seem to have much of an influence on SeaWorld Entertainment's business. Many of the latter's busiest parks are located in Central Florida, a more than six-hour drive from the closest Six Flags or Cedar Fair gated attraction. There are closer Six Flags or Cedar Fair turnstiles to SeaWorld's parks elsewhere, but probably not enough to have a direct impact on foot traffic and guest spending.
However, the merger of two leading regional players should benefit SeaWorld in a couple of ways. For starters, it takes Cedar Fair off the table as a potential SeaWorld buyout. The market wasn't impressed when SeaWorld made an unsolicited $3.4 billion acquisition offer that was ultimately rebuffed early last year. With Cedar Fair and Six Flags gone as potential partners, SeaWorld will have to focus on organic growth. It might also be a time to snap up much smaller players at a deep discount. If Cedar Fair finally made itself available after shooting down SeaWorld in 2022 and Six Flags in 2019, the desperation may run thick for others in this highly fragmented industry.
The merger should also help SeaWorld because a combination of Six Flags and Cedar Fair will likely firm up pricing the industry. The combined players may realize cost-saving synergies that they can pass on to consumers through cheaper prices, but who are we kidding? With a larger portfolio of properties, the 2024 version of Six Flags should be able to justify higher prices for its pricier season passes that include access to all thrill havens.
Finally, SeaWorld can benefit from heightened and potentially favorable analyst attention. Matthew Boss at JPMorgan assumed coverage of SeaWorld with an uninspiring neutral rating last week. However, in the note he did point out that Six Flags is trading at a valuation premium to SeaWorld. With one less publicly traded attractions operator to follow, opportunistic investors may turn to SeaWorld as a pure play in the theme park industry.
Image source: SeaWorld Entertainment.
Things aren't going well for SeaWorld right now, and it was easy to see coming when it went through some pretty extreme lengths to promote guest visits. Encouraging annual passholders to visit multiple times in a short window of time to secure prizes or revising its inclement weather policy to give guests a raincheck on hot days telegraphed the rough quarter it delivered this week.
Attendance of 7.1 million guests in Q3 mirrored the 3% slide in revenue. Net income fell 8%. Analysts were expecting more on both ends of the income statement. Revenue per capita dipped as a gain for in-park spending per guest wasn't enough to offset a decline in admissions.
SeaWorld isn't retreating from the challenge. It continues to invest in new rides and attractions, something that is critical at its namesake parks as they try to distance themselves from the controversial marine life shows they used to stage.
With the country's two leading theme park operators recently raising prices, this should be a golden opportunity for SeaWorld to either boost its own prices or hold the line and gobble up market share. Investors have shied away from the travel and tourism stocks that fared well initially out of the pandemic, but it doesn't mean that SeaWorld Entertainment will be all wet for long. The Six Flags merger with Cedar Fair should help.
