Six Flags up as investor takes big stake, challenges management

By Paul Deckelman and Paul A. Harris

New York, Aug. 31 - Six Flags Inc. bonds were taking a thrilling upward ride Tuesday worthy of any of the attractions at the company's 31 amusement parks on word that an investor has taken a major stake in the New York-based theme park operator - and is challenging the company's management to do better, possibly by selling part or all of Six Flags.

Elsewhere, Technical Olympic USA's bonds were being quoted at higher levels, although traders saw no fresh positive news out on the Hollywood, Fla.-based homebuilder to explain the firming.

On the downside, troubled Jacksonville, Fla.-based supermarket operator Winn-Dixie Stores Inc.'s bonds tumbled about four to five points, pushed downward by factors ranging from renewed bankruptcy speculation among analysts who watch the company to the downward drag exerted by a huge stock slide.

Six Flags' bonds were seen up anywhere from three to four-and-a-half points on the news, with the company's newest issue, its 9 5/8% notes due 2014, moving up to 92 bid, 94 offered from their level late Monday at 87.5.

Its 9½% notes due 2009 firmed to 97 bid, 98 offered from 94.5 bid, 95.5 offered on Monday, while its 8 7/8% notes due 2010 were seen three points better at 92 bid, 93 offered, and its 9¾% notes due 2013 improved to 92.5 bid, 93.5 offered from 88 bid, 90 offered.

After having initially surged between a point-and-a-half and three points, the bonds "got better as the day progressed," a trader said.

The company's New York Stock Exchange-traded shares meanwhile jumped $1.11 (24.89%) to $5.57, on volume of around 4.6 million shares, more than four times the usual turnover.

Six Flags' bonds and shares ratcheted upward on the news that Daniel Snyder, the owner of the Washington Redskins pro football team, has taken an 8.76% stake in the company - and is challenging the current management to maximize the company's value, perhaps even through a merger with another company or a sale of all or part of Six Flags.

Late in the day came the news that Snyder's criticisms of the way Six Flags is underperforming were being echoed by an even bigger shareholder - Bill Gates, who has an 11.5% stake. In a Tuesday filing with the Securities and Exchange Commission, Gates, who owns the shares through his Cascade Investments vehicle, said that he was said he was "increasingly dissatisfied" with the company's financial performance.

The filing said that the billionaire Microsoft Corp. chairman and co-founder plans to grill Six Flags executives on why the company's shares have been plummeting in recent months, as well as other aspects of the theme park operator's decision-making process and finances.

Gates, who already has representation on the company's board, may seek to get another seat on the board, the filing said.

The filing showing Gates' dismay with what's been happening at Six Flags follows an SC-13D filing Monday with the SEC by Snyder, who said that he had acquired 8.15 million shares of the company through his Ashburn, Va.-based Red Zone LLC investment company out of the 93.041 million shares currently outstanding. Snyder paid $34.479 million for his stake.

The series of open-market stock purchases, all of which took place from Aug. 11 onward, makes Snyder the third-largest shareholder in the company, according to published reports.

According to the filing, Snyder believes Six Flags' shares "are undervalued."

It said that the Reporting Persons [i.e. the SEC's legal designation for Snyder and for Red Zone] "believe that the company's management has failed to implement measures to increase revenues and decrease expenses, and its failure to do so has caused the company to be continuously outperformed by its peers in the amusement, recreation and leisure industry."

The filing further states that Snyder and Red Zone "believe their investment has significant potential for increased value and intend to seek to influence management and the board of directors to take steps to maximize stockholder value." It said Snyder may consider seeking representation on Six Flags' board of directors, and may also "encourage the company to maximize stockholder value through a possible merger, sale of the company's assets, consolidation, business combination or a recapitalization or refinancing."

The filing also leaves the door open for further Six Flags stock purchases by Snyder - possibly to the point where he could exercise control over the company - or, alternatively, the sale of his stake.

A spokeswoman for Six Flags told Prospect News that the company would have no immediate comment on Snyder's filing.

Six Flags is the largest regional theme park operator in the United States, with 29 amusement, water and safari parks near various major U.S. cities, plus one park each in Canada and Mexico; it recently sold its European division. Despite its size and dominant market position, the company has struggled over the past year or so.

On Aug. 10, the company reported what Wall Street considered to be disappointing second-quarter results, citing the continued weakness in the economy and some unexpectedly bad weather in some of its key markets.

It showed a net loss for the quarter ended June 30 of $6.8 million (13 cents per share), although this was improved from a $12.3 million loss (19 cents per share) a year ago. Revenues totaled $356.4 million, down $5 million, or 1.4% from a year ago. EBITDA, including 100% performance of several parks that Six Flags runs in partnership with other operators, was $110.8 million, down $2.8 million from year ago. Adjusted EBTIDA, excluding the third-party share of the performance of those partnership parks, was $86.2 million, versus $91.3 million a year ago.

Six Flags also said that a hoped-for upturn in July did not materialize, again because of weather concerns late in the month, which held down attendance. It said at that time that August levels had been running strong and might help the company finish the summer season with full-year revenues flat from a year ago or only down slightly.

Standard & Poor's is not convinced of the company's optimistic outlook for the remainder of the summer season; on Aug. 20, it lowered its ratings on the company's $2.48 billion of outstanding debt and preferred stock, cutting Six Flags' corporate credit rating to B from B+ and saying the rating outlook was negative. The ratings agency cited the theme park operator's higher debt leverage and weak operating outlook.

Technical Olympic rises

Elsewhere, a market source said that Technical Olympic's bonds "seemed higher," although he saw no fresh news out on the homebuilder to explain the gain.

He quoted its 9% notes due 2010 at 107.75 bid, well up from recent levels above 104, and its 10 3/8% notes due 2012 as having firmed to 110.5 bid from 109 recently.

Winn-Dixie sinking

The bonds of supermarket operator Winn-Dixie were meanwhile headed in the opposite direction, traders said, with the company's 8 7/8% notes due 2008 having opened at 92.75 on Tuesday morning, down slightly from Monday's close at 93 bid, 94 offered, before plunging to a close at 88 bid, 89 offered, about five points lower on the session.

The bonds fell in tandem with the company's NYSE-traded shares, which initially swooned all the way down to an intra-day low of $3.95 from Monday's close at $4.89, about a 20% drop, before bouncing slightly off their lows to finish down 72 cents (14.72%) to $4.17 on volume of 10.77 million shares, about nine times the average daily turnover.

Renewed talk of possible bankruptcy was cited by traders as one of the factors behind the fall in the bonds and the stock as Bloomberg ran a piece about the market's revived Winn-Dixie bankruptcy fears quoting retailing analyst Gary Giblen of C.L. King & Associates in New York as having said that "it's becoming evident that the results are going downhill and there is no credible plan to arrest the meltdown of the company."

Other factors mentioned included the coming Hurricane Frances, which could devastate Winn-Dixie's home turf in Florida, Georgia and the Carolinas, and news that the company and several present and former executives have been named as defendants in class-action lawsuits filed by disgruntled shareholders.

Primary stays quiet

One source on the high yield syndicate desk of an investment bank advised Prospect News that, as with Monday, nothing was accomplished in the primary market during the Tuesday session.

"Hopefully we will finish out the week the same way," the syndicate official added.

"Maybe you'll hear a deal announced on Friday but I doubt it. Since there's not really going to be anybody around it's hard to see how a move like that would really help anyone.

"However we think it's going to pick up pretty quickly after Monday."

Investor forecasts narrow spreads

Meanwhile a high yield portfolio manager, speaking on background, told Prospect News on Tuesday that the continued popularity of the high yield asset class coupled with limited new issue supply should make for a comparatively vigorous and orderly end to 2004 in the primary market.

Therefore, as the market works toward the end of the third quarter and into the fourth, there does not appear to be any great need for an investor to adjust his or her portfolio.

"It's going to be more of the same," the investor said, "spreads are going to be very narrow. Capital appreciation I think is going to be very muted.

"The question is, at some point down the road do you need to be thinking about raising quality? Do you need to be thinking about bad credit events?

"It does not appear as though we are on the cusp of defaults going up, or the economy dramatically slowing.

"What we're looking at I believe is more of the same."

Supply is an issue

This investor assured Prospect News that as the year winds down the investment banks can be counted upon to continue to parade out new junk bond deals.

Having said it, however, the buy-sider conceded that new supply is presently an issue for investors.

"It has been an issue all year because you figure approximately a third of new issuance has been refinancings, which is not really net-new supply. And you have had money come into the asset class because it has been such an attractive net-performer.

"I think even with a pickup in supply you'll continue to see spreads fairly narrow."

Tight supply despite fund outflows

The investor also said that the $4.661 billion of year-to-date net outflows from the high yield mutual funds (a number developed from Prospect News' analysis of weekly reports issued by AMG Data Services) seem to be registering little if any impact on the supply-demand scenario.

"That's just one slice of the high yield market," the buy-sider pointed out.

"You can see the liquidity in the price action. Right now there is a much better bid for everything and very low offer.

"Part of that is a function of lots of people being away. But still it reflects a trend in which there is more money looking for yield."

Rising rates should not slow market

An investment banker recently told Prospect News that his firm's outlook on the Federal Funds target rate, which has undergone two 25 basis point increases in two successive months, is that the short rate will continue its upward march at least until the middle of 2005.

Further, the source said, the investment bank expects the Fed Funds rate, which now stands at 1.5% to be at 2.5% by the end of the first quarter of 2005.

The buy-side source seemed to have no problem with that take on the Fed Funds rate.

However, the source added, initially it might not make a difference to high yield.

"You might say that this scenario introduces a negative interest rate effect," the investor argued. "But a 2.5% funds rate would indicate a pretty strong economy, which would be a fundamental offset.

"So it's a tradeoff.

"At some point, if short rates continue to creep up, I think it will start to push out the spreads on high yield. But I think for the rest of the year it's going to be pretty modest.

"And the strong economic fundamentals, the good supply-demand scenario and the low defaults are going to dominate and keep spreads pretty narrow."

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