Six Flags Entertainment (NYSE:SIX)'s merger with Cedar Fair (NYSE:FUN) materially increases value for shareholders, analysts at Jefferies said as they awarded the company with a ‘Buy’ rating, from ‘Hold’.
What’s more, they raised their price target on Six Flags to $32 from $25, saying “the pro forma math is compelling.”
“SIX has struggled with its operating model where FUN has executed more consistently, the geographic redundancy is minimal and offers scale benefits,” the analysts wrote in a client note.
“The value upside does not benefit from real estate financial engineering, in our view.”
Under the deal announced in early November, the analysts noted that Cedar Fair shareholders will get one share in the merged company with Six Flags shareholders receiving 0.58 of a share. This implies that Cedar Fair holders would own 51.2% and Six Flags shareholders 48.8%.
“The FUN Mgt team would run the business ongoing under the Six Flags brand in a C-corp structure, with the SIX CEO as executive chairman and CFO leading the transition,” the analysts added.
Additionally, they said there would be minimal redundancy due to the geographical distribution of the combined portfolio of 42 amusement and water parks across the US, Canada and Mexico, adding credibility to the companies’ synergy targets of $200 million, including $120 million in cost savings and $80 million in revenue.
“Assuming the combined company can achieve its targets, the implied value to SIX holders is $30-50,” the analysts concluded.
“We base our upgrade and time-risk-adjusted price target on the new company achieving at least multiples of 9X EBITDA (underlying earnings) and 11X FCF (free cash flow), which supports our $32 target.”
Six Flags’ shares traded 2.3% higher at $24.24 in early Monday afternoon trade. Cedar Fair was up 2% at $39.08.
Contact the author at stephen.gunnion@proactiveinvestors.com