Can Premier handle its growth?

With the ink drying on a deal to buy the Six Flags theme park chain, Premier Parks executives must prove they can manage a company five times its current size while carrying a huge burden of debt.

Premier, the Oklahoma City owner of White Water Bay and 13 other regional parks, reached an agreement last week to buy Six Flags Entertainment and the theme park licensing rights to its Warner Bros. and DC Comics characters from Time Warner for $1.9 billion. The deal will give the company an estimated $1 billion in 1998 revenue and tack $1.4 billion in debt to its balance sheet, raising the question: Can this once little-known operator of small parks, like the 30-acre Frontier City, handle a dozen giants like the 302-acre Six Flags Over Texas?

Given the optimism of analysts and the apparent glee from investors after the announcement -- the stock shot up 15 percent Tuesday to close at $44.50 on the New York Stock Exchange -- the answer seems to be "yes." "It's a leveraged company. They've got a lot of work ahead with the conversion of these parks," said Karen Eltrich, a fixed-income analyst with Morgan Stanley Dean Witter in New York. But she added that management is "phenomenal -- everyone on the team. It's very deep, and they know the industry well." For Premier -- which in 1990 transformed itself from a real estate management company to a theme park operator with one asset, Frontier City -- buying Six Flags and its 12 parks will be a perfect fit, Chief Financial Officer James Dannhauser said. Premier President Gary Story and other company managers have worked for Six Flags and know its parks. At the same time, Premier's stock and debt issues have been warmly received by investors, making the time right to raise money for a major acquisition, Dannhauser said. Premier, which agreed in December to buy six more parks in Europe, has been aggressively acquiring theme parks since 1996. With the Six Flags deal, it will become the second-largest theme park operator worldwide, behind Walt Disney, in terms of attendance. A major challenge for Premier, which before the Six Flags deal made about $184 million in annual revenue, will be contending with $1.4 billion in debt from the acquisition. Dannhauser said that the company's annual debt service payments will be about 12 percent of its forecast $1 billion in 1998 revenue. That comes from $890 million in Six Flags debt being assumed by Premier, and other borrowings made to purchase the company. Such large payments will not be a problem, he said. As part of the transaction, Premier is issuing $700 million in common stock and raising $530 million in public debt through a new bond issue, some of which will be used to refinance existing debt. Premier plans to reap economies of scale from putting all its parks and the Six Flags attractions under one management team, Dannhauser said. Marginal costs will also decline, while park attendance should rise markedly with improvements that Premier plans, he said. Cedar Fair, a Sandusky, Ohio-based theme park operator, has a benchmark 40 percent operating cash flow at its parks, compared with more than 30 percent margins at Premier and about 2 percent at Six Flags, said Larry Petrella, an analyst with the Lehman Bros. investment firm in New York. Dannhauser said that Premier has plenty of opportunity to improve those returns once the efficiencies of the merger filter to the bottom line. Premier has established a substantial track record in the past few years. It is known in the industry for taking underperforming parks, investing heavily in them, and reaping big attendance gains. Several Premier parks were among the industry's biggest percentage gainers last year. From an investor's standpoint, the Six Flags parks differ from the smaller, often family-owned parks Premier has previously bought. Those parks typically needed costly new attractions, said Ira West, president of Duell Corp, a Los Angeles-based theme park design company. Six Flags' properties are generally first-class and require less initial investment, Dannhauser said. Only a few parks, such as Six Flags Over Texas in Arlington and Six Flags Over Georgia in Atlanta, are perceived by some industry observers to need much in the way of capital improvement. Both of those parks are owned by limited partnerships and managed by Six Flags Theme Parks. The ownership groups, which last year reached agreements to sell to Six Flags Theme Parks, said that Six Flags Theme Parks was not investing aggressively enough in the parks. Dannhauser said the size of the company's debt is not so daunting, considering that Premier will have $1.2 billion in equity once its stock offering is done. "I think we have developed a significant amount of credibility with Wall Street by delivering what we promise," he said. As is typical with deals such as the Six Flags one, the Standard & Poor's and Moody's credit rating agencies put Premier's existing debt on review because of the debt Premier will take on. S&P put Premier's existing debt on its Credit Watch with "negative implications." S&P senior analyst Hal Diamond said in a report that the added debt and the structure of the acquisition adds risk for Premier. Moody's placed one Premier issue on review for possible downgrade and another on review for possible upgrade. Dannhauser said that once management has had a chance to explain the Six Flags deal with the analysts at the credit reporting agencies, they may take a more favorable view. Industry observers certainly like the marriage of Premier and Six Flags in principle. Premier's chief, Kieran Burke, is a former investment banker and has set the company on a successful run of park acquisitions. And for Story, the acquisition is a sort of homecoming, said Gary Slade, publisher of Amusement Today, an Arlington-based trade publication. "Gary Story grew up in the Six Flags organization," Slade said. "He got his start in the industry through Six Flags." David Welch prepared this article for the Fort Worth Star- Telegram.

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