rollercoaster groups huddle ahead of trouble

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

It is natural to clutch your companion anxiously during a sheer drop on a rollercoaster. That explains the tight embrace in which US amusement park operators Cedar Fair and Six Flags are locked. The economy is showing signs of dipping in response to persistently high interest rates.

On Thursday, the pair announced an all-stock merger. They will make roughly equal contributions to a combined business with an $8bn enterprise value. Like most such deals, this one has defensive characteristics.

Amusement parks have been huge boons for the likes of Disney and Comcast. The businesses generated massive cash flow from post-pandemic “revenge” travel that propped up broader entertainment conglomerates.

For Cedar Fair and Six Flags it would be enough to triumph in their core business. It makes sense for them to pool their 42 locations across America and shed subscale status.

Both companies have borrowings that exceed their equity values, with respective debt-to-ebitda ratios above 4 times. Free cash flow, defined as ebitda less capex, is expected to jump by a third.

The partners hope to cut costs and persuade customers to visit parks in the extended network using a loyalty pass. A wider geographic footprint should also reduce bad weather losses.

Driving maximum traffic is crucial. Amusement parks have high fixed costs and require regular capital investment. Profits have rallied sharply in the past two years. But operating margins have struggled to reach 2019 levels.

Cedar Fair shareholders will own 51 per cent of the company with Six Flags owners getting the rest. That is right in line with respective contributions of unlevered free cash flow, adjusted for net debts.

Cedar Fair pays a quarterly dividend while Six Flags does not. As such, shareholders in the latter will get at least a $1 cash payout before the closing.

This leaves the partners hoping for the best, like the rest of US business. The difference is that this well-matched duo is also prepared for the worst.