Investment in SeaWorld entertainment (THE OCEAN -0.70%) these days it’s 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’ll also likely be completely wet by the end of the performance.
SeaWorld Entertainment posted disappointing financial results Wednesday morning. Revenue fell 3% in the seasonally potent third quarter, its worst top line since 2020 with the pandemic-related shutdowns. The share itself will trade lower in 2023.
Against a backdrop of sloppy finances after back-to-back quarters of declining revenue, something interesting happened last week. Six flags (SIX 0.85%) confirmed reports that it would buy a regional theme park operator Cedar Fair (FUN 0.91%) in a merger of equals. The combination is expected to close in the first half of next year, in time for a busy summer travel season. It might not seem obvious right away, but it’s a good thing for SeaWorld Entertainment. Let’s take a closer look at what the deal could do to help SeaWorld’s rudderless ways.
Release the kraken
The combination of Six Flags and Cedar Fair may not appear to have much of an impact on SeaWorld Entertainment’s business. Many of the latter’s busiest parks are in central Florida, more than a six-hour drive from the nearest 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 few ways. For starters, it takes Cedar Fair off the table as a potential SeaWorld buyout. The market was unimpressed when SeaWorld made an unsolicited $3.4 billion takeover offer that was ultimately rejected early last year. With Cedar Fair and Six Flags gone as potential partners, SeaWorld will have to focus on organic growth. It can also be a time to pick up much smaller players at a deep discount. If Cedar Fair finally made itself available after axing SeaWorld in 2022 and Six Flags in 2019, desperation could run thick for others in this highly fragmented industry.
The merger should also help SeaWorld because a combination of Six Flags and Cedar Fair is likely to increase prices for the industry. The combined players may be able to realize cost-saving synergies that they can pass on to consumers through cheaper prices, but who’s kidding? With a larger portfolio of properties, the 2024 version of Six Flags should be able to justify higher prices for its more expensive season tickets, which include access to all thrill havens.
Finally, SeaWorld could benefit from increased and potentially favorable analyst attention. Matthew Boss at JPMorgan assumed coverage of SeaWorld with an uninspiring neutral rating last week. In the note, however, he pointed out that Six Flags is trading at a valuation premium to SeaWorld. With a smaller publicly traded attractions operator to follow, opportunistic investors may approach SeaWorld as a pure play in the theme park industry.
Things aren’t going well for SeaWorld right now, and it was easy to see that coming as it went to some pretty extreme lengths to promote guest visits. Encouraging season ticket holders to visit multiple times in a short period of time to secure prizes or revising its inclement weather policy to give guests a rain check on hot days telegraphed the rough quarter it delivered this week.
Attendance of 7.1 million guests in Q3 reflected the 3% decline in revenue. Net income fell 8 per cent. Analysts expected more on both ends of the income statement. The income per inhabitant fell, as a gain for the expenses in the park per guest was not enough to offset a drop in access.
SeaWorld is not backing down from the challenge. It continues to invest in new rides and attractions, something crucial for its namesake parks as they try to distance themselves from the controversial marine life shows they used to stage.
With the nation’s two leading theme park operators recently raising prices, this should be a golden opportunity for SeaWorld to either raise its own prices or hold the line and gobble up market share. Investors have stayed away from the travel and tourism stocks that initially did well out of the pandemic, but that doesn’t mean SeaWorld Entertainment will be completely wet for long. The Six Flags merger with Cedar Fair should help.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rick Munarriz holds positions at SeaWorld Entertainment. The Motley Fool has positions in and recommends JPMorgan Chase and Six Flags Entertainment. The Motley Fool recommends Cedar Fair and SeaWorld Entertainment. The Motley Fool has a non-disclosure policy.