Six Flags CFO takes stand in bankruptcy trial

Those interested in the company included private equity group MidOcean Partners, real estate magnate Sam Zell, Providence Equity Partners, Apollo Management and Far East International Holdings of Hong Kong, according to testimony.

He also said that none of the interested parties was willing to value the company at a level above what had been proposed in the company's plan
of reorganization.

I think it's interesting that Six Flags, even in bankruptcy, is able to hold firm with these private equity groups to what they think the chain is actually worth. Cedar Fair seems to be unable (read: unwilling) to do that.

Carrie M. said:

Those interested in the company included private equity group MidOcean Partners, real estate magnate Sam Zell, Providence Equity Partners, Apollo Management and Far East International Holdings of Hong Kong, according to testimony.

He also said that none of the interested parties was willing to value the company at a level above what had been proposed in the company's plan
of reorganization.

I think it's interesting that Six Flags, even in bankruptcy, is able to hold firm with these private equity groups to what they think the chain is actually worth. Cedar Fair seems to be unable (read: unwilling) to do that.

Please explain.

The article indicates that several private equity firms made offers to Six Flags for the chain. Six Flags has said that none of those offers were higher than they thought they could manage themselves in their reorganization plan. Cedar Fair was made an offer that was significantly lower than the average unit price from the year prior, and they jumped on it.

I find that interesting given Six Flags is under a bit of pressure to create the best possible financial plan for its constituents under bankruptcy. Cedar Fair, though looking ahead to possible pressures, was not under that same kind of pressure when it accepted the low terms offered by Apollo.

But you have to understand the context of both cases. Six Flags made its determination as to value of the company. Based on that determination, the company proposed its plan of reorganization (crafted by the senior bond holders) which will leave the same senior bond holders with control of the post-bankruptcy entity. The private equity firms become relevant because had any of them been willing to pay more for SF than the value assigned to the company under the proposed plan, the senior bond holders claims would be overvalued and thus the plan could not be confirmed. So it isn't a matter of the company holding strong against the private equity firms.

Totally different from Cedar Fair and the private equity firms. CF's board made a determination at the best value to unitholders at this time is the $11.50/unit price offered by Apollo. At this point, we do not know if that is the best value. If CF is unable to refinance and/or economic problems continue and the parks' performances falter and thus CF is forced to file bankruptcy, unitholders will pretty much assuredly get less than $11.50/unit (just as the SF equityholders). If it can refinance, correct existing management issues and see economic turn around, the units may well be worth more than $11.50. But we just do not know that at this point. And the fact that other private equity firms and other strategic buyers had no interest in paying more for CF than Apollo at least lends some support to the board's determination at this point.

I get that Six Flags has a major interest in the reorganization plan they have proposed. But if they can't prove in their plan that they can offer the most financially to their current holders (ie that the value they set themselves is accurate), then the plan can't be confirmed either way. The point is that they know what the company is worth and are not entertaining offers that are less than that value.

I guess I don't agree that the fact that no other offers were made to CF means that the price offered by Apollo was accurate. In fact, to me, it would suggest how inaccurate it is.

One could argue that other investors understand the true value of the company, or at the very least, the liklihood the unit holders are going to vote for the sale at the currently offered low price point. And given there is so much time and resources involved in making an offer, I doubt any other investors are willing to involve themselves in an offer that isn't likely to pass.

How do you "know" the value of an asset that doesn't have a recognized market (such as a stock exchange, commodities exchange, etc.)? Best you can provide is a range of values and even that will be at least somewhat subjective.

If the value under the SF plan is too high, the only one to complain would be the senior bond holders because they should be getting a higher percentage of the post-bankruptcy company. But the senior bond holders are supporting the plan so that is not an issue. Only issue in terms of value of SF is if the plan undervalues the company thereby giving the senior bond holders more of the equity than they should be getting. The junior bond holders are the ones who would be hurt by an undervaluing of the company and thus they are the parties contesting the debtor's plan.

So one, SF does not "know" the value of the company. And two, the reference to the private equity firms has nothing to do with the company not wanting to sell for less that some claimed "known" value. Point of the reference to the private equity firms is to provide evidence that the proposed plan does not undervalue the company thus countering the objection from the junior bond holders.

With respect to CF, if the $11.50 price was significantly lower than the actual true value of the company, wouldn't another private equity firm or strategic buyer have offered to purchase it for a higher price? Is it clear that unitholders would have voted the deal down at $12.50 or $13.50/unit? That would be another $55 million to $110 million in purchase price. And if the value of CF was so clearly much higher than $11.50/unit, why weren't folks buying up huge numbers of units at a price that was a $1 or $2 lower recently? Or even at current prices of between $11.10 and $11.25 per unit?

I don't understand why you think the assets (or company overall) value cannot be determined. They of course have a value that can be determined or no investors would have made an offer for Six Flags' in the first place.

The point of the reference to the private equity firms in cross examination was to challenge Six Flags about whether or not they've tried to gain as much as possible for the bond holders. They were able to report that in fact their plan provides more than any offer the private equity firms made.

That sounds similar to me conceptually to the scenario with CF. Except when Apollo made the offer to CF, CF decided they were better off "getting back to running parks".

Q Funding did in fact buy up huge numbers of units at prices that were lower than the $11.50/unit purchase price. But then they went public to try to persuade others to vote down this offer, rather than waiting for their short term gain. I'm thinking that means they understand their units are valued in the long term as higher than $11.50.

If the value of Six Flags was a mystery, why would anyone be invested in it now, yesterday or tomorrow? I think Carrie's point, especially as it pertains to Cedar Fair, is that the absence of an interested market today is a poor excuse to sell cheap. That several investors have accumulated more units in hopes of a larger payoff says to me that Cedar Fair's view of the company value is too low, and they did a poor job looking for buyers.

I never said that the value of assets or a company cannot be determined (at least in something of a range). Only that the concept that anyone can "know" the value of assets or a company, which to me implies that there is some certainty/objectivity to that determination, isn't realistic. And if the process of determining value was as easy as SF's board determining/knowing it, you wouldn't see court hearings lasting days/weeks with multiple expert witnesses/appraisers as often as you do. Determining value is much more an art than a science.

And offers that folks make to purchase assets are typically used as part of the process to determine value (along with other comparable asset sales, projected cashflow/income over life of assets and replacement costs) so its not correct to say that you need to determine value before you can make an offer to buy. Determining how much to offer will depend on what the assets are worth to you, how much you want to pay for them and how much you can afford to pay. What someone is willing to pay to buy given assets/a company may be significantly lower than the actual value of those assets (most likely because they are worth much more to other folks).

And I agree that the purpose of introducing the fact that no bidders were willing to pay more for the SF assets than SF has assigned to those assets under its plan was to show that the plan does not undervalue the company and thus does not overvalue the claims of the senior bond holders. But to say that the evidence with respect to the private equity firms indicates that SF was not willing to sell the company for less than the value that SF has determined for its assets and is thus somehow standing up against the private equity firms shows a lack of understanding of the basics of the plan confirmation process in bankruptcy cases.

Saying the Apollo made an offer and CF determined they were better off "getting back to running the parks" is a huge oversimplication of what actually happened. According to the public info, CF consulted with various financial advisors throughout the process and negotiated the acquisition price with Apollo. CF determined that given the other options, the Apollo deal was the best for unitholders. The Apollo deal included a go-shop period during which CF solicited bids from other potentially interested parties. None were interested apparently in paying more for CF.

Seems to me that all of the folks who think the value of the units is significantly more than $11.50 would have been buying units in large numbers in mid to late November when the price per unit was $7-8/unit. But that didn't happen. And I believe that Q Funding began purchasing after the merger was announced and the price had already climbed toward $11.50. They paid more per unit because their buying activity drove the price up. After they stopped buying, the unit price dropped back below the $11.50 which is where it still is today. All that tells you is that Q Funding believes that the value of the units will be more than what they paid for them in the future. They may be wrong. The folks who sold their units recently believe that Q Funding will be wrong. At this point, the jury is still out on those decisions.

Its typically best to avoid selling into an absence of an interested market. But that isn't true if the market will be worse down the road when your choice will be to sell immediately or file bankruptcy. Q Funding does apparently see a larger payoff in the future. But they may be wrong. History is filled with investors who guessed wrong in making investment decisions. And it seems to me that an investor willing to buy acquire less than 20% of the company without refinancing the existing debt doesn't necessarily evidence a poor job looking for buyers. Who were the other buyers that could also refinance the debt that CF didn't approach?

But you just supported my point. People on both sides of a deal (seller and buyer) determine the value they perceive the goods to be such that negotiation can begin.

What someone is willing to pay to buy given assets/a company may be significantly lower than the actual value of those assets (most likely because they are worth much more to other folks).

It is my opinion that in both cases (SF and CF) that has been the scenario. The folks making investment offers have offered lower than what the company is worth to others. In the case of SF, the "others" is management and senior bond holders. In the case of CF, the "others" are the unit holders.

The only difference between the two on the topic of entertaining private equity investment offers, is that SF said no because of their perceived value of the company and CF said yes because of theirs. The "getting back to running parks" quote was Dick Kinzel's, not mine. Whether that's what his reasoning was or just because "he's not a finance guy", only he knows.

But to say that the evidence with respect to the private equity firms indicates that SF was not willing to sell the company for less than the value that SF has determined for its assets and is thus somehow standing up against the private equity firms shows a lack of understanding of the basics of the plan confirmation process in bankruptcy cases.

I hope you feel better having gotten that off your chest. Really.

I do not claim to have an understanding or background in bankruptcy law and/or process. My original comment was an editorial comment based on the news as it was reported. I presented it as such.

But in fairness, besides taking strong issue to my word choice, you seem to be supporting the premise of my statement.

Carrie M. said:
But in fairness, besides taking strong issue to my word choice, you seem to be supporting the premise of my statement.

If you are referring to your initial statement that SF is holding firm against the private equity firms while CF is not, I am not supporting that premise at all. I think that premise is invalid as noted above (in large part because of the realities and context of the bankruptcy process).

And I am not clear as to your premise(s) with respect to determining value and thus cannot determine if I support it/them.

If you remove the bankruptcy context with respect to SF, both companies have an offer on the table which is supported by current management of the applicable company. Management of each company has financial incentives for accepting those offers. Each company has received bids from other interested parties that are less than the bid on the table and/or have asked if other interested parties are willing/able to pay more than the bid on the table with no up-bids being received. Both companies have a constituent group that believes that the bid on the table undervalues the company. The article indicates that the SF junior bondholders now have financing commitments to fund their plan and thus may be able to prove the SF bid on the table undervalues the company. Q Funding has nothing concrete other than its statements that it believes the value of CF is greater than the Apollo bid on the table and the statements of investment firms with no commitments to refinance the CF debt which must be refinanced soon.

From your statements, you appear to view the SF situation as a positive thing and a job well done by SF management in holding firm with its offer on the table and rejecting the lower private equity proposals but view the CF situation as a negative and poor job by CF management in holding firm with its offer on the table and rejecting the lower other private equity proposals. Seems to me that if the junior bond holders can close on their plan, there is a lot more concrete evidence that the SF management is undervaluing its company than there is at this point that CF management is undervaluing its company.

And its interesting to me that in all of this, the SF equity holders will get $0 no matter what happens with the company while CF at least has a plan on the table to pay unitholders $11.50/unit. And I wonder if (when?) the Apollo deal fails, if CF is unable to refinance, files a bankruptcy case with its CFO testifying in favor of its own plan providing $0 to the unitholders and about rejecting private equity offers that were less than the amount owed to CF's debt holders if you would feel the same way about CF management as you do about SF management.

I'm not sure I can try to explain my opinions any clearer than I have, but I'm willing to try.

From your statements, you appear to view the SF situation as a positive thing and a job well done by SF management in holding firm with its offer on the table and rejecting the lower private equity proposals but view the CF situation as a negative and poor job by CF management in holding firm with its offer on the table and rejecting the lower other private equity proposals.

I have said nothing like this. CF hasn't even had any other offers to reject or consider. I think CF management has done a poor job for accepting the offer on the table in the first place.

See, you can remove the bankruptcy factor to make your point, but the bankruptcy is very relevant. CF is not in bankruptcy. If the analysts are accurate in their assessment, CF isn't even on the verge of bankruptcy.

Dick Kinzel has indicated that they were approached by Apollo "out of the blue." I think they had their meeting in the cafeteria or some such thing. They had no reason, as of yet, to consider any offers.

Those are the reasons I view the two companies as different with regard to how they are handling their investment offers.

Whether the outcome you have predicted pans out for CF remains to be seen. But there are others in financial circles (the analysts and current new investors) who disagree with it.

There are two ways to determine the value of a company.

1. Close the company. Sell all the assets. Pay off the creditors and what's left over is the value of the company.

2. or Market Value. Market value is the amount somebody is willing to pay for a company based on his or her opinion of the future profitability of that company. In other words, market value is in the eye of the beholder, in other words, any amount. How much is your used car worth? What somebody is willing to give you for it.

3. Oh yes, you can look at the balance sheet or profit and loss statement, but that does not give the true value of a company.

Carrie M. said:
I have said nothing like this.

That is how I read your initial couple posts in this thread. If I misinterpreted, I apologize.

CF hasn't even had any other offers to reject or consider.

CF approached other potentially interested parties in the go-shop period and none of them was willing to make an offer that was higher than the Apollo deal. They could have submitted offers for less which CF would have rejected, but what would have been the point?

I think CF management has done a poor job for accepting the offer on the table in the first place.

On what basis? What some analysts have said? Because Q Funding has since paid more than the $11.50/unit and thinks the deal should be rejected? Based on the average price/unit over the prior year?

Assuming management determined that the offer was at least worth considering in terms of offering the best value to unitholders, what should the board have done? Is there evidence that the offer on the table with the uncertainties faced by CF as this point is clearly not worth considering?

If the analysts are accurate in their assessment, CF isn't even on the verge of bankruptcy.

Sure if they are right. But what if they are not? At one point, I was impressed with analysts in general. Then I started working with them (not in CF's industry though). There are some good ones and some bad ones. And because of the nature of the business, even the good ones are often wrong. Particularly in the last 2 years.

But at this point, it seems pretty unlikely that CF would be forced into a bankruptcy prior to the time, if refinancing is not arranged, its debt matures. And even then, lenders may give CF some time before they push the issue. But if the lenders see an opportunity to come away with the equity (similar to what the senior bond holders are doing with SF), they may want to force a quicker bankruptcy.

Dick Kinzel has indicated that they were approached by Apollo "out of the blue." I think they had their meeting in the cafeteria or some such thing. They had no reason, as of yet, to consider any offers.

It is not uncommon at all for private equity firms to approach companies that at the time had no intention of selling. Sometimes the offers are accepted and other times not.

Those are the reasons I view the two companies as different with regard to how they are handling their investment offers.

But I think that the two companies are handling the offers essentially the same but the economic status of each company dictates a much different process. SF is insolvent so it does not need to worry about equity holder approval. If a given offer comes in (and everything they have been receiving has been for less than the outstanding debt), SF could call the agents/trustees for the debt obligations and ask if the offer is acceptable. The agents/trustees can get back to SF later that day or in a couple of days with little formality. If the debt holders indicate they would not support the proposed deal, SF management simply rejects it. The senior bond holders wasn't happy with other offers so it proposed its own plan that management now supports which gives control of the company to the senior bond holders.

Because CF is solvent, it needs to get the approval of the proposed deal from its unitholders which requires a formal process. Had CF known that 2/3rds of the unitholders would not approve the Apollo deal (which it appears now will happen this week), CF never would have presented the deal to the unitholders. But the process dictated that they needed to go through the formal process to determine if unitholders would accept it.

Whether the outcome you have predicted pans out for CF remains to be seen. But there are others in financial circles (the analysts and current new investors) who disagree with it.

I am not predicting anything. Just saying that if CF is unable to refinance its debt, a bankruptcy is a possibility. And I already discussed the analysts above. Often times they are wrong. And Q Funding may very well be wrong as well. They certainly would not be the first large, sophisticated investor who mistakenly saw value that did not pan out. And at the same time, the analysts and Q Funding may be right. At this point, we just do not know.

And I don't have a dog in this fight. I sold whatever CF units a had several years ago. I have investments in mutual funds/retirement accounts which I suspect have CF units but I do not hvae a vote. I work in the debt/private equity industry so the process itself is of interest to me. And I definitely want to see Cedar Point remain open though that will happen if the Apollo deal is accepted or rejected, CF refinances or doesn't or files a bankruptcy so that isn't an issue.

From the first time I learned about the proposed Apollo deal, I assumed that CF has had some pretty negative discussions with its lenders about refinancing. At this point the debt market will dictate reduced leverage and higher interest rates (the requirement of reduced leverage could change between now and 2012 but it seems unlikely because of the huge troubles with bad loans lenders have seen at this point and increased interest rates will be a reality for a while). Presumably CF management is concerned that current market conditions in their operating markets will not allow for the required debt reductions to permit refinancing. Everything that I have seen indicates that unemployment will remain at or about 10% for all of 2010 (and nothing is certain there either but typically such forecasts are optomistic). If that is the case, it seems unlikely that unemployment rates will be significantly less by opening day 2011. And a lot of the regions in the midwest upon which CF depends for customers have recently lagged behind in terms of recovery (jobs in particular). And Congress is now talking about changed regulations in the financial industry in response to the financial meltdown which may make refinancing by CF more difficult/expensive. A lot of uncertainty there.

But it certainly looks that this week will be just the beginning (assuming the Apollo deal is rejected as expected). Its possible that the majority of unitholders will reject the decision by management on an incredibly key issue to the company and its unitholders. Or it may be the case that the majority of the unitholders will see a deal that they want to accept rejected because the 2/3rd vote is not obtained. Q Funding is a new player with about 20% of the equity that has not really stated its intentions other than rejecting the Apollo deal. And all if that with CF beginning two huge operating seasons in what is the worst economic climate in the US since the Great Depression.

GoBucks89 said:

That is how I read your initial couple posts in this thread. If I misinterpreted, I apologize.

Apology accepted.

On what basis? What some analysts have said? Because Q Funding has since paid more than the $11.50/unit and thinks the deal should be rejected? Based on the average price/unit over the prior year?

Yes. That's what I explained to be the reasons for my opinion.

Assuming management determined that the offer was at least worth considering in terms of offering the best value to unitholders, what should the board have done? Is there evidence that the offer on the table with the uncertainties faced by CF as this point is clearly not worth considering?

There's no more evidence than what we've already discussed.

Sure if they are right. But what if they are not? At one point, I was impressed with analysts in general. Then I started working with them (not in CF's industry though). There are some good ones and some bad ones. And because of the nature of the business, even the good ones are often wrong. Particularly in the last 2 years.

So I'm wrong, because the sources I've used to form my opinion might be wrong? What if they are right?

I can accept those odds. I'm here for entertainment purposes because I enjoy the industry and like to discuss it. I use the information that's been presented to form my opinions. As more information is presented, my opinions are subject to change.

I am not predicting anything. Just saying that if CF is unable to refinance its debt, a bankruptcy is a possibility. And I already discussed the analysts above. Often times they are wrong. And Q Funding may very well be wrong as well. They certainly would not be the first large, sophisticated investor who mistakenly saw value that did not pan out. And at the same time, the analysts and Q Funding may be right. At this point, we just do not know.

If you don't know then why do you keep challenging me on this? I have at least provided the sources that support my statements.

And I don't have a dog in this fight. I sold whatever CF units a had several years ago. I have investments in mutual funds/retirement accounts which I suspect have CF units but I do not hvae a vote. I work in the debt/private equity industry so the process itself is of interest to me. And I definitely want to see Cedar Point remain open though that will happen if the Apollo deal is accepted or rejected, CF refinances or doesn't or files a bankruptcy so that isn't an issue.

Oh, I see. You work in the private equity industry and you didn't like my perceived tone when I said "holding firm against the private equity groups." At least I get now why you keep taking issue with what I've said when you have no more hard evidence to its contrary.

You must have gone to see Alice in Wonderland this weekend. Its like we are posting in two totally different threads. Pretty bizarre.

Carrie M. said:
Oh, I see. You work in the private equity industry and you didn't like my perceived tone when I said "holding firm against the private equity groups."

Now that is funny. Why would I care about your tone when saying that? Do you even understand how private equity works? People say no to private equity offers all the time, often times holding firm against selling out (to private equity or otherwise). There is nothing to not like about the reality of that.

At least I get now why you keep taking issue with what I've said when you have no more hard evidence to its contrary.

At this point I am not sure you understand the concept of hard evidence. I have been trying to provide context behind the situations of SF and CF and how the various issues such as bankruptcy laws/rules, corporate governance and relations between companies, lenders and equityholders impact those situations. But you apparently would rather make statements without any of that context just based on the situations on their face. Thats fine.

In the end, if SF's junior bond holders are able to convice the bankruptcy judge that their plan is feasible and it is ultimately confirmed, the value of the company that SF's management knew to be accurate would have been proven to be too low. SF's management would have essentially been trying to sell the company for less than its full value to senior bond holders to the detriment of the junior bond holders based on the uncertainty of junior plan. CF's management is accused of doing the same thing in trying to sell the company to Apollo for too low a price to the detriment of unitholders based on the uncertainty faced by the company. At this point, there is uncertainty with respect to the positions taken by both managements. But it seems to me that now that SF's junior bond holders have financing for their plan, that we are closer to knowing if SF's management undervalued the company than we are to knowing if CF's management did so.

Interesting movement on CF's stock today. Price is now at $12.34 with double the average volume over the past 3 months by midday trading.

GoBucks, you have offered very little to this discussion beyond the anecdotal conjecture that you normally throw into these discussions. And I'm growing tired of your snarky comments about how little you think I understand.

I offered an opinionated statement that was presented as such. You questioned it. I supported it with my sources. Let it go, man.

Guess I missed the bibliography requirement in the board rules.

Anyway, increase in Cedar Fair unit price today (closed at $12.24 with more than 3 times the 3-month average trading volume) is apparently due to reports by DealReporter that Apollo is considering increasing offer potentially up to $13.50. If Q Funding units are enough to get to 2/3rd vote, CF could avoid having to adjourn the meeting if Q Funding is willing to flip its vote based on the increased price. We shall see tomorrow.