Homework 1: Part 1: H Partners and Six Flags Case Study.
Following questions are based on the case study. 1. Briefly describe the reasons for Six Flag’s deteriorating performance. Do you believe the core business is sound? (Note-I am not looking for a very long answer. The reasons for bankruptcy will play a big role in your decision to invest or not invest in a company. For instance: a business cycle downturn vs new research that shows company’s products are harmful for people (think asbestos))

Due to the volatile state of Six Flags between 2003 and 2009, one could conclude that Six Flag’s business model was not financially sound. In looking at comparable firms such as Disney or Universal Studios, the amusement parks are not their only component in their business model. In addition to being poorly diversified, Six Flags sold tickets at steep discounts and heavy promotions, which drove the average ticket price to $21.10 in 2008. Unlike their competitors, the parks are marketed to consumers within 100 miles of the park. Firms like Disney and Universal have both domestic and international tourists, the majority of which come from more than 100 miles away. This leaves Six Flags with limited same-park growth because they are limited to the population within driving distance to the park. Furthermore, an unfortunate sequence of events hit the company in 2009. The outbreak of the H1N1 (swine flu virus) caused the Mexico City park to shut down and negatively impacted two of the parks in Texas. The public’s view was negatively affected because of the bankruptcy news and weather deterred park-goers. Finally, Six Flags is a luxury some people couldn’t afford throughout the financial crisis and recession that hit the economy during this time. The financial crisis proved that Six Flags’ business model was not recession-proof. While barely managing to stay afloat in a well functioning economy with their one core business, it became impossible to do so when consumers were not spending on added luxuries like an amusement park.

2. What was Six Flag’s capital structure at the time of bankruptcy filing?

At the time of bankruptcy filing, Six Flags’ capital structure featured three levels of debt and equity. There was Six Flags Theme Parks, Six Flags Operations, and Six Flags Inc. Six Flags Theme Parks featured bank debt that was secured by assets and held mostly by banks. This included a loan of $835 million and a revolver valued at $275 million. Six Flag Theme Parks also directly oversaw all parks except for those partnership parks which were owned by Six Flags Inc. Six Flags Operations featured unsecured debt valued at $400 million that was behind secured debt but senior to the notes held by Six Flags Inc. These unsecured bonds were mostly held by investment management firms. Six Flags Operations also had direct ownership over Six Flags Theme Parks. Six Flags Inc. featured a portion of preferred equity valued at $308 million and a portion of unsecured debt with a total value of $868 million. This group had complete ownership of Six Flags Operations and was owned by common shareholders.

3. Enterprise value:
a. What was the enterprise value as per management’s plan?

The enterprise value as per management’s plan was $1.4 billion, which was down from the $1.7 billion that H Partners expected to see from Six Flags if it filed for bankruptcy.

c. What would be the enterprise value based on comparable companies and comparable transactions?

* Using comparables with leverage of 4.1 x EBITDA, 5.9 x EBITDA, and 5.5 x EBITDA, get average of 5.2 x EBITDA to use for Six Flags * With this multiple, the total debt of Six Flags = 5.2 x $213.1 = $1,108.12 million * Adding this number to market capitalization of $7.6 million will produce an enterprise value based on comparables * Enterprise Value based on Comparables = $1,108.12 mil + $7.6 mil = $1.12 billion

Part 2: Leverage Go to Yahoo Finance (or any other database where you can find historical stock prices) and find Herbalife (HLF) closing prices.
1. Pershing Square, a hedge fund run by Bill Ackman, shorted 1million shares of Herbalife on December 3, 2012. His prime broker requires 150% initial margin and 130% maintenance margin for short position.
Price at close: $45.64

a. Show partial balance sheet for Pershing Square.

Cash: $45.64m + $22.82m = $68.46m | Short: 1m @ 45.64 = $45.64m | | 150% Initial Margin Requirement: $45.64m*50% = $22.82m |

b. On what date did Pershing Square receive its first margin call? 30%(1x) = 22.82 - (x - 45.64)(1) .3x = 22.82 -x + 45.64 1.3x = 68.46 x = $52.66 July 18th, 2013

i. What was Herbalife closing price when the first margin call was issued? $54.44

ii. How much additional margin was Pershing Square required to deposit? ($52.66 - 45.64) 1m = $6.8m

iii. After the margin was deposited, what would be the trigger price for next margin call?
30%(1x) = 29.62 - (x - 52.44) (1)
.3x = 29.62 -x + 52.44
1.3x = 82.06 x = $63.12

iv. Did Herbalife stock ever reach the price calculated in iii? If yes, when? Intraday it reached the price on July 30th, 2013. It closed above that price on July 31st, 2013 at $65.50.

2. Carl Icanh bought 2 million shares in Herbalife on Jan 14, 2013. His prime broker requires 40% initial margin and 35% maintenance margin (Remember-Regulation T has different requirements; these percentages are purely for academic purpose.)
Price at close: $44.08

a. Show partial balance sheet for Icahn’s fund.

| Margin: $88.16m - 35.26m = $52.9m | Long: 2m @ 44.08 = $88.16m | 40% Initial Margin Requirement: $88.16m*40% = $35.26m |

b. What is the trigger price at which a margin call will be issued? 35%(2x) = 35.26 - (44.08 - x)(2) 0.7x = 35.26 - 88.16 + 2x -1.3x = -52.9 x = $40.69

c. When was the first margin call? January 29th, 2013. Herbalife shares closed at $40.25.