Child-friendly theme park rides are safer and more accessible than ever before, but decidedly less rewarding. That is a fair summary of Blackstone's deal to help take Legoland owner Merlin Entertainments private at a 4.8 billion pound ($6.07 billion) equity value.
The private equity group run by Stephen Schwarzman, together with the Canada Pension Plan Investment Board, will own half of the UK-based group which also operates Madame Tussauds wax museum. Denmark's Kirkbi, the investment company of Lego's founding family, currently has a 30 percent stake and is set to increase this to 50 percent. Their offer is worth 37 percent more than the company's closing price before activist investor ValueAct Capital publicly called for a sale in May. Including debt, the enterprise value is 5.9 billion pounds - 12 times the 2018 EBITDA, against an average of 11 times for US and European buyouts in recent years.
The trio's plan to regain losses differs greatly from the standard private-equity process of increasing leverage, slashing costs and flipping a business. Even if they secure net debt up to 5 times the 2019 EBITDA, it would account for just 45 percent of the enterprise value, based on Refinitiv estimates. This is compared to well over 50 percent in most leveraged buyouts. Additionally, there is little room to axe costs: this year's estimated 30 percent EBITDA margin is roughly where the group's profitability was in 2012, when Kirkbi and Blackstone owned Merlin alongside CVC Capital Partners. The Danish family's holding period is effectively endless, while the relevant Blackstone fund has a more than decade-long timeframe.
Instead, the buyers think public markets misjudge Merlin's long-term prospects. The company's management, headed by long-standing leader Nick Varney, has spent heavily on international growth in New York and South Korea, and has built accommodation so that families can make overnight trips. Investors worry that capital expenditure, pegged by analysts at one quarter of revenue this year, will prove wasteful. Returns on capital employed were just 8.9 percent last year, compared with almost 11 percent in 2014. Hence a near-20 percent share price collapse over the past two years.
The consortium is taking the other side of that bet, hoping that Merlin will take a bigger slice of the theme park sector's 6 percent average growth rate. Even then, the returns are so-so. Assume that growth rate continues, there are flat EBITDA margins, and capital expenditure is at 20 percent of revenue. After five years the buyers' cash return would be 218 million pounds before interest, or only 3.6 percent of the acquisition enterprise value. Child-friendly deal-making has its downsides.
The author is Liam Proud, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn
