The Blackstone group, founded in New York, is one of the largest private equity firms in the world with offices in USA, UK, Germany, France and India. The Blackstone model of investment operation is to invest out of a singel global equity fund so all its investments around the world tap into the same capital pools. One of the most attractive industries to invest for the Blackstone is theme parks and there are a number of reasons for that.
The first is that such type of service business generates significant cash flow, second, there is a potential growth for attendance in Europe and additionally there is a weak competition for Blackstone among the investment firms doing roll-ups in Europe. The European fragmented theme park industry was the candidate #1 for consolidation and growth.
Blackstone’s first purchase in the theme park segment industry in Europe was Merlin Entertainment group, which operated 28 atractions in 8 European countries with 6 million visitors annually. Merlin was purchased for €149 million (US$187 million), €39 million(US$49) of which was equity. With this purchase Blackstone set a base for future follow-on acquisition opportunities in the entertainment theme parks industry.
The same year Blackstone with Merlin was able to bid LegoLand deal and purchased it for €375 million (US$475milion), Lego maintained 30% stake in the combined company. Blackstone and Merlin management was able to recognized the opportunities to increase prices, improve martketing and ultimately improve profitability significantly at the LegoLand properties. Next year Blackstone purchased Gardaland, a theme park and hotel complex in Italy for €470 million (US$628 million).
Once again Blackstone and Merlin management was able to improve profitability and lower the capital expenditures (EBITBA growth 9%, capital expenditures decreased by 7%). The next potential purchase of Blackstone was the Tussauds group, a well established company with well-known attractions, where Madame Tussauds museums were the most recognizable all around the world.
This purchase would make Blackstone the major stakeholder in the second largest visitor atttractions business in the world after Disney. After serious negotiations on the fianncial and other terms of the potential transaction with Dubai International Capital (DIC) both parties agreed that Merlin would acquare the Tussauds group in exchange for €1.5 billion (US$2 billion) in cash and offer DIC 20% stake in the combined company.
Along with the acquisition plans Blackstone were looking at the oportunity to perform the dividend recapitalization of Merlin and realize liquidity from its investment. Another option of generating a liquidity for the shareholders came from Tussauds acquisition option – that was sale-lease back option. There were a number of risks associated with each of the options.
The first option to generate the liquidity could be the Merlin’s dividend recapitalization. Based on current European debt market conditions the goal was to get up to 7x EBITDA for recapitalization. So the Blackstone would issue dividents for €917 million, which is €131EBITDA x7 (Exhibit 1). The existing debt of Merlin is €600 million, so part of €917 would be used to cover existing debt. The NPV of the company was €996 million (assuming Er was 0,1251 and terminal growth at 30%), equity-value was €79. The Blackstone group holds 67% stake wich is equal to €212,4 of the cash left over portion of the dividend recapitalization.
That reflects x5,4 of the Merlin’s initial investment(Exhibit 1). Other pros in this option are the group’s excellent relationships with the banks that were willing to finance the transaction. The risks assocoated with the transaction could be that Blackstone wount be able to complete the recapitalization in appropriate time frame, after the transaction the entity would be highly laveraged and potentially would face difficulties in exiting the deal or there might be concerns associated with getting a large borrrowing in the future due to high laverage after dividend recapitalization. Another concern is that one of the share holders might not be agree getting cash now and add a debt portion to the company’s value.
The second option on the Blackstone’s path to liquidity was Tussauds’s group acquisition. Although this acquisition could become the largest in the industry and give the Merlin second place in the theme park industry after Disney there were some serious potential risks. First of all the Tussauds group was to be acquired with 100% debt, which would increase the leverage of the combined company significantly.
Another key concern would be the Merlin’s management ability to handle doublesized company, only 18 months earlier Merlin was a much smaller organization. Uneven growth of Merlin and Trussauds could be a concern as well. On the other hand Blackstone calculated the NVP of the combined company after the Trussauds acquisition as €2,4 billion, the equity-value of the combined company would be €323 million.(Exhibit
2) The NPV calculation is based on the assumption that Er is 0,1251; the terminal growth is 40%. The DIC has a 20% stake of it, the rest 80% would be divided among Merlin’s group entities, the Blackstone would have 53,6% stake of equity - €172,9 million wich is x4,4 of the initial Merlin’s investment. The post-transaction ownership of the combined company is described below:
The third option that was available for the Blackstone was the sale-leaseback, where the group could sell the freehold titles of some of the combined Merlin-Tussauds properties. In return the combined company would have a long-term lease agreement with the buyer for the right to operate the parks and attractionson at the leased real estate. This option would give Blackstone a significant cash inflow of €940million wich they plan to use for debt repayment.
The sale leaseback NPV considering rent payment is €1,8 billion, assuming all cash infusion would be used for debt repayment and the remaining debt would be €1,16 billion, equity value would be €639 million. (Exhibit 3). Blackstone would have 53,6% of equity wich is €342,5m which is x8,8 of it’s initial Merlin’s equity investment. This option looks good, but we need to consider significant risks associated with it.
Such as specific UK law under which the team has to close the Tussauds deal before it can finalize sale leaseback, which would double the risks on sale leaseback. We have to consider that first the team has to deal with Tussauds acquisition risks and then with leaseback ones. Another concern is uncertanty of market conditions which could shift. The risk that a buyer could request additional changes and the deal wount be closed in appropriate time frame.
I would recommend the dividend recapitalization option. On my opinion it is the least risky option to generate liquidity, the leverage is high, but the group will get cash for dividends to pay to the shareholders. Blackstone holds 67% of the equity and get x5,4 it’s initial Merlin’s equity investment according to x7 EBITD scenario, there could be more aggressive numbers. Taking into consideration Merlin’s stable cash flows, brands and properties in the key markets and excellent relationships with the banks I believe the group would be able to close the transaction and demonstrate the results to Blackstone investors within planned time frame.