Tragic kingdom

Reuters Breaking Views
by Neil Unmack

Disney is behaving like Scrooge McDuck with its French investors. The maker of “Mickey’s Christmas Carol” wants to buy out shareholders in Euro Disney at a price that may downplay the Paris theme park’s potential.

Euro Disney’s share price has fallen 94 percent in the last 20 years. One shareholder, hedge fund CIAM, is suing the parent group, and argues the Paris attraction is managed to benefit the Walt Disney Company at the expense of other shareholders. Now the U.S. parent, which owns 86 percent of the French entity and is also a creditor, is offering to buy out minorities at a premium of 67 percent, or 1.6 billion euros.

Were Euro Disney merely an unprofitable theme park, that might look fair. Add in debt of 1.2 billion euros, and the enterprise value of 2.8 billion euros is about twice the revenue Oddo Securities forecasts Euro Disney will make in 2017. That multiple is in line with the leisure sector, but generous for a business that, after capital expenditure, hasn’t generated free cashflow since 2011.

Two things suggest Disney is taking investors for a ride. First, it takes fees for licensing that CIAM says are between double and quadruple the market rate of around 2.5 percent. One board member resigned recently citing the park’s dismal profitability. Then there’s property. Euro Disney has a contract to buy, develop and sell over 1,000 hectares of Parisian land. A study commissioned by CIAM reckons that could be worth 1.9 billion euros. Disney disagrees with these arguments, and points out that the French market regulator has approved a lower price.

Assume Euro Disney can grow EBITDA to 210 million euros in 2018, which would imply a plausible margin of 15 percent. On an ungenerous multiple of 10 and including the land, the total value could be about 4 billion euros, or 2.8 billion euros after stripping out net debt.

Fair value is a useful yardstick, but battles with minority investors often come down to the price it takes to make a nuisance go away. Many of Euro Disney’s shareholders stick around as much for the theme park discounts as the shareholder returns. Disney can afford to be a little more generous, but Scrooge-like changes of heart only happen in fiction.