LONDON (Reuters Breakingviews) - Theme parks’ child-friendly rides are safer and more accessible, but decidedly less rewarding. That’s a fair summary of Blackstone’s deal to help take Legoland owner Merlin Entertainments private at a 4.8 billion pound equity value.
The private equity group run by Stephen Schwarzman will, together with the Canada Pension Plan Investment Board, own half of the UK-based group which also runs Madame Tussauds wax museum. Denmark’s Kirkbi, the investment company of Lego’s founding family which currently has a 30% stake, will own the other half. Their offer is worth 37% more than the company’s closing price before activist investor ValueAct Capital publicly agitated for a sale last month. Including debt, the enterprise value is 5.9 billion pounds – 12 times 2018 EBITDA, against an average of 11 times for U.S. and European buyouts in recent years.
The trio’s plan to make back that money is worlds away from the standard private-equity playbook of whacking up leverage, slashing costs and flipping the business. Even if they juice net debt up to 5 times 2019 EBITDA, it would account for just 45% of the enterprise value, based on Refinitiv estimates, compared with well over half in most leveraged buyouts. And there’s little room to axe costs: this year’s estimated 30% 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 time horizon.
Instead, the buyers think public markets misjudge Merlin’s long-term prospects. The company’s management, led by long-time boss Nick Varney, has spent heavily on international growth in New York and Korea, and built accommodation so families can stay overnight. 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% last year, compared with almost 11% in 2014. Hence a near-20% 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% average growth rate. Even then, the returns are so-so. Assume that growth rate continues, flat EBITDA margins, and capex at 20% of revenue. After five years the buyers’ cash return would be 218 million pounds before interest, or only 3.6% of the acquisition enterprise value. Child-friendly dealmaking has its downsides.
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