8/7/2019 97-09

1/13

1

Euro Disneyland SCA

This case was developed by Professor Anant K. Sundaram of the American GraduateSchool of International Management, with assistance from Ravi Mohanas a basis forclass discussion, from publicly available sources of information. Funding was provided bythe Center for International Business Education at the University of Michigan.

In September 1989, the U.S.-based Walt Disney Company (WDC) finalized its plans foran initial public offering (IPO) that would partially finance the next stage of development ofits first major theme park and resort complex in Europe. The park would be called EuroDisneyland (EDL) and be located outside Paris. The IPO would issue 85.88 millionshares at an offer price of FF72 per share, with 50% reserved for French investors andthe other 50% for investors from the rest of the European Community. Following the IPO,the issued share capital of EDL would be 170 million shares with a nominal value of FF10each, with WDC owning 49.5%. The shares would trade on the Paris, London andBrussels stock exchanges.

WDC had been involved with the project since its inception in 1985, when it was calledEuro Disneyland SA and operated as WDCs wholly-owned French subsidiary. Theparent company decided that the time had come to put in place a set of ownership andgovernance changes that would take the project to the next phase of growth anddevelopment. The proposed set of transactions would transform EDL into the largesttheme park and resort complex in Europe, converting it from a wholly-owned subsidiaryinto a stand alone business entity using complex project financing.

Walt Disney Company

WDC is famous for operating the worlds most successful theme park complexes. It runstheme parks in Florida and California in the United States (Disney World and Disneyland)and in Japan (Tokyo Disneyland), which collectively drew 51 million visitors in 1988. Theannual average theme park attendance of over 12 million each dwarfs the 4.6 million inannual attendance at the largest non-Disney theme park (Seaworld, in Florida). Thenearest-sized competitors in Europe are Tivoli Gardens in Denmark, which drew 4.5million visitors in 1988, and Liseberg in Sweden with 2.8 million visitors.

WDCs dominance of the theme park industry is attributed to its superior productofferings, efficient operations management, and its marketing acumen. It pioneered theidea that theme parks should not just be conventional amusement parks but anentertainment experience where the visitor is both participant and spectator. Parks aredivided into distinct areas called lands (such as exotic adventures or fairy tales) in whicha unique theme is presented through a combination of architecture, landscaping,costumes and actors, music and live entertainment, rides, and food and beverages. Thedesign of the theme parks is the responsibility of special teams of Disney imagineersarchitects, designers and engineers employed by its wholly-owned subsidiary, Walt

8/7/2019 97-09

2/13

2

Disney Imagineering. Disneyland in California, set up in 1955, saw a 3.6% annual growthrate in attendance during its first 34 years, attracting over 300 million visitors during thisperiod; the attendance at Disney World, set up in 1971, grew from 10.7 million visits in1971 to 26 million in 1989. Attendance at Tokyo Disneyland, set up in 1983, reachedapproximately 14.9 million in 1988.

In addition to theme parks, WDC is a leading provider of filmed family entertainment (thecompany originally began as a maker of animated films) and receives royalties from itsconsumer product licenses worldwide, with its well-known characters such as MickeyMouse, Donald Duck, and Goofy. In 1988, theme parks accounted for 59.4% of WDCrevenues, filmed entertainment for 33.4% and consumer products 7.2%. The shares ofoperating income from these three segments were 63.8%, 21.0% and 15.2%,respectively.

European Theme Park

Confident in its ability to leverage its success in the U.S. and Japan, WDC decided duringthe early 1980s to export its theme park concept to Europe. This was motivated by itsassessment of the past demand for Disney products and its name recognition in Europe,as well as the popularity of its U.S. theme parks among European visitors. WDC hasmarketed its reproductions of Disney characters and its films in Europe for nearly fiftyyears. Approximately 25% of its 1988 revenues came from Europe. In the same year,WDC estimated that approximately two million visitors to its U.S. theme parks were ofEuropean origin.

After evaluating nearly 200 locations in both France and Spain, the company chose to

locate the park in France, outside of Paris. The new parklocated in Marne-la-Valle,32 kms east of Pariswould occupy 4800 acres, consisting of theme parks and hotels(2400 acres), commercial and residential development (2400 acres), and infrastructure(roads and railway track, 400 acres). WDC formed Euro Disneyland SA, a wholly-ownedFrench subsidiary in 1985, and capitalized it with an initial investment of FF250,000(25,000 shares at FF10 each). In March 1987, WDC entered into an Agreement on theCreation and the Operation of Euro Disneyland en France with the local and nationalgovernments in France. By 1989, just prior to the proposed IPO, WDC had incurredFF2.3 billion in development costs (and Disneys financial partners, an additional FF462million). During this period, the risk of the project had been primarily assumed by WDC.

The new plans called for an aggressive two phase development. Phase I was scheduledto be fully operational by April 1992 and included the Magic Kingdom theme park and theMagic Kingdom Hotel, as well as five other hotels. The budget for this first phase wasestimated to be FF14.9 billion: FF8.6 billion for the Magic Kingdom theme park, and therest for development of hotels (and other expenses). Phase II consisted of adding aDisney/MGM Studio theme park by 1996, increasing the number of hotels to 20 by 2011,and adding golf courses, water entertainment areas, and camp sites. The cost to set up

8/7/2019 97-09

3/13

3

the Disney/ MGM Studio alone was estimated to be FF5.9 billion. Phase II was expectedto be operational by 1996.

Role of the French Government

The French government granted a number of incentives in order to attract EDL to France.The benefits, offered by the government as outlined in the 1988 agreement, were valuedby some analysts at FF6 billion. The concessions covered four major areas. First, thegovernment allowed EDL to purchase the land at 1970 prices, a 50% to 90% discountrelative to the market price. Second, the government agreed to provide a transportationinfrastructure, both road and rail, to connect the theme park to Paris. Third, thegovernment would provide a 20-year FF4.8 billion loan at a fixed annual rate of 7.85%, arate less than the current French government long-term borrowing rate of 9.1%. Finally,the tax authorities agreed that EDL could depreciate its assets over ten years, rather thanthe twenty years that would be normal for such an asset class.

In return, WDC would have to complete the first phase of the project by April 1992.Further, EDL would: (1) ensure minimal usage of the rail infrastructure during the first fiveyears of the project (with default clauses to cover fares if the annual traffic fell below 75%of 9.13 million round trips); (2) invest FF45 million for electricity and utility infrastructures;(3) pay FF200 million in taxes to the province by 1999; (4) make sure, over the next fiveyears, that WDC did not reduce its ownership share in the project to below 17%; and (5)agree not to open competing theme parks or resort complexes within 800 kms of thecurrent project.

Proposed Project Ownership Structure

WDC proposed a new, complex ownership and governance structure for the project. EDLwas organized as a societe en commandite par actions(SCA), or a form of limitedpartnership. This structure allowed WDC to avoid double taxation, without incurring theliability inherent in partnerships. The following additional entities formed the projectsmanagement structure:

Euro Disneyland SA, a wholly owned subsidiary of WDC, would manage EDL fora management fee. The management fee was composed of a base and anincentive component. The base fee would consist of 3% of EDLs annual revenue.

After five years and the fulfillment of certain financial covenants, the base feewould increase to 6% of annual revenues. The incentive fee was based on asliding percentage scale of EDLs pre-tax cash flow.

EDL Holding Company SA (Holding Company), a wholly-owned subsidiary ofWDC would own 49% of EDL. Public investors would own the remaining 51%.The shareholders would elect a supervisory board to oversee the management ofEDL. However, the supervisory board could not replace Euro Disneyland SA as

8/7/2019 97-09

4/13

4

the management company, or compel them to make any major operational orstrategic decisions.

EDL Participations SA (Participations), a wholly owned subsidiary of the HoldingCompany, would act as the general partner in EDL. Participations would bear allthe liability for the debts and other liabilities of EDL. EDL would pay Participations

0.5% of its after-tax profits for its services and could not remove Participations asthe general partner.

Euro Disneyland SNC (SNC) would finance the construction of the MagicKingdom theme park by purchasing the park for the cost of the land andconstruction. They would then lease the Magic Kingdom theme park back to EDLfor twenty years. At the conclusion of the lease, EDL would buy back the themepark for a nominal value. Thus, the project could also take advantage of the taxbenefits of leasing. WDC would own 17% of SNC.

1

The details of the governance and ownership structure are shown in Exhibit 1.

Financing the Project

EDL planned to finance Phase I through a combination of market debt (FF4.5 billion at aninterest rate of PIBOR plusa spread of

1/2% to

7/8%), a French government loan (FF4.8

billion at an interest rate of 7.85%) and the equity IPO (expected to generate FF5.73billion, net of transaction costs). Phase II was expected to be financed entirely with a newdebt issue (FF5.9 billion at an assumed interest rate of 9%).

As mentioned, the original project was launched in 1985 with the formation of Euro

Disneyland SA. On February 24, 1989, Euro Disneyland SA was converted to EuroDisneyland SCA (EDL). In March 1989, WDC issued an additional 975,000 shares. (Themotivation behind this share issue was to convince a major institutional investor thatdemand existed for shares in the EDL.) Three French banksBanque Indosuez,Banque Nationale de Paris and Caisse Nationale de Crdit Agricoleand the U.K.investment bank S.G. Warburg bought 510,000 shares for FF15 per share, and WDCpurchased the remaining 465,000 for FF10 per share.

In addition to this equity, FF2.13 billion worth of debt was issued to the equity investors.WDC purchased FF828.1 million worth of the debt, and the rest was bought by the fourequity-owning French banks. Exhibit 2 shows the pre-IPO ownership structure of EDL,

after these equity and debt issues.

The proposed IPO would offer 85.88 million shares at FF72. After the IPO, the Frenchbanks original debt would be redeemed at par plus interest (12.5%); the banks would,however, retain an option to buy up to 3.26 million additional shares. EDLs existing debtwould be converted into 82.81 million shares. The IPO proceeds would also be used torepay WDC and its partners for the project development costs of FF2.762 billion incurred

8/7/2019 97-09

5/13

5

to-date. (EDLs post-IPO ownership structure is shown in Exhibit 3; the changes in EDLsbalance sheet as a result of the above transactions are shown in Exhibit 4.)

S.G. Warburg was chosen by WDC as the lead manager for the IPO.2

Warburgundertook the valuations for EDL, and prepared the Offering Circular. The Offering

Circular contained detailed revenue, cost, and cash flow projections for EDL for the 25-year period 1992 to 2016 (Exhibit 5), and a sensitivity analysis of expected returns toshareholders under WDCs valuation assumptions (Exhibit 7).

Valuation Assumptions

Warburg and WDC made a number of specific assumptions in their projections. Some ofthe key assumptions were as follows:

11 million annual visitors in the first year for the Magic Kingdom, with annual growth of

4.9% per year in years 25, 2.7% in years 610, 0.6% in years 1120 and zeropercent thereafter.3

Admission fees for both the Magic Kingdom and the second theme park would grow at6.5% per year, and per-visitor expenditure on other items such as food, beverage,parking, etc. would grow at 5% per year.

4

8 million annual visitors in the first year for the second theme park with an assumedannual growth of 2% per year for the first ten years, and 1% per year thereafter.

Resort and hotel revenues (see Exhibit 5).

Royalties and management fees to WDC, and lease payments to SNC (see Exhibit 5).

New debt issues and debt redemption as set forth in Exhibit 6, and net interestexpense (i.e., interest payments minusinterest received) as set forth in Exhibit 5.

Discount rate of 12% for the period afterthe opening of the first theme park (after April1992), and 20% for the initial development phase (October 1989 to April 1992).

5

Capital expenditures (including land purchase) and changes in net working capital(see Exhibit 5).

Inflation rate of 5% per year, and PIBOR of 9% per year. Interest rate on excess cashassumed to be invested at 9% per year during the pre-opening period, and 12%

thereafter.

Corporate tax rate of 42%, and possible tax credits as set forth in Exhibit 5.

The provision of such detailed valuation information in an IPO offering circular, especiallyin the European setting, was somewhat unusual. The information provided analysts withthe ability to assess their own value for EDL, and to assess whether the FF72 per sharewas, indeed, a fair price to pay for the IPO. Analysts in the U.S. were intrigued by how

8/7/2019 97-09

6/13

6

the proposed governance and management structure, as well as the financial changes,would affect the parent firm, WDC. In particular, they wondered about any potential cashflow impacts on WDCs U.S. shareholders, in the event that some of the assumptionsbehind the EDL cash flows and discount rates proved too optimistic or failed tomaterialize.

8/7/2019 97-09

7/13

7

Footnotes

1. Actually, the 17% would be owned by an entity called Euro Disneyland ParticipationsSA, a wholly-owned subsidiary of WDC. In addition, there would be a managementcompany to manage the financing company, SNC. See Exhibit 1 for details.

2. Regional lead managers for the issue included Banque Indosuez (Belgium andLuxembourg), Deutsche Bank Capital Markets Limited (Germany), Mediobanca (Italy)and Credit Suisse First Boston (rest of EC).

3. This was based on the 11 million in attendance achieved by Tokyo Disneyland duringits first year of operation, and a study conducted by the US consulting firm Arthur D.Little, which estimated attendance to be between 11.7 million and 17.8 million duringthe first year.

4. Disney ticket prices in the U.S. have had a 2.6% real growth since 1972.

5. The offering circular did not provide information regarding how the 12% discount ratewas derived. However, according to another source (Euro Disneyland SCA: TheProject Financing in Case Studies in Finance, R. Bruner (ed.), 2nd edition, Irwin: NY,1994) it was derived based on assessment of comparables. S.G. Warburgestimated it based on IRRs from forecasted dividends for WDC (U.S.), Accor (aFrench hotel group) and Club Med (a French resort and travel operator), resulting inrespective discount rates of 9%, 11.3% and 11.9%. The 1989 betas (measuredagainst their respective home market benchmarks) for these three firms are 1.26, 1.02and 1.14, respectively. Their long term debt-to-book equity ratios are 12.3%, 64.6%and 48.2%, respectively (Source: Disclosure/Worldscope database). The historicalmarket risk premium for a well-diversified portfolio of stocks in France, relative to theFrench governments long-term borrowing rate, is approximately 7.5%.

8/7/2019 97-09

8/13

8

French/EC

Shareholders

Walt Disney

Company

French

Corporations

Euro Disneyland

SCA

(EDL)

Euro Disneyland

SNC

(Financing Company)

Ownership

Management

Euro Disneyland SA

(Management Company)

EDL Participations SA

EDL Holding Company

Management Company

for SNC

Euro Disneyland

Participations SA

Exhibit 1 Euro Disneyland SCA: Corporate Ownership and Management Structure.

Source: Adapated from the EDL Offering Circular.

83%

51%

100%100%

17%

49%

(statutory share)

8/7/2019 97-09

9/13

9

Exhibit 2 Equity Ownership of Euro Disneyland SCA before IPO.

Entity # of Shares (000) Ownership (%) FF Invested(millions)

Walt Disney Company 490 49.0 4.9

Investment Banks 510 51.0 7.6

Public 0 0.0 0.0

Total 1000 100.0 12.5

Exhibit 3 Equity Ownership of Euro Disneyland SCA after IPO.

Entity No. of Shares Ownership (%) FF Invested

(millions) (millions)

Walt Disney Company 83.3 49.0 833

Investment Banks 0.9 0.5 9

Public 85.9 50.5 5730

Total 170.0 100.0 6572

Source: Derived from the EDL Offering Circular.

8/7/2019 97-09

10/13

10

Exhibit 4 Financial Transformation of Euro Disneyland SCA.

(FF millions)

Stage 1 Stage 2 Stage 3

InitialPosition

After Equity &Debt Issue

Post-IPO &

Debt Clearance

Cash -1010.00 1122.99 5560.13

Other Assets 3709.10 3709.39 3709.39

Total Assets 2699.10 4832.38 9269.52

Payable to WDC 1908.57 1908.57 1908.57

Debt to Banks &WDC

0.00 2120.95 0.00

Other Liabilities 783.19 783.19 783.19

Total Liabilities 2691.76 4812.71 2691.76

Share Capital 0.25 10.00 1700.00

Share Premium 0.00 2.58 4870.68

Retained Earnings 7.09 7.09 7.09

Total ShareholdersEquity

7.34 19.67 6577.77

Source: Derived from the EDL Offering Circular.

8/7/2019 97-09

11/13

11

Exhibit 5 Euro Disneyland SCA's Revenue, Cost and Profit Projections.(FF millions)

Revenues 1992 1993 1994 1995 1996 2001 2006 2011 2016

Magic Kingdom 4246 4657 5384 5853 6415 9730 13055 18181 24118

Second Theme Park 0 0 0 0 3128 4565 6656 9313 12954

Resort Development 1236 2144 3520 5077 6386 8133 9498 8979 5923

Total Revenues 5482 6801 8904 10930 15929 22428 29209 36473 42995

Implied Annual Growth Rate(%)

24 31 23 46 7 5 5 3

Operating Expenses 3439 4337 5592 6340 9129 13358 17448 20948 22138

Implied Annual Growth Rate(%)

26 29 13 44 8 5 4 1

Other Expenses

Lease Expensea

958 950 958 962 975 1242 882 83 1

Implied Annual Growth Rate(%)

-0 0 0 1 5 -7 -38 -59

Royalties & ManagementFees

b357 504 864 1385 2537 3832 5425 7710 10678

Implied Annual Growth Rate(%)

41 71 60 83 9 7 7 7

Depreciation 596 604 631 637 966 658 723 842 228

Implied Annual Growth Rate

(%)

1 4 0 52 -7 2 3 -23

Net Interest Expensec

-219 -213 -11 -70 376 305 357 352 1

Total Other Expenses 1692 1845 2442 2914 4854 6037 7387 8987 10908

Profit Before Tax 351 619 870 1676 1946 3033 4374 6 538 9949

Taxes (42%) 147 260 366 704 818 1274 1837 2746 4180

Net Profit 204 359 504 972 1128 1759 2537 3792 5769

Dividends 275 425 625 900 1100 1750 2524 3379 5719Implied Annual Growth Rate

(%)

55 47 44 22 10 8 6 11

Tax Credit 1 138 213 313 450 536 865 1908 2373

Implied Annual Growth Rate

(%)

54 47 44 4 10 17 4

Capital Expenditured

392 610 3408 3461 886 641 944 841 310

Implied Annual Growth Rate(%)

56 459 2 -74 -6 8 -2 -18

Change in Net WorkingCapital

e-779 -668 516 997 1548 683 100 45 57

Implied Annual Growth Rate

f

(%) -14 -177 93 55 -15 -32 -15 5

Note: Data for 1992-96 are annual; following that, the data are presented in five-year increments.a

Lease payments to SNC (the financing company).b

Royalties and Management Fees payable to WDC.c

Net interest expense = Interest paid minus interest received.d

Capital expenditure includes cost of land purchase.e

Negative values imply an increase in current assets, and positive values, a decrease in current assets.fAll implied growth rates are projected compound annual growth rates.

Source: EDL Offering Circular and Casewriter Estimates.

8/7/2019 97-09

12/13

12

Exhibit 6 Euro Disneyland SCA: Projected Debt Schedule.

(FF billions)

Year Debt Issuance Debt Redemption Net Debt Level

1989 9.30 0.00 9.301992 0.99 0.00 10.29

1993 0.69 0.54 10.44

1994 2.95 0.78 12.61

1995 2.95 1.60 13.96

1996 0.00 1.87 12.09

1997 0.00 1.87 10.22

1998 0.00 1.87 8.35

1999 0.00 1.87 6.48

2000 0.00 1.87 4.61

2001 0.78 1.58 3.81

2002 0.78 1.58 3.01

2003 0.78 1.58 2.21

2004 0.78 1.58 1.41

2005 0.78 1.58 0.61

2006 1.15 0.44 1.32

2007 1.15 0.44 2.03

2008 1.15 0.44 2.742009 1.15 0.44 3.45

2010 1.15 0.44 4.16

2011 0.00 0.00 4.16

2012 0.00 0.00 4.16

2013 0.00 0.00 4.16

2014 0.00 0.00 4.16

2015 0.00 0.00 4.16

2016 0.00 0.00 4.16

Note: The 1989 debt of FF9.3 bn consists of FF4.5 bn at interestrate of PIBOR + 1/2% to 7/8%, and FF4.8 billion at 7.85%. From1992 and on, the interest rate is assumed to be 9%.Source: EDL Offering Circular and Casewriter Estimates.

8/7/2019 97-09

13/13

13

Exhibit 7 WDC's Sensitivity Analysis of Returns to EDL Shareholders.

Internal Rate

of ReturnBase Case 13.3

Reduced Attendance (10 million visits in year 1 ofoperation)

12.7

Increased Attendance (12 million visits in year 1 ofoperation)

13.8

10% Reduction in per capita spending 12.3

10% Increase in per capita spending 14.1

Six month delay in opening 12.8

10% Increase in construction costs 13.2

10% Reduction in resort income 13.0

10% Increase in resort income 13.5

7% Inflation after 1992 and unchanged real interestrates

15.3

3% Inflation after 1992 and unchanged real interestrates

11.2

1% Reduction in real interest rates after 1992 13.2

1% Increase in real interest rates after 1992 13.3

14.5 P/E ratio in 2017 13.4

10.5 P/E ratio in 2017 13.1

Note: The company is assumed to be capitalized at 12.5 times net profitavailable for distribution in the year ending March 31, 2017. Share value is

derived from gross dividends per share assumed during the life of the project,plus an assumed residual value in year 2017, discounted at 12%.

Source: EDL Offering Circular.