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UVA-F-1034 Euro Disneyland S.C.A.: The Project Financing
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UVA-F-1034
EURO DISNEYLAND S.C.A.: THE PROJECT FINANCING
Anyone who has had builders knows that the first law of building is that the estimate is a figure approximating to half the eventual cost of a project. The second law of building is that the customer always pays. The third law of building is not to assume that just because the figures have a row of naughts on the end that the costing is any more accurate than that which is employed to build your conservatory. Time will tell. Meanwhile we ought also perhaps to take a sanguine look at the projections for the number of people who are going to visit the site… What I find difficult to square, if this is such a cast iron certainty, is why [Disney] has not kept the whole project for itself, and why it is so keen to use other people’s money. Disney may have made Cinderella, but the rest of us should not believe in good fairies.1 In the spring of 1989, the Walt Disney Company (Disney or WDC) set in motion a complex series of transactions that would have several effects on its Euro Disneyland project, the largest metropolitan development project in western Europe. These effects would include the following: •
The reduction of the Walt Disney Company’s equity interest from 100% to 49%.
•
The repayment to Disney of (French francs) FRF2.8 billion in project-development costs.
•
A massive increase in leverage; FRF12.3 billion in debts and lease obligations.
•
One of the largest European initial public offerings (IPO) of common stock by a company that had no revenues or earnings.
•
The creation of a bewildering ownership and governance structure for the project.
•
The generation of a cascade of French government subsidies, investments, and tax breaks.
1
“Fact and Fantasy in Disneyland,” Evening Standard (October 10, 1989).
This case was prepared from public information by Professor Robert F. Bruner of the Darden Graduate School of Business Administration at the University of Virginia and Professor Herwig Langohr of INSEAD with the assistance of Research Associate Anne Campbell. The authors thank S. G. Warburg Securities for its cooperation with the research. Neither the Walt Disney Company nor Euro Disneyland S.C.A. has been involved in the preparation of this case, and neither company takes any responsibility for its contents. Copyright © 1992 jointly by INSEAD, Fontainebleau, France, and the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 4/98. ◊
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Some analysts viewed those developments with alarm, voicing suspicions about Disney’s partial removal from the project. Others welcomed the opportunity to invest alongside the world’s most successful theme-park operator. Virtually everyone struggled to understand the implications for Disney and other stakeholders in Euro Disneyland.
The Euro Disneyland Project Disney planned to build the park on approximately 1,945 hectares2 (4,800 acres) about 32 kilometers due east of Paris, France. Disney chose that site on the basis of availability, communications, and proximity to a potential audience after considering 200 possible sites in France and Spain. About half of the developable land, 857 hectares, would be devoted to entertainment and resort facilities. Another 808 hectares would be set aside for retail, commercial, industrial, and residential purposes. Regional and primary infrastructure such as roads and railway tracks would constitute the balance of 280 hectares. The heart of the entertainment area would feature two separate theme parks: (1) the Magic Kingdom, modeled after similar parks operating in the United States and Japan, and (2) a park based on Disney’s MGM Studio theme park in Florida. The Magic Kingdom’s five themed lands, Main Street, Frontierland, Adventureland, Fantasyland, and Discoveryland, would occupy 160 hectares. They were expected to cost FRF8.6 billion. The Disney MGM Studio theme park, which would offer visits to studio film sets and presentations on Hollywood filmmaking, was expected to cost FRF5.9 billion. Disney planned to make hotels the linchpin of a comprehensive resort facility. Six hotels (with 5,200 rooms) were to be ready by 1992. By 2011, those facilities would increase to more than 20 hotels with 18,200 rooms. Future entertainment facilities would include two golf courses, a water-recreation area, campgrounds providing 2,100 sites, and a 60,000-m2 retail/entertainment complex. Euro Disneyland’s commercial development would lie just beyond the ring road that would surround the entertainment core on the southern part of the site. Facilities would consist of single and multifamily residences, timeshare apartments, 700,000 m2 of office space, 750,000 m2 of industrial space, and 95,000 m2 of retail space. Visitors would access Euro Disneyland using an interchange from a high speed, multilane highway, an extension of the suburban railroad system serving Paris, or the high speed train à grande vitesse (TGV) railroad train system serving travelers from the more distant regions of France and neighboring countries.
2
A hectare is a measure of area equal to 10,000 square meters (m2), or 2.471 acres.
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Disney planned to open the Magic Kingdom theme park in April 1992. A total cost of FRF14 billion was budgeted for “Phase IA,” which included the initial capital investment in the Magic Kingdom; the Magic Kingdom hotel; and peripheral development, organization, interest, and preopening expenses. About FRF4.9 billion of this amount would be spent by the end of September 1989.
Project Ownership and Governance Euro Disneyland would be organized as a société en commandité par actions (S.C.A.), a type of French company that had certain features similar to those of a limited partnership. Exhibit 1 summarizes the ownership structure and percentages of investment in the Euro Disneyland project. There were four primary participants in that structure: •
Euro Disney S.A., a gérant or management company, and a wholly owned subsidiary of the Walt Disney Company, would manage and direct the project. The gérant’s responsibility would be to manage Euro Disneyland S.C.A. in the company’s best interests. The gérant’s compensation would consist of a base fee and a management incentive fee.3
•
The shareholders, or associés commanditaires, could elect the supervisory board and approve the annual accounts and dividend payments. Shareholders would have no liability for the debts of the company. By agreement with the French government, the Walt Disney Company would use its best efforts to ensure that, until opening day, investors living in the European Community (EC) would hold the shares that Disney did not own. Shares would be listed for public trading in Paris, London, and Brussels. EDL Holding Company S.A., a French société anonyme and a wholly owned subsidiary of the Walt Disney Company, would hold the other 49% of the shares.
•
The role of the supervisory board, or conseil de surveillance, would be to monitor the general affairs and management of Euro Disneyland S.C.A., to report on the performance of the gérant, to approve contracts between the gérant and its affiliates and Euro Disneyland S.C.A., and to prepare an annual report. This board could not, however, remove the gérant or require that it take any action.
•
The associé commandité, or general partner, had unlimited liability for all debts and liabilities of the company. The general partner would be EDL Participations S.A., which was
3
The base fee in any year would equal 3% of Euro Disneyland S.C.A.’s total revenues in that year, less 0.5% of the S.C.A.’s net after-tax profits, until the later of (1) the expiration of five financial years of Magic Kingdom operations or (2) the end of the financial year in which the company satisfied certain financial tests under the bank-loan agreement. Thereafter, the base fee would be 6% per year less 0.5% of the S.C.A.’s net after-tax profits. The base fee was reflected in the operating expenses of the theme parks. The incentive fee would be equal to 35% of any pretax gains on sales of hotels, plus a percentage of the S.C.A.’s pretax cash flow. This percentage would range from zero if the cash flow was below 10% of the actual cost of Phase IA; 30% if the cash flow was between 10% and 15% of the cost of Phase IA; 40% if the cash flow was between 15% and 20% of the cost of Phase IA; and 50% if the cash flow was above 20% of the cost of Phase IA. Those thresholds would increase proportionately if inflation were more than 5% per year, or decrease proportionately if inflation were less than 4% per year.
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wholly owned by Disney through EDL Holding Company S.A. It would receive a distribution each year of 0.5% of Euro Disneyland S.C.A.’s net after-tax profits. EDL Participations could not be removed as general partner without its consent. On the other hand, it could not dispose of its interest as general partner without a majority vote of the shareholders of Euro Disneyland S.C.A. As part of the general financing plan for the project, one other entity would be established: •
Euro Disneyland S.N.C., société en nom collectif, or the financing company, would serve as a vehicle to finance the construction of the Magic Kingdom through the use of a taxleveraged financing lease. Euro Disneyland S.C.A. would build the Magic Kingdom and sell it to the financing company for the cost of the land and construction.4 The financing company would lease the Magic Kingdom back to Euro Disneyland S.C.A. for 20 years with lease payments essentially matching the debt service and incidental costs of the financing company. Upon complete amortization of its liabilities, the financing company would sell the Magic Kingdom back to Euro Disneyland S.C.A. for a nominal value, whereupon the S.N.C. would be dissolved. Euro Disneyland Participations S.A., a wholly owned subsidiary of the Walt Disney Company, would provide 17% of the partners’ equity capital in Euro Disneyland S.N.C. During the construction and early years following completion of the Magic Kingdom, interest expenses and depreciation of assets over a 10year period were expected to produce tax losses for the S.N.C. The structure of the financing company would permit the partners to take those losses directly into their accounts for tax purposes.5
In addition to its 49% interest in S.C.A., and its 17% interest in S.N.C., the Walt Disney Company would receive royalties6 in return for granting a 30-year intellectual and industrialproperty-rights license to Euro Disneyland S.C.A.
4
Of the total Phase IA budgeted cost of FRF14 billion, S.N.C. would effectively finance FRF10.3 billion, leaving S.C.A. to finance the balance, FRF3.7 billion. Those investments would be financed as follows: S.C.A. Total S.N.C. Market debt 4,300 200 4,500 Government loans 3,000 1,800 4,800 S.N.C. equity 2,000 — 2,000 S.C.A. equity 1,000* 1,700 2,700 Total 10,300 3,700 14,000 * This amount is invested by the S.C.A. in the S.N.C. 5 Although the partners were legally liable for the financing company’s debt, Euro Disneyland S.C.A. waived any right of recourse against the partners in the event of the financing company’s default. Moreover, Euro Disneyland S.C.A., Euro Disneyland Participations S.A., and the Walt Disney Company agreed to indemnify the partners for any liabilities they might incur. 6 The royalties would be equal to 10% of the gross revenues at theme parks, plus 5% of gross revenues from merchandise, food, and beverage sales, plus 10% of fees due from participants who invested money toward the construction of specific rides, plus 5% of the gross revenues of theme hotels.
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The Master Agreement with the French Government Although it did not appear in a listing of investors, the French government would be an influential participant in Euro Disneyland’s development. Disney and the French government signed a master agreement in February 1988 that committed each party to certain obligations. France agreed to: 1. Provide 1,665 hectares for the theme-park resort, commercial, and residential development at a fixed price; the price was set at the 1971 cost of raw agricultural land, or approximately FRF140,0007 per hectare. By comparison, raw land zoned for commercial uses in the Île-deFrance region was listed for prices ranging from FRF170,000 to FRF210,000 per hectare. Euro Disneyland S.C.A. would have 20 years to complete the land purchases at the same price. The government explained that it wished to “damp down” property speculation in the area.8 2. Finance, construct, and operate a 20-kilometer extension of the Paris suburban railroad to provide direct access from central Paris to the gates of the Magic Kingdom. This would entail building two railroad stations, a car park, and a bus station. 3. Finance and construct two junctions to link the A4 motorway with the Euro Disneyland site. 4. Contribute FRF200 million toward the construction of secondary roads. 5. Provide up to FRF4.8 billion in loans at an annual fixed rate of 7.85%—a rate less than the French government’s own borrowing rate.9 The loans would mature in 20 years and would amortize from years six through 20. 6. Apply the lowest VAT rate of 5.5% on all Euro Disneyland’s consumer products (compared with 18.6% for consumer durables and cars and 33% for luxury goods). In addition to the master agreement, the French government agreed to provide TGV train service to Euro Disneyland starting in June 1994. France also confirmed that the Magic Kingdom could depreciate assets over a 10-year period, rather than the usual 20-year period. One journalist estimated that the entire package of concessions would cost the French taxpayer $54,000 (about FRF297,000) for each new job the park would create.10 Other analysts estimated the value of the government concessions at up to FRF6 billion.11
7
This is the case writers’ estimate. The master agreement actually cited a land cost of FRF111,000 per hectare, but added to this cost would be direct and indirect infrastructure costs (not including roads and railroads), and certain overhead and financing expenses. 8 George Sivell, “Mickey Mouse Weaves a Magic Deal,” Times of London, 29 May 1989. 9 The 20-year French government bond was currently priced to yield 9.1% in the market. 10 The journalist, Gilles Smadja, was quoted in “Presto! Let the Magic Begin,” Newsweek (April 13, 1992): 14. Euro Disneyland was projected to employ over 11,000 people, implying that the estimated value of the concessions was FRF 3.267 billion ($594 million). 11 “Disney President Pelted with Eggs at Stock Announcement,” Associated Press article, 5 October 1989.
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The master agreement required Euro Disneyland S.C.A. and Euro Disneyland S.N.C. to open the Magic Kingdom by April 1992 and complete Phase IA. In addition, Euro Disneyland had to guarantee a minimum amount of suburban rail system traffic,12 pay FRF45 million for utility and electrical networks, guarantee a minimum level of tax revenues to the Department of Seine-etMarne,13 encourage share ownership by EC nationals, use French and other EC contractors and suppliers (subject to their availability on a competitive basis), and include at least one attraction in the Magic Kingdom depicting French and European civilization. The Walt Disney Company agreed to refrain from opening or licensing another theme park within 800 km of Euro Disneyland for five years after opening the Magic Kingdom. Disney agreed to hold at least 17% of the shares of Euro Disneyland S.C.A. and Euro Disneyland S.N.C. until the fifth anniversary of opening day.
The Walt Disney Company The Walt Disney Company, headquartered in Burbank, California, was the parent, or sponsor, of the Euro Disneyland project. Disney derived 60% of its revenues from the development and operation of theme parks. Observers generally acknowledged that the Walt Disney Company dominated the theme-park industry by virtue of its size, customer franchise, and product leadership. Fifty million visitors attended Disney’s four theme parks annually, an average of more than 12 million per park. The next largest competing park attracted 4.6 million. Disney achieved dominance in the theme-park industry through the nature and quality of its facilities,14 its crowd-handling techniques, its use of entertainment culture, and its operational and marketing15 skills.
Financial Forecast and Valuation In a departure from its usual practice, Disney intended to publish a detailed financial forecast for the project in advance of the IPO of shares. Exhibit 2 presents a forecast of the operating 12
Euro Disneyland guaranteed a minimum of 9.13 million one-way journeys each year for a five-year period after opening day. Failing that, Euro Disneyland would make payments varying from four to seven French francs (measured in 1986 francs) per journey to the extent that actual traffic fell below 75% of the minimum agreed level. 13 This aimed to reimburse the Department of Seine-et-Marne for the FRF 200 million in expenditures for the primary and secondary infrastructure. The aggregate taxes would have to reach FRF200 million by 1999 (measured in 1986 francs). Any shortfall would be filled jointly by Euro Disneyland and the Republic of France. 14 Disney designed all of its own rides and attractions, using an in-house “Imagineering” department. That approach guaranteed uniqueness, consistency, and high product quality. Rides could be tailored to the unique needs of the theme area and of the entire park and designed especially for Disney’s high-volume attendance. Finally, the in-house approach guaranteed Disney exclusive ownership of the numerous design innovations (many of which were patented). 15 Disney aimed to maximize attendance at the parks and to achieve high occupancy at the Disney resort hotels. The company’s main marketing tools were public relations, media promotions, participant campaigns, national advertising campaigns, and special events. Some attractions and services were co-marketed with “participants,” such as Renault, Banque Nationale de Paris, and France Telecom, that had committed to sponsoring an attraction at Euro Disneyland. Special pricing and travel packages played a key role in maintaining demand throughout the year.
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statement and dividends by year from 1992 to 1996 and for each fifth year thereafter to 2016. This exhibit concludes with the total annual return to shareholders. Exhibit 3 presents the sources and applications of funds for the forecast period, evincing a substantial reliance on debt financing in the first few years followed by steady debt amortization. Exhibit 4 gives the debt/equity ratio by year for Euro Disneyland S.C.A. Disney made the unusual assumption that certain revenue items would grow at a greater rate than inflation. Magic Kingdom ticket prices, hotel rates, campsite rates, and lease rates in the retail/entertainment center were projected to grow at 6.5% versus 5% for inflation. Analysts wondered what might account for a 1.5% real growth rate over Disney’s forecast period. By comparison, ticket prices at Disney theme parks in the United States had grown at a real rate of 2.6% per annum since 1972. Based on the discounted cash flow (DCF) analysis of this forecast, S.G. Warburg, the prospective lead underwriter for the IPO, concluded that shares in Euro Disneyland S.C.A. would be worth approximately FRF70 each. Warburg’s analysis used a 12% discount rate.16 Warburg also conducted an extensive sensitivity analysis of the share values, the results of which are given in Exhibit 5.
Financial Transformation The Euro Disneyland project would be transformed in a two-stage process from an all-equity, wholly owned unit of the Walt Disney Company into a leveraged public firm, minority-owned by Disney. Exhibit 6 presents the balance sheet of Euro Disneyland S.C.A. and adjustments that resulted from the two-stage process. 1. Sale of ORAs, March 1989. To set in motion the complex project financing, the Caisse des Depôts et Consignations (the large pension-fund management company operated by the French government) required that Euro Disneyland prove its ability to sell shares of stock in 16
In estimating a discount rate for the project, S.G. Warburg acknowledged that “there are currently no quoted investment opportunities that are directly comparable to Euro Disneyland in the sense that they offer a direct and undiluted play on the theme-park industry.” The Walt Disney Company in the United States offered one comparison. Warburg identified two comparable companies in the French business community. The first was Club Mediteranée, the world leader in holiday villages, which like Euro Disneyland provided the concept of a “total” destination resort. Club Med and Euro Disneyland differed in that Club Med offered a globally diversified portfolio of destination resorts, whereas Euro Disneyland offered only one. The countries where the Club Med resorts were located, however, experienced greater weather and political risks than Europe. Warburg also compared Euro Disneyland with Accor, the leading French hotel operator. Accor’s assets were located primarily in France, and the properties were, on average, quite young. They therefore held the prospect of long lives and capital gains similar to Euro Disneyland. Warburg forecasted dividends and estimated an internal rate of return (IRR) for Disney, Accor, and Club Med. Against an estimated IRR of 9% for the Walt Disney Company, 11.3% for Accor, and 11.9% for Club Med, Warburg reasoned that the market would fix on a discount rate of 12% for Euro Disneyland’s return to share investors after April 1993. Warburg suggested that during the development period (October 1989 to April 1992) investors would look for an implicit return of 20% on their investments. This higher rate would reflect the development risks prior to opening and the fact that Euro Disneyland was not a going concern at the IPO.
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the project. Accordingly, in March 1989, Euro Disneyland arranged for four investor banks to purchase 510,000 shares of stock at FRF15 per share. Those banks were Banque Indosuez, Banque Nationale de Paris, S.G. Warburg & Co., and Caisse Nationale de Crédit Agricole. At the same time, EDL Holding Company purchased 465,000 shares at FRF10 per share.17 The investor banks and EDL Holding Company also purchased debt securities of Euro Disneyland, called Obligations Remboursables en Actions (ORA), which were to be repaid substantially from the proceeds of the forthcoming IPO.18 2. Initial Public Offering of Common Stock, Fall 1989. The sale of shares was expected to raise net proceeds of FRF5.73 billion. The proceeds would be used to repay the ORAs that were issued by the company in March 1989, and to support the funding of Phase IA and subsequent phases. Following the IPO, the Walt Disney Company would own 49% of the shares, the investor banks would own about 0.5%, and the public would own about 50.5%. Immediately following the IPO, the issued share capital of S.C.A. would be FRF1.7 billion, divided into 170 million shares of FRF10 each. Analysts noted that the Walt Disney Company would receive a substantial gain through this initial public offering. Disney’s shares, carried at the purchase price of FRF10 each, would be revalued at FRF72 each. Disney responded that the resulting total value of its shares (FRF5.997 billion) would be fair recognition of an already substantial investment of know-how, personnel resources, and cash expenditure, and an acknowledgment of Disney’s role as the risk-bearing sponsor of the project. As of September 30, 1989, the total assets of Euro Disneyland S.C.A. amounted to FRF4.833 billion. Disney’s projected net cash invested in the equity of Euro Disneyland S.C.A. would be approximately FRF833 million.19 Analysts puzzled over various cash flows that composed the return to the Walt Disney Company from the Euro Disneyland project: (1) royalties; (2) incentive fees (see Footnote 3); (3) 17
In March 1989, shareholders approved an increase in capital: 510,000 shares were issued at FRF15 per share to the investor banks (i.e., Banque Indosuez, Banque Nationale de Paris, S.G. Warburg & Co., and Caisse Nationale de Crédit Agricole). In addition, 465,000 shares were issued at par (FRF10) to EDL Holding Company. Prior to the IPO, shares were held as follows: EDL Holding Company (490,000), Banque Indosuez (204,000), Banque Nationale de Paris (153,000), S.G. Warburg & Co. (102,000), and Caisse Nationale de Crédit Agricole (51,000); for a total of 1,000,000 shares. On June 30, 1989, the share capital would amount to FRF10 million, comprising one million fully paid FRF10 ordinary voting shares. Shareholders’ equity would increase by FRF5.73 billion from the net IPO proceeds, plus FRF828.1 million from the conversion of Disney ORAs. In September 1989, 85,880,000 new shares would be issued in order to be subscribed in cash as part of the IPO. This would increase S.C.A.’s share capital by FRF858,000,000 to a total of FRF868,000,000. 18 In March 1989, S.C.A. completed a private placement of ORAs and stock purchase warrants that raised FRF2,129,950,000. EDL Holding Company subscribed for 828,100 noninterest-bearing ORAs at par with a nominal unit value of FRF1,000. Upon completion of the public equity offering, those ORAs would convert into 82,810,000 shares of S.C.A. The investor banks subscribed pro rata for a total of 861,900 ORAs at par with a nominal unit value of FRF1,500. Those ORAs bear interest at 12.5% per year. Upon completion of the IPO, the ORAs held by the investor banks would be redeemed in cash at their par value plus accrued interest. On June 30, this amounted to FRF13,469,000. The investor banks also received warrants to purchase between 310,000 and 3,260,000 additional shares, depending on the redemption date of their ORAs. 19 Disney’s cash investment in equity consisted of outlays for the initial 25,000 shares at FRF10 in 1985, another 465,000 shares at FRF10 in March 1989, and FRF828.1 million for the ORAs, also in March 1989.
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dividends from the S.C.A.; (4) depreciation tax shields from the S.N.C.20; (5) Disney’s participation in net profits; and (6) the reimbursement of FRF2.762 billion of development costs previously incurred by WDC. Exhibit 7 presents a forecast of those various cash flows to the Walt Disney Company based on the pro forma for the project financing. Because the extent of WDC’s future tax burden was unclear, this exhibit presents the total cash flows to WDC under two scenarios: (1) WDC pays no taxes on its returns from Euro Disneyland and (2) WDC pays taxes at the maximum 35% rate on all returns from Euro Disneyland. To provide a basis of comparison for the project-financing results, Exhibit 8 gives a forecast assuming no project financing but holding the capital structure constant.
Conclusion The transactions of 1989 would transform the Euro Disneyland project dramatically: from a private to a publicly owned project; from a simple governance and ownership structure to a complex one; from one stakeholder to many; from internal financing to external financing; and from an unlevered to a levered project. Analysts pondered the implications of that transformation. Most important, they asked why WDC brought many players into the project. Why should banks, equity investors, and the French government participate so massively? Who stood to gain what?
20
As stated earlier, because the lease payments received by the S.N.C. from the S.C.A. would just equal the S.N.C.’s financing expenses, the only source of income to the investors in the S.N.C. would come from the tax losses generated from depreciation of the Magic Kingdom theme park. This annual return would be a tax savings to the investors equal to the tax rate times annual depreciation.
-10Exhibit 1 Management and Control Structure of the Euro Disneyland Project
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Exhibit 2 Profit Projections (in millions of French francs; year begin April 1) 1992
1993
1994
1995
1996
2001
2006
2011
2016
Revenues Magic Kingdom1 Second theme park Resort and property development Total revenues
4,246 0 1,236 5,482
4,657 0 2,144 6,801
5,384 0 3,520 8,904
5,853 0 5,077 10,930
6,415 3,128 6,386 15,929
9,730 4,565 8,133 22,428
13,055 6,656 9,498 29,209
18,181 9,313 8,979 36,473
24,118 12,954 5,923 42,995
Operating expenses Magic Kingdom1 Second theme park Resort and property development Total operating expenses Operating income
2,643 0 796 3,439 2,043
2,836 0 1,501 4,337 2,464
3,161 0 2,431 5,592 3,312
3,370 0 2,970 6,340 4,590
3,641 1,794 3,694 9,129 6,800
5,504 2,644 5,210 13,358 9,070
7,384 3,695 6,369 17,448 11,761
10,175 5,020 5,753 20,948 15,525
13,097 6,830 2,211 22,138 20,857
Other expenses (income) Royalties Pre-opening amortization Depreciation Interest expense Interest and other income Lease expense Management incentive fees Total other expenses (income)
302 341 255 567 (786) 958 55 1,692
333 341 263 575 (788) 950 171 1,845
387 341 290 757 (768) 958 477 2,492
422 341 296 708 (778) 962 963 2,914
717 341 625 1,166 (790) 975 1,820 4,854
2,120 0 842 352 0 83 5,590 8,987
2,802 0 228 0 0 0 7,876 10,906
1
Includes Magic Kingdom Hotel.
1,085 0 658 920 (615) 1,242 2,747 6,037
1,509 0 723 623 (266) 882 3,916 7,387
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Exhibit 2 (continued)
Profit before taxation Taxation Net profit Dividends payable2 Tax credit or payment (avoir fiscal) Total return
1992
1993
1994
1995
1996
2001
2006
2011
2016
351 147 $204 275 0 $275
620 260 $360 425 138 $563
870 366 $504 625 213 $838
1,676 704 $972 900 313 $1,213
1,945 818 $1,127 1,100 450 $1,550
3,034 1,274 $1,760 1,750 536 $2,286
4,375 1,837 $2,538 2,524 865 $3,389
6,539 2,746 $3,793 3,379 1,908 $5,287
9,951 4,180 $5,771 5,719 2,373 $8,092
Source: Initial Public Offering Circular, Euro Disneyland S.C.A., September 1989, 36.
2
After transfers to legal reserve and deduction of a distributive share of 0.5% of net profits after tax payable to the associé commandité. In later years, dividends payable reflect the availability of cash. Dividends from 1992 through 1996 include distribution of profits carried forward from earlier years arising from interest income.
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Exhibit 3 Cash Flow Projections (in millions of French francs; years beginning April 1) 1992
1993
1994
1995
1996
2001
2006
2011
2016
351 597 990 1,938
620 604 693 1,917
870 631 2,950 4,451
1,676 638 2,950 5,264
1,945 967 0 2,912
3,034 658 779 4,471
4,375 723 1,146 6,244
6,539 842 0 7,381
9,951 228 0 10,179
310 0 31 51 0
326 0 139 145 24
293 2,950 62 103 540
313 2,950 0 198 781
334 102 0 450 1,600
335 101 0 205 1,872
471 134 0 339 1,584
658 178 5 0 440
114 196 0 0 0
Source of funds Profit before taxation Depreciation and amortization Issuance of long-term debt
Application of funds Capital expenditures Magic Kingdom Second theme park Resort and property development Acquisition of land Repayment of long-term debt
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Exhibit 3 (continued)
Loan to financing company Taxes paid Dividends payable Movement in working capital1 Movement in net liquid funds
1992
1993
1994
1995
1996
2001
2006
2011
2016
0 139 275 806 (779) $353
(24) 414 425 1,449 (668) $(200)
(47) 519 625 5,045 516 $(78)
(71) 858 900 5,927 997 $334
(94) 971 1,100 4,463 1,548 $(3)
(259) 1,280 1,750 5,284 683 $(130)
0 1,843 2,524 6,895 100 $(551)
0 2,746 3,379 7,406 45 $20
0 4,180 5,719 10,209 57 $27
Source: Initial Public Offering Circular, Euro Disneyland S.C.A., September 1989, 37. 1
The yearly movement in working capital may be analyzed as follows: 1992 1993 (Increase) decrease in resort and property-development inventories due to funding of projects and sales (979) (678) 10 Increase in current liabilities 200 $(779) $(668)
1994
1995
1996
2001
2006
2011
2016
507 9 $516
785 212 $997
1,527 21 $1,548
656 27 $683
65 35 $100
0 45 $45
0 57 $57
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UVA-F-1034
Exhibit 4 Forecasted Debt/Equity Ratio for Euro Disneyland S.C.A.
2.1 2 1.9 1.8 1.7 1.6 1.5 1.4
Debt/ Equity Ratio
1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1989
1993 1991
1997 1995
Source: Research Report, S.G. Warburg, 106.
2001 1999
2005 2003
2009 2007
2013 2011
2016
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UVA-F-1034
Exhibit 5 Returns to Investors and Sensitivity Analysis (in French francs) The table below illustrates the projected returns to the investor based on the assumptions previously described and demonstrates the effect of variations on those returns with certain key assumptions. At the end of the period, the company is assumed to be capitalized at 12.5 times the net profit available for distribution in the year ending March 31, 2017.
1992 Company’s projections Reduced attendance assuming 10 million visits in the 1st year of operations of the Magic Kingdom Increased attendance assuming 12 million visits in the 1st year of operations of the Magic Kingdom Reduced per capita spending assuming per capita spending at both theme parks is lower by 10% Increased per capita spending assuming per capita spending at both theme parks is higher by 10% Delay assuming a 6-month delay in the opening of the Magic Kingdom Increased construction costs assuming costs of construction of Phase IA are higher by 10%
1
Internal Rate of Return over Period to 2017 Net Dividend per Share; years beginning April 1 Net Value in Issue Price 1995 2001 2006 2011 2016 April 19931 (FRF72)
1.6 1.6
5.3 5.3
10.3 9.4
14.8 13.8
19.9 18.4
33.6 31.7
131 119
13.3% 12.7
1.6
5.3
11.1
15.9
21.3
35.6
141
13.8
1.6
4.8
8.9
12.9
17.4
30.3
112
12.3
1.6
5.3
11.6
16.6
22.3
37.0
147
14.l
1.6
4.5
9.7
12.6
21.8
33.6
122
12.8
1.6
5.3
10.2
15.1
20.4
34.0
129
13.2
Net value in April 1993 reflects gross dividends per share and assumed residual value in 2017 discounted at an illustrative rate of 12%.
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UVA-F-1034
Exhibit 5 (continued)
1992 Reduced resort and property-development income assuming that income from all resort and property development is lower by 10% Increased resort and property-development income assuming that income from all resort and property development is higher by 10%
Internal Rate of Return over Period to 2017 Net Dividend per Share; years beginning April 1 Net Value in Issue Price 1995 2001 2006 2011 2016 April 19932 (FRF72)
1.6
5.3
9.8
14.3
19.3
33.0
126
13.0
1.6
5.3
10.8
15.4
20.4
34.3
135
13.5%
Source: Initial Public Offering Circular, Euro Disneyland S.C.A., September 1989, 38–39. 2
Net value in April 1993 reflects gross dividends per share and assumed residual value in 2017 discounted at an illustrative rate of 12%.
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UVA-F-1034
Exhibit 6 Pro Forma Balance Sheet of Euro Disneyland S.C.A. (in thousands of French francs)
Fixed assets Intangible assets Tangible assets Deposits Total fixed assets Construction in progress Current assets Accounts receivable Cash and investments Total current assets Deferred charges Total assets
Actual (Dec. 31, 1988)
Project Devel. Activities
0 0 0 0 0
8,644 475,630 4,232
0 251 251 0 251
Sale of ORAs and Shares
Expected (Sept. 30, 1989)
Repay. and Conversion of ORAs
Exercise of Warrants
IPO
8,644 475,630 4,232 488,506 1,748,653
1,748,653 761,994 (1,010,518)
2,133,250
710,460 2,699,095
2,133,250
761,994 1,122,983 1,884,977 710,460 4,832,596
Pro Forma (Sept. 30, 1989) 8,644 475,630 4,232 488,506 1,748,653
(1,292,850)
(1,292,850)
5,730,000
0
5,730,000
761,994 5,560,133 6,322,127 710,460 9,269,746
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UVA-F-1034
Exhibit 6 (continued) Actual (Dec. 31, 1988) Shareholders’ equity Share capital Share premium Accumulated losses Current period net income Subtotal ORAs and warrants Deferred taxes Current liabilities Payable to Euro Disney S.A. Other accounts payable Total current liabilities Deferred revenues Total equity & liab.
250 25 (24) 0 251 0 0 0 0 0 0 251
Project Devel. Activities
Sale of ORAs and Shares
Expected (Sept. 30, 1989)
Repay. and Conversion of ORAs
9,750 2,550
10,000 2,575 (24) 7,333 19,884 2,120,950 4,688
828,100
7,333 2,120,950 4,688 1,908,567 537,124 241,383 2,699,095
2,133,250
1,908,567 537,124 2,445,691 241,383 4,832,596
Exercise of Warrants
IPO
3,100 1,550
858,800 4,866,550
(2,120,950)
(1,292,850)
4,650
5,725,350
Pro Forma (Sept. 30, 1989) 1,700,000 4,870,675 (24) 7,333 6,577,984 0 4,688 1,908,567 537,124 2,445,691 241,383 9,269,746
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UVA-F-1034
Exhibit 7 Projected Cash Flows to the Walt Disney Company Assuming Euro Disneyland Is Financed as Proposed (in millions of French francs) Base Fees 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1
197.4 244.8 320.5 393.5 573.4 614.1 657.6 704.1 754.0 807.4 851.2 897.4 946.1 997.4 1,051.5 1,099.3 1,149.2 1,201.4 1,256.0
Incentive Fees
55.0 171.0 477.0 963.0 1,820.0 1,976.2 2,145.8 2,329.9 2,529.9 2,747.0 2,948.9 3,165.6 3,398.2 3,647.9 3,916.0 4,204.9 4,515.1 4,848.2 5,205.9
Royalties
302.0 333.0 387.0 422.0 717.0 778.9 846.2 919.3 998.7 1,085.0 1,159.0 1,238.0 1,322.5 1,412.7 1,509.0 1,615.2 1,728.8 1,850.4 1,980.6
Profit Particip.
1.0 1.9 2.5 4.8 5.6 6.1 6.7 7.3 8.0 8.8 9.6 10.4 11.4 12.4 13.5 14.5 15.5 16.6 17.7
Dividends
137.0 281.0 419.0 606.0 775.0 850.1 932.6 1,023.0 1,122.2 1,231.0 1,306.9 1,387.4 1,472.9 1,563.6 1,660.0 1,843.6 2,047.6 2,274.1 2,525.6
S.N.C. Return
Reimb Payments
(340.0)
1,909.0 360.0 493.0
61.3 61.3 61.3 61.3 61.3 61.3 61.3 61.3 61.3 61.3
Invest. Outlay
Cash Flow to Walt Disney Company (Untaxed) (Maximum Tax1)
(833.0)
(833.0) 1,569.0 360.0 1,246.6 1,093.0 1,667.3 2,450.6 3,952.3 4,286.7 4,650.1 5,045.0 5,474.1 5,940.5 6,275.5 6,698.8 7,151.0 7,634.0 8,150.0 8,777.4 9,456.2 10,190.7 10,985.9
This takes into account the fullest possible tax burden imposed on all cash inflows at the rate of 35% per year.
(833.0) 900.9 234.0 810.3 710.5 1,083.8 1,592.9 2,569.0 2,786.4 3,022.6 3,279.3 3,558.2 3,861.3 4,079.1 4,354.2 4,648.2 4,962.1 5,297.5 5,705.3 6,146.5 6,624.0 7,140.8
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UVA-F-1034
Exhibit 7 (continued)
2011 2012 2013 2014 2015 2016
Base Fees
Incentive Fees
Royalties
Profit Particip.
Dividends
1,313.0 1,356.9 1,402.3 1,449.2 1,497.7 1,547.8
5,590.0 5,986.7 6,411.6 6,866.7 7,354.1 7,876.0
2,120.0 2,241.6 2,370.2 2,506.2 2,650.0 2,802.0
19.0 20.7 22.5 24.5 26.6 29.0
2,805.0 2,989.8 3,186.8 3,396.7 3,620.5 3,859.0
S.N.C. Return
Reimb Payments
Invest. Outlay
134,281.73
Cash Flow to Walt Disney Company (Untaxed) (Maximum Tax2) 11,847.0 12,595.8 13,393.5 14,243.3 15,148.9 150,395.5
7,700.6 8,187.3 8,705.8 9,258.2 9,846.8 97,957.1
Source: Offering Circular, Euro Disneyland S.C.A., September 1989, and case writers’ analysis.
2
This takes into account the fullest possible tax burden imposed on all cash inflows at the rate of 35% per year.. The terminal value was estimated by capitalizing the sum of base fees, incentive fees, royalties, profit participation, and dividends at a rate of 12%, S.G. Warburg’s estimate of a discount rate appropriate for this project. Estimated this way, the terminal value assumes no growth after the investment horizon. 3
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UVA-F-1034
Exhibit 8 Projected Cash Flows to the Walt Disney Company Assuming Euro Disneyland is a Fully Integrated Internal Project (in millions of French francs)
Oper. Income 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1
2,043.0 2,464.0 3,312.0 4,590.0 6,800.0 7,203.3 7,630.4 8,082.9 8,562.2 9,070.0 9,553.8 10,063.3 10,600.1 11,165.5 11,761.0 12,432.6 13,142.5 13,893.0 14,686.4
Amort. and Deprec.
700.0 684.6 680.9 817.2 949.4 946.2 940.5 932.4 922.2 910.3 896.8 886.6 879.7 876.2 876.0 879.4 881.6 882.6 882.5
Pretax income is taxed at 35% per year.
Net Interest Expense
(219.0) (213.0) (11.0) (70.0) 376.0 360.6 345.8 331.6 318.0 305.0 314.8 324.8 335.2 345.9 357.0 356.0 355.0 354.0 353.0
Taxes1
546.7 697.3 924.7 1,345.0 1,916.1 2,063.7 2,220.5 2,386.6 2,562.7 2,749.1 2,919.8 3,098.2 3,284.8 3,480.2 3,684.8 3,919.0 4,167.1 4,429.8 4,707.8
Capital Expend.
+/− Debt
3,800.0 5,100.0 5,100.0 392.0 610.0 3,408.0 3,461.0 886.0 830.5 778.4 729.6 683.9 641.0 692.6 748.3 808.6 873.7 944.0 922.4 901.4 880.8 860.7
2,767.5 2,767.5 2,767.5 990.0 669.0 2,410.0 2,169.0 (1,600.0) (1,498.6) (1,397.2) (1,295.8) (1,194.4) (1,093.0) (962.0) (831.0) (700.0) (569.0) (438.0) (438.4) (438.8) (439.2) (439.6)
Terminal Value
Residual Cash Flow to WDC (1,032.5) (2,332.5) (2,332.5) 2,313.3 2,038.7 1,400.3 2,023.0 2,021.9 2,449.9 2,888.6 3,339.3 3,803.2 4,281.9 4,664.7 5,061.0 5,471.5 5,896.7 6,337.2 6,796.8 7,280.3 7,789.3 8,325.3
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UVA-F-1034
Exhibit 8 (continued)
2011 2012 2013 2014 2015 2016
Oper. Income
Amort. and Deprec.
Net Interest Expense
15,525.0 16,469.3 17,471.1 18,533.8 19,661.1 20,857.0
881.4 879.4 869.8 854.6 834.9 812.1
352.0 43.4 5.3 0.7 0.1 0.0
Taxes2
Capital Expend.
+/− Debt
5,002.1 5,441.3 5,808.6 6,187.5 6,589.1 7,015.7
841.0 688.8 564.2 462.1 378.5 310.0
(440.0) (352.0) (264.0) (176.0) (88.0) 0.0
Terminal Value
112,760.83
Residual Cash Flow to WDC 8,889.9 9,943.8 10,829.0 11,707.5 12,605.4 126,292.1
Source: Pro forma adjustment of projections contained in the Offering Circular, Euro Disneyland S.C.A., September 1989.
2
Pretax income is taxed at 35% per year. The terminal value was estimated by capitalizing the residual cash flow of the project at 12%, S.G. Warburg’s estimate of a discount rate appropriate for this project. Estimated this way, the terminal value assumes no growth after the investment horizon. 3
