Euro Disney Activist Play With 3 Times Upside Potential by Jan Martinek, Central European Capital Partners
Walt Disney took Euro Walt Disney shareholders for a scary ride. The Euro Walt Disney shareholders now want their money back.
Walt Disney (NYSE:WALT DISNEY ) is a majority shareholder in Euro Disney (EDL.PA) (OTCPK:EUDSF), the operator of the Disney park near Paris. It is the number one tourist spot in Europe.
Despite the high annual visitor numbers, the park has not been making money. In fact, Walt Disney has been the only party that has been making money from Euro Disney. Walt Disney has been collecting $110 – 125 million in annual fees from Euro Disney. In total Walt Disney collected from Euro Disney over €2 billion. But that is not all. Almost all park constructions have been done by Walt Disney subsidiaries. The contracts are said to be quite rich and helped to improve Walt Disney profitability further. All this is now a subject of litigation.
A scary ride
The shareholders were laughing at the start
Since the beginning, Walt Disney has been managing the park. It was a tough ride for its shareholders, who financed the park construction. Since 1990, the Walt Walt Disney share price went up five times. During the same period, the Euro Walt Disney share price went down by 99%. At the peak, the market cap of Euro Walt Disney was at USD 3.3 billion. All that money were burnt.
Source: Wall Street Journal article
After driving the park to the ground and wiping out the other people’s money, Walt Disney decided to step in during 2015. Through a capital increase, debt for equity swap and a tender offer for remaining shares the Walt Disney increased its stake in the park by 37% to 76.7%.
The smart takeover took place in several steps:
- Capital increase – existing shareholders, could subscribe 9 new shares at €1 per each share they owned. The rights issue raised €423 million.
- Debt for equity swap – Walt Disney swapped €600 Million debt provided to Euro Walt Disney ney for shares priced at €1.25.
- Tender offer – Walt Disney launched an offer for the remaining shares of Euro Disney at €1.25 per shares. After the tender, Walt Disney allowed the other shareholders to repurchase part of the tendered shares so that they can retain their stakes.
After the takeover the shareholding was as follows:
Walt Disney 76.7%
Prince Alwaleed 10%
CIMA and other shareholders 13.3%
When approving the tender offer, the Board of Euro Disney commissioned a fairness opinion from a French firm LEDOUBLE. In February 2015, the LEDOUBLE confirmed the fairness of the mandatory tender offer price of €1.25 per share.
Euro Disney – The litigation
The offer resulted in litigation. The opportunity brought in the activist investor community lead by Charity Investment Asset Management CIMA fund.
Besides the litigation on the offer, they do not like the fact, that while managing the park, Walt Disney managed to burn $3.5 billion of other shareholder money while making around $110-125 million per year in royalties and fees and profiting from the park construction and maintenance.
The core of the problems lies in the Euro Walt Disney management. CIMA asserts that Walt Disney maneuvered Euro Disney management into a clear conflict of interest. They might be motivated to act for the benefit of Walt Disney at the expense of the other Euro Disney shareholders. As an example, all Euro Disney employees are granted shares in Euro Disney, but the management committee gets shares of Walt Disney.
CIMA fund claims that shareholders were not told about the true value of the Euro Disney assets and the health of their business. The Fund is also demanding the repayment of €930 million ($1.05 billion) to Euro Disney, in repayment of “exorbitant” and “abusive” royalties and other fees paid to the U.S. firm
CIMA filed a criminal complaint against Walt Disney and Subsidiaries alleging misuse of corporate assets, filing false accounts and providing false information.
A civil case against Walt Disney subsidiaries, demanding the repayment of €930 million to Euro Disney, was filed in the Commercial Court of Meaux in October.
CIMA is also appealing to the French Supreme Court against the approval of the Walt Disney offer to purchase Euro Disney shares by the French regulator.
CIMA claims that the other shareholders were misled. In particular, CIMA criticizes the Euro Disney announcement from January 2015 (before the recapitalization) that the attendance is expected to decrease by 2.6 million in 2015 and the earnings are expected to go down by 45% by 2023. These ominous expectations were the main declared basis Euro Disney making a provision against the park subsidiary and therefore for the whole recapitalization. The results were quite different – the earnings went up by 25% on the previous year, and the attendance was up by 600,000 in the previous year. One could argue that such statements and actions could be a confirmation of the management´s conflict of interest. I have been in numerous litigations, and it is exactly such details that change the court’s view on the matter.
Valuation gap
CIMA commissioned report by French valuer Thierry Bergeras that valued the company at €3.7 per share which is three times higher than the Euro Disney valuer LEDOUBLE.
The major difference is related to the 2,230 hectares of land near the park that is partly developed and partly in development. Euro Disney expert firm appointed during the recapitalization didn’t value this park’s land. CIMA commissioned expert valuer establishes the value of the real estate development at €2.7 per share.
Under the agreement with the French state, the public institution EPA FRANCE is in charge of acquiring empty plots. Euro Disney has an option right to request a transfer of the plots to the Euro Disney group at a fixed price of €1.69/m2 plus the cost of the secondary infrastructures and a 25% share of the EPA’s structural expenses. CIMA believes that these options have significant value. Euro Disney claims that value is not material, due to accounting issues (options have a defined maturity, and therefore could expire, which has never happened, yet) and significant costs to develop the land incurred by Walt Disney subsidiary.
Further, the €3.7 per share valuation does not include valuation of Villages Nature (1,210 recreational cottages and 520 apartments built on 180 hectares) due to insufficient information available to CIMA commissioned expert valuer. The value of the project is undoubtedly material, and therefore, €3.7 per share valuation is most likely on the lower end. Today, the shares trade at €1.24 per share.
Summary
The free float of Euro Disney is 13.3%. At current market price, the free float is €125 million, which is less than the profits Walt Disney annually collects from Euro Disney. It is irrational for Walt Disney not to take Euro Disney private. It is just a matter of time. Given the above valuation of the real estate business, it is unlikely that Euro Disney freeze-out offer would go below the current €1.24 per share.
Meanwhile, 2017 is the 25 anniversary of the Euro Disney opening. The management is planning new attractions and a big PR sales push. The performance is likely to improve, which might drive the valuation higher. The two points above should serve as a downside protection for investors.
CIMA is trying to establish, that the contractual arrangements between both companies have been abusive and is seeking for the return of € 930 million taken out by Walt Disney. The amount is equal to current market capitalization of Euro Disney. If granted the Euro Disney would benefit from returned cash as well as amended business model that would change the profitability of the company for the future. Brighter future might be finally on the horizon for the Euro Disney shareholders.
