The Walt Disney Company (DIS) is planning to acquire the rest of its struggling Paris theme park. Currently, the company owns 38.9% of Disneyland Paris, 10% is owned by the Saudi business tycoon Prince Al Waleed Bin Talaal while the rest is listed on the Paris Euronext exchange. Currently, Disney is the sole owner of its two American parks, in Florida and California, while the rest are joint ventures. Disneyland Paris is one of the continent's favorite tourist destinations and attracted 15.6 million customers in 2011 but overall, it has been an unprofitable venture with total five year's losses of $277.8 million.
For the year ending October 1, 2011, the 30 year old Disneyland Paris' debt totaled $1.9 billion, a decline from $2.1 billion in 2010 but significantly higher than the Hong Kong Disneyland Resort with $330 million. Its performance was so bad that it again failed to make the $26.4 million interest payment to its primary lender, the state owned CDC bank and the $32.7 million royalty payment to Disney. This was particularly disappointing for investors because after three decades of operations this should not be the case. A similar situation is brewing with the Hong Kong park as well, a joint venture with the local government. Its chronic lack of profitability is trying the patience of the Hong Kong government that has received no return on its investment to this point.
To make the acquisition lucrative, Disneyland Paris will have to reduce its massive debt, otherwise it will just keep piling up losses. Euro Disney's CEO Philippe Gas had earlier stated in 2010 that the company plans to get rid of at least 25% of Paris' debt by 2013, which will make the buyout more attractive, ~ $564 million. As of June 2012, the parent had more than $4.3 billion in cash and short term investments. Due to the success of the Avengers and the cash cow that is ESPN, the profits for the quarter ending June 30 rose by 31% to $1.8 billion.
Walt Disney's subsidiary Euro Disney, which owns Disneyland Paris, has a total market value of just $338 million. While Disney can certainly afford the buyout the question is it worthwhile to do so? If the Paris subsidiary manages to reduce its debt levels and return to paying royalty and management fees to Disney then it should become a likely investment target. The theme park is a magnet for tourists from across Europe. It managed to attract record guests in 2011, a time when Europe was just beginning to feel the full brunt of the debt crisis. How is that playing out now that the entire PIIGS periphery of the Eurozone has imploded economically? This could be a case of Disney buying back its own assets at distressed levels.
With the Euro having bottomed in the medium term but still relatively cheap versus the Dollar tourism should remain relatively cheap. I would expect the CurrencyShares Euro ETF (FXE) to do very well in the medium term (12-18 months) as so much of the turmoil and bad news has been priced into it at this point. How much lower does one really think the Euro versus the equally ugly U.S. Dollar can go? Europe's economy will likely worsen in the short-run but the medium to longer term holds promise with a Euro that is stronger versus the Dollar but weaker against most everything else. This will attract foreign capital and tourists intrigued by lower European wages for that is the real effect of the Troika's demand for austerity measures.
For Disney this means that acquiring and shoring up Disneyland Paris is a good long-term plan, buying up their asset when the Euro is cheap and preparing it, relatively debt free, for when the economy recovers and is full of foreign tourists spending relatively stronger currencies.
In its third quarterly results, Disney's revenue increased by 4% year-on-year to $11.1 billion while profits were $1.8 billion. The Parks and Resorts segment increased revenues by 9% to $3.1 billion while income was up 21% to $630 million. Since the beginning of the year, Disney's shares have gone up by 39%.
On the other hand, its theme-park rival, Six Flags Entertainment Corp (SIX), has also seen its stock increase by 40.7% year to date on the strength of quarterly revenue growth of 10.7% to $374.9 million. Six Flags has been consistently outperforming the indices for quite some time and has become relatively more expensive. While Disney uses its media content and distribution to sell its Dream Factory image that translates into its iconic tourist parks, Six Flags operates exclusively in leisure parks which have higher fixed costs and more susceptible to down turns in the economy. Given the situation in the U.S., Six Flags has done an outstanding job by improving revenues and profits.
But the sector, overall, is looking at a very difficult medium term in the west. Massive debt hangover will keep growth slim if there is any at all. For Disney between the challenges facing Disneyland Paris and the growing concerns over the Hong Kong park becoming a political football it calls into question the entire Big Recreation industry. With gambling revenues in Macau having reached a peak in the near term the entertainment/tourist industry is a harbinger of bigger structural problems and I wouldn't be buying Disney for its ability to attract people to spend thousands on a vacation when they are having a hard time paying for cable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.