Corporate Finance

Mortgaging the Mouse

Amid turnstile heroics at Euro Disney, the villain is still heavy debt. What now for its new CFO?
Victoria GriffithAugust 1, 1997

As the new chief financial officer of Euro Disney, Philippe Misteli becomes a character in a story with all the potential for terror– or a fabulously happy ending–typically found in an animated Disney fairy tale.

The terror, in this case, reflects Euro Disney’s debt load of $2.6 billion (15 billion French francs), an onerous level for a company with a book value of less than $1 billion (Ffr5.8 billion). Operations at its primary asset, the Disneyland Paris theme park, at last are flourishing after a monumentally rocky start. In April it celebrated its fifth anniversary–Disney-style, with Mickey Mouse parades galore –on a genuinely upbeat note; attendance surged from 8.8 million in 1994 to 11.7 million last year. And for the reporting year ending this September, analysts have been forecasting 12.5 million– more than twice the number of tourists the Eiffel Tower attracted last year.

But mounting financial obligations are preventing the company from reflecting the turnaround in the earnings column. For the six months ended March 31, in fact, Euro Disney reported that its net loss widened to $36 million (Ffr210 million), even as revenues jumped 12.5 percent.

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“There’s an odd dichotomy here, in that I’d put a strong buy on the company for its operations, but a strong sell for its finances,” says Jean-Baptist Delabare, an analyst formerly with UBS.

That there is still a Paris theme park around to debate about, of course, reflects the presence of a fairy godmother in this story: Walt Disney Co., owner of a 39 percent controlling interest in Euro Disney. And she wields a wand that many a CFO would love to have available in the event of financial reversals. Like other deep-pocketed corporations launching expensive start-up ventures–Boeing with its 777 airliner or Gannett with USA Today, for example–the California entertainment concern has managed to eliminate doubt that it will stand behind its creation, including with a financial bailout, if necessary.

It was not always thus. When Philippe Bourguignon first came to Euro Disney in 1993 as chairman, there was talk that “rich Uncle Walt” in America might be looking for a way to extricate itself from what appeared to be impending financial disaster. Disney Co. chairman Michael Eisner had dubbed Euro Disney “our first real financial disappointment”; attendance was continuing to run far below original forecasts; and a staggering debt of Ffr24 billion severely limited Bourguignon’s options. The operational strategy he designed with then-CFO Michael Montgomery included a 20 percent cut in admission prices, and introduction of wine and beer service at park restaurants, reflecting French tastes.


But their greatest coup may have been the financial plan that staved off a bankruptcy filing long enough for Paris Disneyland to start living up to expectations at the turnstiles. The key ingredient was a restructuring of Euro Disney debt that allowed it to operate largely unencumbered by its financial obligations for several years. The restructuring included a three-year holiday on interest payments, and a moratorium on management and royalty fees due to Disney Co.

The financial redesign, analysts say, has allowed investors to glimpse at last the money- making prospects that Disneyland Paris has always represented. Euro Disney says per- customer spending at the park is now up, though its policy is to not say how much is spent. Since 1994, its hotel occupancy has swelled from an anemic 60 percent to an outstanding 72 percent–well above the French average. And the new operating strategy has received a major boost from the strengthening European economy, particularly in Britain, which accounts for a large proportion of its business.

Next year could bring another bonanza, analysts predict, because of the new tunnel under the English Channel and a new commuter- rail service being promised by the French government, and because Paris will host events for the World Cup soccer tournament. The theme park is expected to benefit heavily from the tourist spillover.

Like the offscreen presence of a dastardly villain, though, the debt load continues to cast a long, eerie shadow over the group–and CFO Misteli in particular. And the situation is about to worsen dramatically: the 1994 restructuring essentially pushed Euro Disney’s obligations further out into the future, making the next few years a time of reckoning. The interest, of course, has continued to accrue, even though the company has not been making full payments.

“It’s a question of, if the tree falls in the forest and no one hears it, did it really fall?” says Thomas Lys, who teaches mergers and acquisitions at Northwestern University’s J.L. Kellogg Graduate School of Management. “Of course it did. The debt may not have affected profits for a few years, but it didn’t go away.”

In 1996, Euro Disney began making payments on the interest. The payments have been structured to grow over a three-year period; in 1998 they will kick in in full, and the debt will begin to amortize. To make matters worse, 1999 is the year Walt Disney Co. is to start receiving management and royalty fees, though at a 50 percent rate for 10 years. Euro Disney will owe the parent company the following: management fees amounting to 1 percent of total revenues; 5 percent of royalties and entrance fees; and 2.5 percent on merchandise and food. Royalty payments and management fees alone will come to about $34 million. Another black day on Euro Disney’s calendar: October 1, 2001. That’s when nearly $603 million (Ffr3.5 billion) of convertible bonds, also issued as part of the restructuring, will mature. Unless equity prices rise substantially, analysts say creditors are extremely unlikely to convert the debt to equity.

This increasingly precarious situation has analysts predicting another major restructuring. “Something has to give over the next 18 months,” says Jeff Summers, a director and head of research at the London-based debt- trading group Klesch & Co. “The situation as it is, is untenable.”

Euro Disney says Misteli is still too new in his job to comment, and doesn’t make other senior executives available. But one deal almost certainly in the works relates to the Disney Co. royalty payments: either an extension of the holiday, or a further reduction in the amount due. Analysts for the Burbank, California, company are so certain Euro Disney will arrange not to pay the hefty fees in 1999, that they have left them out of their forecasts. “We’re not including those figures at all, since we think they are very unlikely to be paid,” says Jessica Reif Cohen, who covers Walt Disney for Merrill Lynch. (Others think a flat forgiveness isn’t likely, noting the grief Disney took from shareholders when it dismissed high-priced president Michael Ovitz a year after recruiting him for the job–paying Ovitz a $90 million severance package.) Certainly, further talks with the major creditor banks, including Banque Nationale de Paris, Indosuez, and Credit Agricole, seem to be in the cards.


Misteli is said to be toying with other potential solutions as well, including a sale of Disneyland Paris hotel assets: the five- star hotel at the entrance and the Davy Crockett Ranch. When Euro Disney was created, it said its hotel participation would be temporary, and that it would look to shed the majority of those assets in the long run (though it plans to keep the operational management intact). “It’s no secret that our hotels are up for sale,” says Philippe Ravanas, a spokesman for the group. “The question is, who will want to buy them?”

Jeff Summers, who figures the hotels need to fetch at least Ffr4 billion to Ffr5 billion to make financial sense for the company, thinks he’s identified a potential answer: HRH Prince Alwaleed Bin Talal Bin Abdulazid Al Saud, a wealthy Saudi financier who has a 24 percent equity stake in Euro Disney. Alwaleed recently bought the George V in Paris, which could indicate a willingness to accumulate strategic hotel investments in France, Summers points out. Because of Alwaleed’s substantial ownership in Euro Disney, an equity-asset swap could be part of the package. While Euro Disney says rising occupancy makes the hotels a more attractive asset, Ravanas casts doubt on the suggestion that the Saudi is about to make an offer. “If Prince Alwaleed were interested,” says Ravanas, “I think we’d be the first to know.”

Another possibility is a traditional rights issue, although an obstacle to this would be the poor performance of Euro Disney’s stock so far. After a high of over Ffr70 in 1992, the per-share price of a Euro Disney share on the French exchange sank to Ffr8.7 at the end of 1994, and in recent weeks stood at Ffr9.15. “They can do a rights issue, but the question is, will we want to buy?” says analyst Delabare. Perhaps preferred stock could sweeten the deal for investors, by guaranteeing holders the first crack at dividends.

Refinancing the company’s debt again is yet another option. The trouble there: interest on existing debt is about 6.75 percent, and it’s uncertain if Euro Disney can win a much lower rate. Moreover, a penalty fee–the company won’t reveal the exact amount, but says it is hefty–would be charged were the group to prepay. Convertibles are an option here, since that would allow debtholders to take an equity stake further down the road, after the group sorts out its finances. Much will depend on market sentiment over the next 18 months.

Help for Misteli may come from cash flows kicking in soon from new sources of revenue for Euro Disney. An entertainment complex with cinemas just opened, operated for it by the French entertainment group Gaumont, and a shopping mall is being built just outside the park. These projects could help boost attendance and length of stay, since there currently is little to do in the area at night.


Lifting cash generation enough to rid Euro Disney of debt, however, would probably require investment in an even bigger project. “I think they have to decide if they want to go for the big one, which would mean a second theme park alongside the present one,” says Delabare. Such a venture, of course, would almost certainly require more debt financing– creating something of a vicious cycle–and would do nothing to increase immediate cash flow, since a new park would take years to complete.

A case of musical managers makes Euro Disney’s financial riddles even more intriguing. Bourguignon left earlier this year to run Club Med resorts, and was replaced by Gilles Pelisson. In May, Misteli succeeded Xavier de Mezerac, who had succeeded Michael Montgomery as CFO soon after the restructuring. (Montgomery, a former Disney Co. treasurer, became chief financial strategist for the Dreamworks SKG enterprise of Steven Spielberg, Jeffrey Katzenberg, and David Geffen.) A Franco-Swiss citizen, Misteli was formerly vice president of strategy at the U.K. consumer-products giant Unilever, where his 13- year career included a stint as chief financial officer for Quest, the group’s cosmetics division. Investors and analysts are still waiting to see if the management changes will cause any shift in strategy.

As in Walt Disney’s classic films, however, the clouds could suddenly part at the darkest hour–bathing the characters happily ever after in sunshine and profits. Now that its operational future looks rosier, the experts believe, it is less likely than ever that the mighty California company or Euro Disney’s creditor banks would abandon the park. “And bankruptcy would be very expensive,” says Kellogg’s Lys, “because there’s no ‘second- best’ use for those assets.”

Some observers, then, think Misteli’s real challenge may be to bring that Disney fairy godmother in sooner, rather than later, to wave the financial magic wand.

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