Is there magic in Madame Tussauds owner Merlin as it prepares for £3bn London float?
The runaway success of the Royal Mail float appears to have given Merlin Entertainments the nudge it needed.
Earlier this week the British owner of Alton Towers, Legoland and Madame Tussauds unveiled plans for a £3bn London listing.
This will include the sale of shares to private investors, who will receive 10-15 per cent of the £200m-worth of stock being issued.
Lots to smile about: Merlin's new ride, the Smiler, at Alton Towers
As an added incentive to buy, Merlin is offering would-be shareholders money off the cost of annual passes worth up to £107. You have to buy £1,000-worth of shares to qualify for this perk.
Gimmicks like this are fine, but they can’t magically transform a poor investment into a good one.
The 1990s float of Euro Disney is the car crash introduction to the markets Merlin will hope to avoid. And there is every reason to believe it will. Merlin looks well run, has a thriving and growing visitor base and possesses what looks like a coherent business plan.
In fact the worry among the sceptics is not that Merlin is the next Euro Disney (now Disneyland Paris), but that it has been dressed up for sale to look more attractive than it actually is.
Often cited is the case of private equity-owned Debenhams, which was refloated in May 2006 with net debts of £1.2billion and a seriously under-invested retail estate. What followed the IPO was not pretty.
Merlin’s debts also stand at around £1.2billion, but they will drop to £1billion when the group lists in the middle of next month.
The issue is not the size of the liability but the company’s ability to repay what it owes. And in that regard Merlin is fairly conservatively geared, with debts of two and a half times its forecast earnings before interest, tax, depreciation and amortisation (EBITDA).
Its cash generation is such that it can comfortably meet its loan repayments while investing a significant sum of money in its 99 visitor attractions. Last year its net operating cash flow was £348million while its capital expenditure was £163million.
The business itself, while private equity backed, is hardly a quick flip. It has been built by chief executive Nick Varney and his team over 14 years. In that time the business has grown and last year 53million visitors walked through the gates and doors of its parks and attractions, placing it second only to Walt Disney globally.
But how much is Merlin worth? Reports suggest the group will be valued at around £3bn on listing next month, or £4billion including debt. The latter figure is what analysts call the enterprise value of the company. And this number will help us decide whether Merlin’s shares are a bargain or not.
The experts brought in to price the shares will look at a benchmark snappily referred to as EV/EBITDA.
It is worked out by dividing the enterprise value of the company (£4billion) by the forecast earnings before tax (circa £400million). On this basis Merlin is worth around 10 times forecast EBITDA. Firms such as parks giants Six Flags, Cedar Fair, Sea World and the granddaddy Walt Disney tend to trade on an average 9.5 times EBITDA. That said, the four mentioned are predominantly North America-based businesses whose fortunes are closely allied to the ups and downs of the world’s largest economy.
But there is an argument that with attractions such as Tussauds, the London Eye, Thorpe Park and Warwick Castle, Merlin is a brands business and demands a rating closer to the 12 times EBITDA drinks group Diageo enjoys. The company also manages big international names. Any way you cut it, the mooted price tag looks like fair value, rather than a raging Royal Mail-style bargain.
As well as the £200million of new money being raised via the sale of shares, the company’s existing shareholders – private equity pair Blackstone and CVC Capital Partners, plus Kirkbi, the Danish family trust which owns the Lego brand – are selling a further £400million of stock.
OUR VERDICT: Expect this to be a more keenly priced float than the Royal Mail’s. The valuation is likely to be fair rather than generous. But the current management has a record of delivering strong underlying growth.
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