A battle over Euro Disney

IF YOU judge only by the volume of screams and the beaming faces of those taking rides at Europe’s most-visited, privately-owned tourist destination, then it is clear that Disneyland Paris has much to celebrate. In the three decades since Disney, an American media firm, agreed to put its European theme park on a site east of Paris, and the 25 years since its doors swung open, in 1992, 320m customers have queued for attractions such as “Space Mountain”, a stomach-twisting rollercoaster, and photo-ops with Disney characters.

To mark these anniversaries the firm is making bold claims for the park’s economic and social benefits. Nearly €8bn ($8.6bn) has been invested in or near the site, which includes a second Disney studio-themed park, 8,500 hotel rooms, convention centres and a golf course. France’s economy has supposedly seen gains worth €68bn and the creation of 56,000 jobs. Politicians pay it heed: François Hollande, the retiring president, made an end-of-term visit late last month.

But investors tell a different story. Shares in Euro Disney (the French parent company) have performed like a raft on the “Pirates of the Caribbean” log-flume ride: the price on the opening day in 1989 was the equivalent of €97 and they reached €221 three years later, but have languished for more than a decade since (see chart). Disney repeatedly reinvested capital to avoid bankruptcy at Euro Disney, in the process diluting others’ holdings. In 1989 it owned 49%; it is now the majority-owner.

Last month it restated its wish to take Euro Disney wholly private, and agreed to swap some of its own stock for a 9% stake in the European firm that was held by Prince Alwaleed bin Talal of Saudi Arabia. Disney now holds nearly 86% of Euro Disney. It is offering—for a limited period—to buy out remaining investors for €2 a share, roughly the current price.

A senior executive at Euro Disney suggests that the smallest investors are unlikely to grumble about that price, even if they are out of pocket. They may have bought into the project as much for emotional as financial reasons, caring about the brand and perks, such as preferential entry to the park. In any case, he says, the firm always risked “financial failure” right from the start because of high debt, held by 64 different lenders. Had Disney not recapitalised and reduced those borrowings, no business would even exist to be taken private.

Yet investors clearly have reasons to lament the firm’s performance. Disneyland Paris has failed to deliver more than a handful of profitable years—it last did so in 2008. Visitor numbers have slipped. Some 13m came last year, 1m-2m fewer than a decade ago; hotel occupancy rates that were at nearly 90% early in this decade are below 80%; spending per visitor is up only modestly, despite new restaurants. A spokesman, François Banon, blames “macroeconomic conditions and difficulties”, noting years of stagnation in France and its neighbours, plus fears about terrorism.

Others say that Disney itself may be at fault. CIAM, a French activist fund, took a stake in Euro Disney in 2015. It reckons its shares were badly undervalued, and has decided to resist Disney’s effort to take it private. It has asked a judge to investigate if Disney’s description of Euro Disney’s value was fair. CIAM points to Euro Disney’s rights until 2035 to develop 2,200 hectares of prime commercial land close to Paris, around the theme park, at a remarkably low purchase cost, it says, of €1.69 per square metre (rights which it has only partly exercised). The judge may yet dismiss the case. But Anne-Sophie d’Andlau, of CIAM, says a surveyor commissioned by her fund concluded the value of controlling the land was €1.9bn alone—far above Euro Disney’s market capitalisation.

CIAM also alleges a “darker side” to Disney’s behaviour, suggesting the American firm should reimburse over €900m in fees and royalties for the Disney brand that were charged to its European outfit over the years. Although these are occasionally waived by Disney, CIAM claims that they are excessive and that they help to explain Euro Disney’s lack of profits.

Mr Banon calls these allegations “false and unfounded”. The property business earns Euro Disney just €10m annually, he points out, and CIAM’s calculation “grossly exaggerates the value of these real-estate rights”. As for Disney’s various fees, he says royalties are unexceptional at 6% or less of total revenues, and that a management fee is 1% of revenues.

The dispute could quickly end if Disney increases its offer. CIAM notes that since it began asking questions, Disney has already raised its bid to minority holders, from €1.25, which implies that the earlier valuation was too low. CIAM is emerging as a rare French activist fund that gets results: it profited by intervening in the takeover of Club Med, a tourist firm, by China’s Fosun International two years ago.

As for Euro Disney, its theme park has high running costs. It is woefully behind on digital efforts: it lacks Wi-Fi for visitors. But it is popular, and France’s economy is perking up a bit. A plan to develop new railway lines in the greater Paris region should increase demand for the commercial land that it has rights to. How irksome it would be for some if it delivered steady profits under Disney’s full ownership.