Euro Disney: A Mickey Mouse Project?

~ Pergamon
0263-2373(94)00027-1
European Management Journal Vol. 12, No. 3, pp. 306-314, 1994
Copyright © 1994 Elsevier Science Ltd
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0263-2373/94 $7.00 + 0.00
Euro Disney:
A Mickey Mouse Project?
ROGER MILLS, Professor of Accounting and Finance, Henley Management College, UK;
JAMES DIMECH DEBONO, Masters Programme, Henley Management College, UK;
VICTORIA DIMECH DEBONO, Masters Programme, Henley Management College, UK
In this Case Study of Walt Disney’s investment in
a theme park near Paris, Roger Mills, James and
Victoria Dimech Debono document the
unfavourable economic conditions and overoptimistic projections that caused the successful
launch of the project in 1992 to quickly turn sour.
By using a Shareholder Value Analysis model they
then show how estimates of shareholder value per
share, based on information in the original
prospectus, are drastically revised downwards as
more realistic assumptions, like total debt owed,
are built into the valuation model. In March 1994, a
major financial restructuring plan was agreed with
Euro Disney’s banks — but was this another
Disney fantasy?
Background
It was in the early 1950s when Walt Disney pioneered
the concept of the theme park. This was to be a unique
entertainment experience where the guest is not only
a spectator but also a participant. Walt Disney wanted
his theme park to be different from the random collection of roller coasters, merry-go-rounds and ferris
wheels which could be found in the conventional
carnival atmosphere, so he thought up the idea of the
‘lands’, distinct areas in which a selected theme can vary
from an exotic adventure, to a childhood fairy tale.
These are presented through architecture, landscaping,
costuming, music, live entertainment, merchandise and
food and beverage.
The first Disney theme park was established in 1955 with
the opening of Disneyland in Los Angeles, California.
This was an immediate success and over the years has
attracted more than 300 million visitors. In 1971 Disney
opened its second theme park Walt Disney World in
Florida. This also proved to be another raging success.
It was in the early 1980s when Disney first ventured
overseas with the theme park idea. In April 1983 Disney,
together with the Oriental Land company, opened
Tokyo Disneyland. This was very similar in concept to
Disneyland in Southern California and whilst it had a
rocky beginning it soon turned into another monstrous
success for Disney. Unfortunately though, Disney took
306 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994
EURO DISNEY: A MICKEY MOUSE PROJECT?
no equity stake in the Oriental Land company, the
company which owns and operates the park. Consequently from this venture Disney only earns a
relatively modest share for the use of its name and
characters in the form of 10 per cent of admission
revenues and 5 per cent of food and souvenir revenues.
In the mid 1980s Walt Disney came under new
management, and it was at this time that the idea of
bringing the Disney magic to Europe was first
fantasised. This was as a consequence of the success of
the Tokyo theme park, the popularity of the American
theme parks amongst Europeans and the success of
Disney’s products in Europe for over 50 years.
Why France?
It was evident right from the beginning that nothing
would stop the French from winning the race to host
the Disney theme park. Besides bringing prestige and
12,000 jobs to France, Euro Disney would help the
depressed agricultural region of Marne-la-Vall6e.
To achieve its ends France gave many concessions.
Apart from money, it offered subsidised loans, 5000
acres of land at 1971 prices and sufficient land to permit
expansion of the project to meet increasing demand,
road and rail links giving ready access to the site, tax
breaks, reduced Value Added Tax on ticket sales and
the acceptance of a claim of French ancestry for the
Disney patriarch.
Disney felt that this site would provide a central position
within Europe for the theme park which, in turn, would
have a favourable effect on the attendance levels and
on the commercial development they had planned for
the site.
In 1985 a letter of intent was signed confirming France
as the host country and identifying Marne-la-Vall~e, a
1943 hectare site 32 km east of Paris as the site for the
newest Magic Kingdom. Some two years later, on
March 24th 1987, Michael Eisner, the President of
Disney and Jacques Chirac the Prime Minister of France,
signed the contract for the building of the Disney theme
park east of Paris.
Just before the signing of this contract, a poll was held
in France, the results of which suggested that 85 per cent
of the French population supported the idea of the park
being built in their country. But the French reasoning
behind this may have been less the love of cartoon
animals and more the money the park would generate.
Offer For Sale Of Shares
In October 1989, Euro Disney offered its shares to the
public. In the prospectus prepared by Arthur D. Little,
the forecasts showed how the park would enchant the
310 million Europeans calculated to live within the circle
of Disney magic. It illustrated why the park would be
an immediate success as a consequence of revenue from
high attendance levels, from property development
around the park and from accommodation provided to
visitors in the various standards of hotels that were to
be built.
The prospectus also indicated that the early profits and
the sale of the first hotels to be built would fuel funds
for the repayment of the loans and further expansion
which was expected to start at the latest in 1996, when
a second theme park would be built. Disney seemed to
bank on the fact that it had a competitive advantage in
respect of the expected size and quality of Euro
Disneyland and its attractions as well as its hotel
capacity and resort environment. These, according to
the prospectus, made it unique and comparable to no
leisure resort or amenity in Europe.
It should also not be ignored that the prospectus
revealed how Walt Disney was not going to let its
shareholders be short-changed from the profits of Euro
Disney as they had been in the case of the Tokyo theme
park. Nor was it going to lose out on the profits from
property development around the park, as had happened in California where the surrounding land owners
saw the value of their plots soar and were able to cash
in on the Disney magic. However, Euro Disney could
not be a subsidiary of Disney because according to
French law the company would have to be controlled
within the European Community. The group thus
sought to secure its position by setting up a number of
companies in France which were wholly owned by it.
Euro Disney’s offer of shares to the public in the
European Community on 9 October 1989 was a huge
success. A total of 85.8 million shares were offered to
the public, half of these were offered in France and the
other half were made available to the other member
states of the European Community. The shares had a
nominal value of 10 FFr. approximately £1 (Oct. 1989
rates) and were sold at 707p per share payable in full
on application. This meant that each share had a
premium of approximately £6.
In the European Community (excluding France) the
shares were 11 times oversubscribed, although the
methods used to offer shares to the public did vary. For
example, in France the shares were offered by way of
a public subscription while in the United Kingdom they
were sold through an offer for sale.
In France, so huge was the success of the share offer
that the next day the banks refused to accept any further
orders from customers. Similar success was experienced
in the United Kingdom where the £67 million of shares
offered for sale were 4.7 times oversubscribed.
Why did Euro Disney Demand Such a High
Share Price?
Euro Disney’s offer for shares to the public was seen
to be a huge success. But, why was the public ready to
pay such a high price for the shares and how justified
EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994 307
EURO DISNEY: A MICKEY MOUSE PROJECT?
was Euro Disney in demanding this price? The reason
why the public was ready to pay such a high price can
be understood with reference to a valuation undertaken
which used a discounted cash flow model known as
Shareholder Value Analysis (overview provided in
Appendix 1). This valuation was based upon the
published information given in the original prospectus,
and resulted in a value per share of FFr. 78.36. When
compared with the issue price of FFr. 72.82 (translated
at the rate given on the prospectus of (£1 = FFr. 10.30),
the analysis shows a premium of FFr. 5.54.
At this stage it should be noted that to arrive at this
shareholder value certain assumptions had to be made
because of the limited data available in the prospectus.
The main assumptions used were as follows:
Sales Revenues
Sales revenues for Euro Disney relate to cash inflows
from three main streams
Magic Kingdom
Second Theme Park (after 1996)
Resort and Property Development
Operating Profit
The operating profit figure was derived after deducting
the relevant operating expenses under the three revenue
centres.
• Investment — Increases in both fixed assets and
working capital are necessary for growth to occur.
It has been assumed that there is a direct
relationship between the increase in sales and the
increase in the incremental fixed capital and the
incremental working capital requirements.
• Planning period — A planning period was
provided in the Euro Disney prospectus. Any
value beyond this planning period, has been
captured by performing a perpetuity calculation.
• Cost of Capital — The cost of capital rate used in
the valuation process was that of 12 per cent, the
rate used by Arthur D. Little in the prospectus.
Disney Opens its Doors to the
Public
Euro Disney opened its magical doors to the public on
12 April 1992 amidst a £10 million television Europewide advertising campaign capped by a two hour live
broadcast to 30 countries, and amidst forecasts of huge
profits and a share price which had reached a peak of
1659p a few weeks before.
Roy Disney, the founder’s nephew in the welcome
speech told the 15,000 guests in the opening ceremony
who overflowed the neat pavements and flooded
around the Chateau de la Belle au Bois Dormant almost
blotting it out of sight, that the d’Isigny family had
lived in France as recently as the Norman Invasion of
England.
However, the grand opening was marred by technical
failures, long queues, striking railway employees, the
missing speech of welcome from France’s socialist
government and by the virulent opposition of some of
the French intellectuals who described it as a ‘cultural
Chernobyl’ and felt that the idea of Euro Disney was
a threat to French civilisation and culture. It soon also
became terribly evident that everyone, bankers, brokers
and even government had been blinded by the glamour
and that all the projections that had been made four
years before had all been horribly off the mark. Things
started to turn sour for Euro Disney right from the very
beginning. For example, its opening corresponded with
economic conditions which were very different from
those that had existed and were anticipated when the
projections had been drawn up.
The first shock was reflected in attendance figures.
These were alarmingly low in comparison to the
projections. It had been estimated that the initial
attendance potential was to be between 11.7 and 17.8
million with an annual growth rate of around 4.9 per
cent in the first five years. These high attendance levels
were thought possible because of research conducted
by Arthur D. Little (ADL) which concluded that:
1. Euro Disney would require more than one day to
visit
2. The hotels available would satisfy the demand of
these customers who would need to stay longer
than one day
3. The Disney name and the quality of the experience
would make the theme park a popular holiday
destination resort.
4. The park has a location at the centre of an area of
high population density. Paris was just 40 minutes
away by train and the international airports of
Roissy-Charles De Gaulle and Orly were easily
accessible from the park.
ADL calculated that there were 310 million people to
whom Euro Disney was easily accessible. As regards the
admission price, ADL reviewed admission prices
charged in Paris for major attractions which could be
considered competitive in terms of entertainment value.
It concluded that although the price of Euro Disney was
higher it was justified when one takes into consideration
the destination resort features and the high quality of
the entertainment.
Projections are way out
What in actual fact happened was that the initial visitor
figures from the UK and Germany exceeded their
expectations but the French attendance was disappointingly low, despite all that had been done to attract them.
All in all, from the opening to June 1992 Euro Disney’s
peak period, attendance had only averaged around
30,000 tourists daily. To achieve an attendance
anywhere near the 11 million target it had to maintain
this level even throughout the winter period.
To try and boost French attendance during the low
308 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994
EURO DISNEY: A MICKEY MOUSE PROJECT?
season Euro Disney offered residents of the Paris area
discounts of up to 30 per cent on the admission price.
unfortunately, this corresponded with a drastic fall in
the attendance of foreigners after the collapse of the
Exchange Rate Mechanism in September 1992. The
French government’s determination to maintain the
value of the franc, meant that this currency acquired
strength against other currencies. This meant that
suddenly for the British and Italian tourists it became
between 10 to 20 per cent more expensive to visit Euro
Disney.
The decline in foreign attendance was a significant 50
per cent in respect of British tourists and 25 per cent in
respect of Italian visitors. Furthermore, it was reckoned
that on occasions for British tourists, a mere £41
separated the cost of visiting either Euro Disney in Paris,
or Disneyworld in Florida, where one had the added
advantage of guaranteed good weather. This ignores
other issues like the fact that a tourist in Florida would
ultimately spend less because food and other
entertainment is virtually half European prices.
I The strengthening Franc in late
1992 was only one reason for Euro
Disney’s developing problems
The second major shock came in respect to the per capita
spending. Those people who did go to see Mickey
Mouse in Marne-la-Vall6e did not spend as much on
food, beverage and merchandise once they where inside
the park. The main reason being that many visitors felt
that the admission fees had been pitched unrealistically
high and they were not ready to dig deeper into their
pockets and splash out on food and merchandise which
they also felt were priced too high.
The shocks for Euro Disney were not over yet and they
were in for another disappointment in respect of their
hotel occupancy rates. It had been projected way back
in 1988 that the occupancy rates would grow from 68
per cent in the hotels opening year to a rate which
stabilises in the third year of operation at 80 or 85 per
cent depending on the location of the hotel. What they
had not anticipated was that due to the sluggish
economic environment, tourists were able to find
accommodation in Paris and in business hotels with cutprice week-end rates and commute to Euro Disney by
RER, the overland rail link. Ironically, the superb infrastructure installed by the French government proved to
be a deterrent for Euro Disney. Occupancy at the Euro
Disney hotels only averaged around 55 per cent.
The high prices and the exchange rate fluctuations were
not the only reasons why people stayed away. Euro
Disney had conducted its marketing in the wrong way
by treating Europe as a homogeneous market. The
concept for the park was too close to Disney’s US parks
to suit European tastes.
Euro Disney also started to face huge problems in
connection with its employees. In the original
prospectus Euro Disney felt that by paying wages which
were 10 per cent over the market average it would attract
high quality personnel, who could be trained effectively
to be Disney people. But Disney’s insistence of
conforming to its rigorous standards of appearance,
behaviour and chaotic working hours caused discontent
among its employees and caused many to leave. In fact
by June 92 in just 3 months some 1000 employees had
left Euro Disney.
One other problem Euro Disney was also reckoned to
be facing with respect to staff was that the French
authorities had in effect “bought’ the jobs that came with
the Park. This meant that the Company was operating
with a staff that some analysts considered to be more
that 10 per cent higher than necessary.
Shareholders on a Disney Roller Coaster
After just 6 months of operation, Euro Disney
announced a net loss before taxes of 339 million FFr.,
also confirmed in its 1992 annual report, which
contained the first set of published accounts following
its opening in April. This was extremely different from
the net profit before taxes of 34 million FFr. which had
been projected in the 1989 prospectus.
In the letter to shareholders in the report both the
Chairman and President of Euro Disney expressed an
air of optimism which lead them to believe that the
assumptions used to develop the financial model
associated with the company flotation were still possible
to achieve. They stated that they were very satisfied with
what the park had achieved in spite of all that had
happened and the prevailing economic environment.
They pointed out that the company has moved aggressively to develop new marketing strategies but that the
company would postpone any further office development for the time being. In fact, they noted with some
pride that Euro Disney had hosted seven million guests,
the majority of whom stated their intent to make a
return visit and achieved an average hotel occupancy
rate of 74 per cent in the first six months of its
operations.
However Euro Disney shareholders had seen great
changes in their share prices. As the opening of the park
had drawn near, shareholders saw their share prices
soar to a high of FFr. 165.2. However, subsequent prices
had fallen to a low of FFr. 71.10 in September. The
movement in the share prices for the period October
1991 to October 1992 is shown below in Figure 1.
What was the Underlying Value?
An analysis of the share price utilising the same
valuation model reviewed earlier resulted in a
shareholder value per share as at 30 September 1992 of
FFr. 70.33, close to the low of FFr. 71.10.
Table 1 shows a summary of its computation.
EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994 309
EURO DISNEY: A MICKEY MOUSE PROJECT?
October January April July October
Figure I Euro Disney Share Prices, October 1991 to
October 1992
Table 1 Shareholder Value per Share, Euro Disney,
30 September, 1992
Present value of Free Cash Flows
Present value of Perpetuity Calculation
Corporate Value
Deduct Value of Debt
Shareholder Value
No. of Shares (in millions)
Shareholder Value per Share (FFr.)
FFr. (Millions)
20239.76
4315.99
24555.76
12600.00
11955.76
170.007
70.33
A major dilemma encountered in undertaking this
valuation concerned the amount of debt owed by Euro
Disney. On the face of it, Consolidated Balance Sheet
long term borrowings amounted to FFr. 6,222 million.
But on scrutiny of the annual report, the notes to the
accounts revealed that the total debt owed by the group
amounted to FFr. 12.6 bn. To complicate matters
further, the Group’s Consolidated Balance Sheet
prepared under US Generally Accepted Accounting
Principles (GAAP), showed that borrowings amounted
to approximately FFr. 18.9 bn! Using this figure would
have resulted in a Shareholder Value per Share of FFr.
33.31.
Euro Disney Runs Into More
Trouble
Euro Disney had stated in its prospectus that the net
proceeds would be of FFr. 5.73 bn. Of these, FFr. 1.3 bn
would be used for the repayment of securities made by
the bank, the balance to be used for the funding of the
remainder of Phase 1 and any subsequent phases.
Euro Disney originally intended to obtain a total of FFr.
9.3 billion in loans from banks and, CDC (la Caisse des
Depots et Consignations, a French state-owned financial
institution). It also had a standby facility of FFr. 2.5 bn.
With these in hand it was confident that it would be in
a position of completing Phase 1 and have sufficient
working capital to be able to operate.
Bank loans taken out by Euro Disney were intended to
be repaid as a result of selling hotels because Euro
Disney intended to keep only the Euro Disney hotel.
The company also had the intention of building more
hotels in Phase II. A total of 18,200 rooms of different
class and in different locations were to be provided.
These were assumed to be financed from new loans and
the company was confident that it would be able to sell
these hotels within two or three years and thus pay back
the loans.
The water recreation area and all the commercial and
residential property development like offices, retail
shopping centres, the corporate car park, and the
residential development were to be financed out of
future cash flows. Unfortunately, once again the
assumptions were wrong.
Disney’s grand ideas were scuppered as the property
market in France crashed and Euro Disney was left to
maintain and run the five hotels it had built and also
to service the debt on borrowed funds. Furthermore,
in July 1993 Euro Disney’s American parent declined
giving the expansion of the second theme park the goahead. However the second theme park was thought
to be vital for the survival of the hotels, because visitors
would be required to stay overnight so as to be able to
visit the whole resort. This would in turn boost hotel
occupancy.
To make matters worse the company had initially
expected to repay the floating FFr. 9.5 billion at 9 per
cent but had to pay an average of 2 per cent more which
added approximately FFr. 200 million to its annual
interest bill. Inflation, the salvation of many an indebted
developer was running at only 2.1 per cent. In France
as compared with the 5 per cent which Disney had
projected. All of this resulted in Euro Disney carrying
a debt burden of around £2.3 billion by the end of 1993.
The restructuring of the company’s operations and its
debts now seemed to be vital. In October 1993 Euro
Disney announced that it was to shed some 950 jobs out
of a total of more than 11,000 and that it had put
ambitious expansion plans on hold.
On 10 November 1993 Euro Disney issued its financial
statements for the year ended September 1993. These
demonstrated another loss for Euro Disney amounting
to FFr. 5.3 bn. These losses, which where higher than
had been anticipated, were due to the balance of the preopening costs which was entirely written off.
The scale of the losses increased the urgency of the
capital restructuring and put pressure on Walt Disney
to help rescue the European leisure company. The
central dilemma regarding the restructuring which faced
Euro Disney was that the most likely means of
restructuring was via a share issue, probably by way of
a rights issue. But the weakness of the share price,
which had tumbled to 436p on the London Stock
Exchange after the announcement of the 1993 results,
310 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994
EURO DISNEY: A MICKEY MOUSE PROJECT?
complicated the issue. It would also have to be an
extremely large issue to raise the sort of money that the
company required. By November 1993 financial restructuring talks were under way between Euro Disney, its
bankers, of which there were about sixty, and Walt
Disney.
No optimism for Euro Disney in 1993
The air of optimism voiced by Euro Disney Chairman
Phillippe Bourguignon in his statement to the
shareholders in the 1992 annual report was nowhere to
be found in the 1993 annual report. In his statement to
shareholders in 1993, he acknowledged that Euro
Disney was facing difficulties which he attributed to the
high prices charged, an ineffective marketing strategy
and the recessionary economic environment. Consequently, Euro Disney’s plan in respect to the future
would be to counter these factors by adopting more
‘affordable’ prices, changing its marketing strategy to
target its customers with the intention of smoothing
seasonal fluctuations, and also by being more cost
effective. In this respect Euro Disney was undergoing
a delayerisation of its management and attempting to
implement a more fiat management structure. Furthermore he explained the reasoning behind the shelving
of the expansion of the second theme park as being a
consequence of the current economic conditions.
Quoting Mr Bourguignon’s words and summing up the
whole story: ‘Finally, the severe unbalance in Euro
Disney’s financial structure has become such a burden
it is jeopardising the very existence of the company.’
As would be expected in such circumstances the
statutory auditors issued a qualified audit report on a
going concern basis. Both the auditors and the directors
reported that the company would run into liquidity
problems. Furthermore, it was underlined that Walt
Disney had promised to fund the distressed Euro Disney
group until Spring 1994. Also of importance was the
change in accounting policy regarding pre-opening and
start up costs. It was decided to write off such costs as
soon as they were incurred and not amortise them over
…. ary
Figure 2 Share Prices of Euro Disney, October 1992
to January 1994
a period of five or twenty years. The effect of this change
was an exceptional expense amounting to FFr. 3,213
million and the Consolidated Income Statement showed
a net loss of FFr. 5,337 million. This meant that the
retained deficit amounted to FFr. 5,036 million (see Table
2), which reduced shareholder’s equity to a mere
FFr. 1,517 million, a decrease in value of 78.4 per cent
from that of the previous year. The shareholder’s equity
per share fell from FFr. 41.33 to FFr. 8.92. Share prices
for Euro Disney during this period fluctuated between
FFr. 99 in March and FFr. 23.7 in November (Figure 2)
and on several occasions were suspended from trading.
A Shareholder Value Analysis was undertaken based
upon 1993 information and resulted in a Shareholder
Value per Share of FFr. 37.84 (Table 3).
Many assumptions in the valuation model were
drastically changed in view of Euro Disney’s decision
to shelve the plans of building the second theme park,
the resort, and property development.
Euro Disney Runs Out of Cash
Bruised by recession and crushed by the weight of FFr.
20 bn in debt, Euro Disney ran out of cash. This forced
Table 2 Retained Earnings/Deficit, Euro Disney 1991-93.
Shares Share Share Retained
(in thousands) Capital premium earnings
(deficit)
Balance at Sept. 30, 1991 170,000 1,700 4,878 636
Conversion of 7,308 bonds 7 2
Net Loss (188)
Allocated (1)
Balance at Sept. 30, 1992 170,000 1,700 4,880 447
Conversion 1
Net Loss (5336)
Dividends (173)
Balance at Sept. 30, 1993 170,000 1,700 4,880 (5,063)
EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994 311
EURO DISNEY: A MICKEY MOUSE PROJECT?
Table 3 Shareholder Value Analysis, Euro Disney,
1993.
Present value of Free Cash Flows
Present value of Perpetuity Calculation
Corporate Value
Deduct Value of Debt
Shareholder Value
No. of Shares (in millions)
Shareholder Value per Share (FFr.)
FFr.(MiUions)
16501.83
2531.10
19032.93
12600.00
6432.93
170.007
37.84
Walt Disney to provide emergency funds to keep it from
going into receivership. Walt Disney also gave Euro
Disney until 31 March 1994 for a financial restructuring
plan to be devised.
It was estimated that to survive, Euro Disney would
have required a combination of cash and debt relief of
at least FFr. 12 bn. Disney had the power to put the park
into bankruptcy, but total collapse for Walt Disney,
the most image-conscious of firms, would have added
humiliation to insult and locked it out of Europe for the
foreseeable future. Walt Disney thus had to face the
choice between serving the interests of its shareholders
or suffer the damage to its image.
The well-publicised difficulties of Euro Disney helped
to depress the parent company’s share price and in
December 1993, Mr Michael Eisner chairman of Walt
Disney, wrote to all its shareholders explaining the
problems of Euro Disney and assured them that
although
we certainly are interested in aiding Euro Disney the public
company that bears our name and reputation. We will deal
in good faith with our fellow shareholders and Euro Disney
creditors. But in doing so I promise all shareholders of Walt
Disney that we will take no action to endanger the health of
Disney itself.
Closure would have involved much embarrassment for
the French government which would have had an
additional 40,000 people on the already extensive
unemployment list of 3.2 million.
The Disney camp awaited an audit commissioned by the
creditor banks into Euro Disney’s financial position
before the full scale negotiations over restructuring got
under way. Despite the depth of the park’s financial
crisis, Euro Disney, its creditors and France appeared
to be stuck with one another because closure of the park
really was not feasible. All of the French banks and
financial institutions would have lost everything.
Selling Euro Disney to other operators would not have
made much of a dent in the debt and putting the
company into receivership would have entailed them
finding somebody to operate the park. Realistically,
there was no one better to run the park than Disney.
A restructuring is agreed for Euro
Disney
Euro Disney was pulled from the brink of closure. After
weeks of intricate negotiations between Walt Disney and
the steering committee which represented Euro Disney’s
banks, an agreement was reached on a rescue deal.
The terms of the rescue were presented to Euro Disney’s
anxious shareholders at the annual general meeting on
14 March 1994 which was held in the Buffalo Bill Wild
West Saloon, a place which ideally reflected the feelings
of shareholders.
It was agreed that Walt Disney would:
• arrange a FFr. 1.1 bn standby line of credit for 10
years at market interest rate,
• spend an additional FFr. 1.4 bn on buying certain
park assets which it would eventually lease back,
• waive royalties on entrance fees, food and merchandise and suspend management fees, both for
five years, and
• subscribe for 49 per cent of a FFr. 6 bn rights issue
which they hoped to float.
The banks on the other hand had agreed to:
• underwrite the remaining 51 per cent of the FFr.
6 bn rights issue,
• accept a moratorium of 18 months on their interest
payments, and
• defer principal payments for 3 years.
The most controversial element of the package was an
issue of bonds subscribed by the banks and Walt Disney,
with a ten year warrant to buy Euro Disney stock at FFr.
40 per share, which may lead to the potential issue of
up to 70 milh’on new Euro Disney shares. This last piece
of news and the fact that the FFr. 6 bn worth of shares
would have denominations of FFr. 10 did not please
ordinary shareholders, who saw their shares very
heavily diluted.
Finally, Phillippe Bourguignon also announced a projection that Euro Disney should turn in a profit for the
1994-1995 financial year. But can Euro Disney shareholders expect this to be so? Euro Disney sells fantasy,
is this another Euro Disney dream? Time alone will tell.
Appendix 1: Shareholder Value
Analysis Overview
Shareholder Value Analysis (SVA) is a technique that
has been developed for company valuation which uses
the principles of discounted cash flow analysis. At its
simplest and for purposes of this case study it can be
thought of as centring upon the following seven key
value drivers:
• Sales growth rate.
• Operating profit margin.
• Cash tax rate.
• Fixed capital needs.
312 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994
EURO DISNEY: A MICKEY MOUSE PROJECT?
• Working capital needs.
• Cost of capital.
• Planning period.
With a knowledge of current sales revenue, the first five
of these value drivers can be used to generate a free cash
flow forecast, which can then be discounted at the cost
of capital to produce a present value. However, one
problem that exists is the time period over which cash
flow estimation should be undertaken. The going
concern assumption of organisations and their separate
legal entity status from the owners can be taken to imply
an infinite forecasting period and ‘forever’ cash flow
projections.
Most individuals are loathe to project too far into the
future, quite simply because of a lack of faith in making
assumptions about very long term business performance, e.g. beyond say 10 years. Fortunately, this
forecasting problem can be dealt with quite straightforwardly by determining a limit to the planning period.
Use of project life cycle analysis or competitive analysis
frameworks enables the future in principle to be divided
into two time periods for purposes of valuation. The first
is the planning period over which the first six value
drivers are estimated for each time period to produce
a number of present value calculations. These individual
present value calculations are then summed up to give
the present value of the planning period as a whole. The
second is the infinite time period beyond the planning
period. It is assumed that there will be no further sales
growth after the planning period but that sufficient
replacement expenditure will be undertaken to maintain
future sales revenue, then the valuation of this time
period can be shown to reduce to a perpetuity
calculation. This perpetuity value at the end of the
planning period is then converted into today’s terms by
a present value calculation and added to the present
value of the planning period to produce a total present
value. After the present value of anything owing to debt
holders is deducted from this figure, we are left with
the total present value attributable to shareholders,
otherwise known as ‘shareholder value’.
Appendix 2
The Consolidated Financial Statements
Consolidated Profit and Loss Statement in FFr.
(millions).
1993 1992 1991
Revenues
Theme park and Resorts 4874 3819
Consfftuent sales and related
services 851 4644 6201
5725 8643 6201
Costs and Expenses
Theme park and Resort direct
operating expenses
Cost of constituent sales and
related services
Operating income/loss before
3382 2427
846 4644 6215
fixed and adminstrative
expenses 1497 1392 (14)
Depreciation and
amortisation 227 316
Lease rental expense 1712 716
Royalties 262 197
General and administrative
expenses 1113 845
Operating Profit/Loss (1817) (682) (14)
Financial income 719 541 521
Financial expenses 615 (307) (115)
Profit/Loss before exceptional
items (1713) (448) 392
Exceptional income (3624) 109 4
Income tax benefit
(provision) 151 (147)
Net Income/Loss (5337) (188) 249
Consolidated Balance Sheet
1993 1992 1991
Fixed Assets
Intangible assets 173 1491 79
Tangible assets 5111 4788 2722
Long-term receivables 5223 3988 1564
10507 10267 4365
Deferred charges 510 2001 1716
Current Assets
Inventories 221 387 42
Accounts receivable
Financing companies 585 1915
Trade debtors 313 456 11
Other 966 1248 1903
Short term investment 861 1726 5947
Cash 343 560 69
Total Assets 13721 17230 15968
Shareholders Equity
Share capital 1700 1700 1700
Share premium 4880 4880 4878
Retained earnings (5063) 447 636
1517 7027 7214
151
160 316 265
8287 6222 4226
Deferred income tax liability
Deferred revenues
Long term borrowings
Current Liabilities
Payments to related
companies 1525 796 421
Accounts payable 1640 2869 3691
Provision for risk and
charges 601
Total 13721 17230 15968
EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994 313
EURO DISNEY: A MICKEY MOUSE PROJECT?
Selected Bibliography
Coopers & Lybrand, How can Shareholder Value Analysis improve
Corporate Performance in the 1990s?, 1993.
Day, G.S. & Fahey, L. Putting Strategy into Shareholder Value
Analysis, Harvard Business Review, 1990, March-April.
Euro Disney SCA, Offer For Sale, October 9, 1989.
Mills, R.W. Finance, Strategy and Strategic Value Analysis —
Linking Two Key Business Issues, Mars Business
Associates, Ltd., 1994.
Selected Press Reports
1992
Financial Times, Mickey Mouse Outfit Suffers Culture Shock,
(Michael Skapinker), 28 April.
Financial Times, A Question of the Mouse’s Attraction, (Gary
Mead), 13/14 June.
Financial Times, Euro Disney plans Third French Leisure
Complex. (Alice Rawsthorn), 20/21 June.
1993
Economist, Waiting For Dumbo, 1 May.
Sunday Times, Magic rubs off the Disney Kingdom (Alan
Ruddock, Helen Davidson), 22 August.
Guardian, A Cold Wind blows on Magic Kingdom, (Mike
Milner), 11 November.
Financial Times, White Knuckle Ride for Fantasyland Investors,
(John Ridding), 11 November.
The Times, S. & P. to Lower Walt Disney Rating after French
Losses, (Philip Robinson), 16 November.
The Independent, Euro Disney Shares face Bourse Inquiry, 16
November.
Daily Telegraph, Support by Banks Key to Future of Euro
Disney, (Tim Witcher, Mary Brasier), 23 December.
The Times, Euro Disney Slashes Price All Round, (Jeremy
Laurance), 30 December.
The Independent, Shares in ‘Dreadful’ Euro Disney tumble,
(John Willcock), 30 December.
1994
The Independent, Euro Disney hit by Talk of Closure, (Diane
Coyle), 1 January.
Financial Times, Paris Theme Park Woes hit Disney Chairman’s
Pocket, (Martin Dickson), 5 January.
Financial Times, Euro Disney Banks may seek Theme Park
Shake-Up, (Alice Rawsthorn), 11 January.
The Independent on Sunday, Euro Disney’s Future in Balance as
Banks meet, (William Kay), 30 January.
The Times, Walt Disney takes Hard Line over Euro Park,
(Martin Waller), 3 February.
Financial Times, Euro Disney Debt Sale Hits Snag, (Alice
Rawsthorn), 10 February.
The Guardian, Spanish Rival for Euro Disney Cash, (Frank
Kane), 15 February.
Financial Times, Euro Disney Shares Slide on Fears of
Restructure, (John Ridding), 23 February.
The Times, Stock Market — US Support helps shares win SeeSaw Battle, 4 March.
The Times, Disney’s White Knuckle Ride, 10 March.
The Times, Euro Disney Directors set to face the Music, (John
Ashworth), 14 March.
Daily Telegraph, ‘Mousetrap’ opens in French Theme Park, (City
Comment), 15 March.
The Times, Walt Disney steps in to rescue European Park, (John
Ashworth), 15 March.
Financial Times, £1.5 billion Outline Rescue Deal agreed for Euro
Disney, (David Buchan, Alice Rawsthorn), 15 March.
Daily Telegraph, Euro Disney Price slips as Doubts Continue,
(Mary Brasier, Tim Witcher), 16 March.
Economist, Euro Disney’s Wish Comes True, 19 March.
ROGER MILLS, Henley
Management College,
Greenlands, Henley-onThames, Oxon. RG9 3AU,
UK.
Roger Mills is Professor of
Acounting and Finance at
Henley Management College
where he is also Director of
Studies of the Active MBA
programme and Head of the
Accounting and Finance Faculty. He trained as an
accountant in industry and is a fellow of several
professional associations. He is the co-author of several
books on accounting and finance as well as many
articles on subjects like strategic financial and value
analysis, project appraisal and business valuation. His
latest book is Finance, Strategy and Strategic Value
Analysis: Linking Two Key Business Issues, (Mars
Business Associates Ltd., 1994)
JAMES DIMECH
DEBONO, Henley
Management College,
Greenlands, Henley-onThames, Oxon. RG9 3AU,
UK
James Dimech Debono is a
graduate of Malta University
and a practising accountant.
He is about to complete his
MBA at Henley Management
College, and is involved in research into company
valuation processes.
VICTORIA DIMECH
DEBONO, Henley
Management College,
Greenlands, Henley-onThames, Oxon. RG9 3AU,
UK
Victoria Dimech Debono is a
graduate of Malta University
and subsequently practised as
an accountant in the
construction industry.
Currently, she is a member of the Master’s Programme
at Henley Management College and is researching into
strategic value analysis.
314 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 3 September 1994 Euro_Disney_A_Mickey_Mouse_project (1)