Euro Disneyland SCA

This case was developed by Professor Anant K. Sundaram of the American Graduate
School of International Management, with assistance from Ravi Mohan as a basis for
class discussion, from publicly available sources of information. Funding was provided by
the Center for International Business Education at the University of Michigan.

In September 1989, the U.S.-based Walt Disney Company (WDC) finalized its plans for
an initial public offering (IPO) that would partially finance the next stage of development of
its first major theme park and resort complex in Europe. The park would be called Euro
Disneyland (EDL) and be located outside Paris. The IPO would issue 85.88 million
shares at an offer price of FF72 per share, with 50% reserved for French investors and
the other 50% for investors from the rest of the European Community. Following the IPO,
the issued share capital of EDL would be 170 million shares with a nominal value of FF10
each, with WDC owning 49.5%. The shares would trade on the Paris, London and
Brussels stock exchanges.

WDC had been involved with the project since its inception in 1985, when it was called
Euro Disneyland SA and operated as WDC’s wholly-owned French subsidiary. The
parent company decided that the time had come to put in place a set of ownership and
governance changes that would take the project to the next phase of growth and
development. The proposed set of transactions would transform EDL into the largest
theme park and resort complex in Europe, converting it from a wholly-owned subsidiary
into a stand alone business entity using complex project financing.

Walt Disney Company

WDC is famous for operating the world’s most successful theme park complexes. It runs
theme parks in Florida and California in the United States (Disney World and Disneyland)
and in Japan (Tokyo Disneyland), which collectively drew 51 million visitors in 1988. The
annual average theme park attendance of over 12 million each dwarfs the 4.6 million in
annual attendance at the largest non-Disney theme park (Seaworld, in Florida). The
nearest-sized competitors in Europe are Tivoli Gardens in Denmark, which drew 4.5
million visitors in 1988, and Liseberg in Sweden with 2.8 million visitors.

WDC’s dominance of the theme park industry is attributed to its superior product
offerings, efficient operations management, and its marketing acumen. It pioneered the
idea that theme parks should not just be conventional amusement parks but an
“entertainment experience” where the visitor is both participant and spectator. Parks are
divided into distinct areas called “lands” (such as exotic adventures or fairy tales) in which
a unique theme is presented through a combination of architecture, landscaping,
costumes and actors, music and live entertainment, rides, and food and beverages. The
design of the theme parks is the responsibility of special teams of Disney “imagineers”—
architects, designers and engineers employed by its wholly-owned subsidiary, Walt

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Disney Imagineering. Disneyland in California, set up in 1955, saw a 3.6% annual growth
rate in attendance during its first 34 years, attracting over 300 million visitors during this
period; the attendance at Disney World, set up in 1971, grew from 10.7 million visits in
1971 to 26 million in 1989. Attendance at Tokyo Disneyland, set up in 1983, reached
approximately 14.9 million in 1988.

In addition to theme parks, WDC is a leading provider of filmed family entertainment (the
company originally began as a maker of animated films) and receives royalties from its
consumer product licenses worldwide, with its well-known characters such as Mickey
Mouse, Donald Duck, and Goofy. In 1988, theme parks accounted for 59.4% of WDC
revenues, filmed entertainment for 33.4% and consumer products 7.2%. The shares of
operating income from these three segments were 63.8%, 21.0% and 15.2%,
respectively.

European Theme Park

Confident in its ability to leverage its success in the U.S. and Japan, WDC decided during
the early 1980s to export its theme park concept to Europe. This was motivated by its
assessment of the past demand for Disney products and its name recognition in Europe,
as well as the popularity of its U.S. theme parks among European visitors. WDC has
marketed its reproductions of Disney characters and its films in Europe for nearly fifty
years. Approximately 25% of its 1988 revenues came from Europe. In the same year,
WDC estimated that approximately two million visitors to its U.S. theme parks were of
European origin.

After evaluating nearly 200 locations in both France and Spain, the company chose to
locate the park in France, outside of Paris. The new park––located in Marne-la-Vallée,
32 kms east of Paris––would occupy 4800 acres, consisting of theme parks and hotels
(2400 acres), commercial and residential development (2400 acres), and infrastructure
(roads and railway track, 400 acres). WDC formed Euro Disneyland SA, a wholly-owned
French subsidiary in 1985, and capitalized it with an initial investment of FF250,000
(25,000 shares at FF10 each). In March 1987, WDC entered into an “Agreement on the
Creation and the Operation of Euro Disneyland en France” with the local and national
governments in France. By 1989, just prior to the proposed IPO, WDC had incurred
FF2.3 billion in development costs (and Disney’s financial partners, an additional FF462
million). During this period, the risk of the project had been primarily assumed by WDC.

The new plans called for an aggressive two phase development. Phase I was scheduled
to be fully operational by April 1992 and included the Magic Kingdom theme park and the
Magic Kingdom Hotel, as well as five other hotels. The budget for this first phase was
estimated to be FF14.9 billion: FF8.6 billion for the Magic Kingdom theme park, and the
rest for development of hotels (and other expenses). Phase II consisted of adding a
Disney/MGM Studio theme park by 1996, increasing the number of hotels to 20 by 2011,
and adding golf courses, water entertainment areas, and camp sites. The cost to set up

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the Disney/ MGM Studio alone was estimated to be FF5.9 billion. Phase II was expected
to be operational by 1996.

Role of the French Government

The French government granted a number of incentives in order to attract EDL to France.
The benefits, offered by the government as outlined in the 1988 agreement, were valued
by some analysts at FF6 billion. The concessions covered four major areas. First, the
government allowed EDL to purchase the land at 1970 prices, a 50% to 90% discount
relative to the market price. Second, the government agreed to provide a transportation
infrastructure, both road and rail, to connect the theme park to Paris. Third, the
government would provide a 20-year FF4.8 billion loan at a fixed annual rate of 7.85%, a
rate less than the current French government long-term borrowing rate of 9.1%. Finally,
the tax authorities agreed that EDL could depreciate its’ assets over ten years, rather than
the twenty years that would be normal for such an asset class.

In return, WDC would have to complete the first phase of the project by April 1992.
Further, EDL would: (1) ensure minimal usage of the rail infrastructure during the first five
years of the project (with default clauses to cover fares if the annual traffic fell below 75%
of 9.13 million round trips); (2) invest FF45 million for electricity and utility infrastructures;
(3) pay FF200 million in taxes to the province by 1999; (4) make sure, over the next five
years, that WDC did not reduce its ownership share in the project to below 17%; and (5)
agree not to open competing theme parks or resort complexes within 800 kms of the
current project.

Proposed Project Ownership Structure

WDC proposed a new, complex ownership and governance structure for the project. EDL
was organized as a societe en commandite par actions (SCA), or a form of limited
partnership. This structure allowed WDC to avoid double taxation, without incurring the
liability inherent in partnerships. The following additional entities formed the project’s
management structure:

Euro Disneyland SA, a wholly owned subsidiary of WDC, would manage EDL for
a management fee. The management fee was composed of a base and an
incentive component. The base fee would consist of 3% of EDL’s annual revenue.
After five years and the fulfillment of certain financial covenants, the base fee
would increase to 6% of annual revenues. The incentive fee was based on a
sliding percentage scale of EDL’s pre-tax cash flow.
EDL Holding Company SA (Holding Company), a wholly-owned subsidiary of
WDC would own 49% of EDL. Public investors would own the remaining 51%.
The shareholders would elect a supervisory board to oversee the management of
EDL. However, the supervisory board could not replace Euro Disneyland SA as

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 the management company, or compel them to make any major operational or
strategic decisions.
EDL Participations SA (Participations), a wholly owned subsidiary of the Holding
Company, would act as the general partner in EDL. Participations would bear all
the liability for the debts and other liabilities of EDL. EDL would pay Participations
0.5% of its after-tax profits for its services and could not remove Participations as
the general partner.
Euro Disneyland SNC (SNC) would finance the construction of the Magic
Kingdom theme park by purchasing the park for the cost of the land and
construction. They would then lease the Magic Kingdom theme park back to EDL
for twenty years. At the conclusion of the lease, EDL would buy back the theme
park for a nominal value. Thus, the project could also take advantage of the tax
benefits of leasing. WDC would own 17% of SNC.1

The details of the governance and ownership structure are shown in Exhibit 1.

Financing the Project

EDL planned to finance Phase I through a combination of market debt (FF4.5 billion at an
interest rate of PIBOR plus a spread of 1/2% to 7/8%), a French government loan (FF4.8
billion at an interest rate of 7.85%) and the equity IPO (expected to generate FF5.73
billion, net of transaction costs). Phase II was expected to be financed entirely with a new
debt issue (FF5.9 billion at an assumed interest rate of 9%).

As mentioned, the original project was launched in 1985 with the formation of Euro
Disneyland SA. On February 24, 1989, Euro Disneyland SA was converted to Euro
Disneyland SCA (EDL). In March 1989, WDC issued an additional 975,000 shares. (The
motivation behind this share issue was to convince a major institutional investor that
demand existed for shares in the EDL.) Three French banks––Banque Indosuez,
Banque Nationale de Paris and Caisse Nationale de Crédit Agricole—and the U.K.
investment bank S.G. Warburg bought 510,000 shares for FF15 per share, and WDC
purchased the remaining 465,000 for FF10 per share.

In addition to this equity, FF2.13 billion worth of debt was issued to the equity investors.
WDC purchased FF828.1 million worth of the debt, and the rest was bought by the four
equity-owning French banks. Exhibit 2 shows the pre-IPO ownership structure of EDL,
after these equity and debt issues.

The proposed IPO would offer 85.88 million shares at FF72. After the IPO, the French
banks’ original debt would be redeemed at par plus interest (12.5%); the banks would,
however, retain an option to buy up to 3.26 million additional shares. EDL’s existing debt
would be converted into 82.81 million shares. The IPO proceeds would also be used to
repay WDC and its partners for the project development costs of FF2.762 billion incurred

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to-date. (EDL’s post-IPO ownership structure is shown in Exhibit 3; the changes in EDL’s
balance sheet as a result of the above transactions are shown in Exhibit 4.)

S.G. Warburg was chosen by WDC as the lead manager for the IPO.2 Warburg
undertook the valuations for EDL, and prepared the Offering Circular. The Offering
Circular contained detailed revenue, cost, and cash flow projections for EDL for the 25-
year period 1992 to 2016 (Exhibit 5), and a sensitivity analysis of expected returns to
shareholders under WDC’s valuation assumptions (Exhibit 7).

Valuation Assumptions

Warburg and WDC made a number of specific assumptions in their projections. Some of
the key assumptions were as follows:

11 million annual visitors in the first year for the Magic Kingdom, with annual growth of
4.9% per year in years 2–5, 2.7% in years 6–10, 0.6% in years 11–20 and zero
percent thereafter.3
Admission fees for both the Magic Kingdom and the second theme park would grow at
6.5% per year, and per-visitor expenditure on other items such as food, beverage,
parking, etc. would grow at 5% per year.4
8 million annual visitors in the first year for the second theme park with an assumed
annual growth of 2% per year for the first ten years, and 1% per year thereafter.
Resort and hotel revenues (see Exhibit 5).
Royalties and management fees to WDC, and lease payments to SNC (see Exhibit 5).
New debt issues and debt redemption as set forth in Exhibit 6, and net interest
expense (i.e., interest payments minus interest received) as set forth in Exhibit 5.
Discount rate of 12% for the period after the opening of the first theme park (after April
1992), and 20% for the initial development phase (October 1989 to April 1992).5
Capital expenditures (including land purchase) and changes in net working capital
(see Exhibit 5).
Inflation rate of 5% per year, and PIBOR of 9% per year. Interest rate on excess cash
assumed to be invested at 9% per year during the pre-opening period, and 12%
thereafter.
Corporate tax rate of 42%, and possible tax credits as set forth in Exhibit 5.

The provision of such detailed valuation information in an IPO offering circular, especially
in the European setting, was somewhat unusual. The information provided analysts with
the ability to assess their own value for EDL, and to assess whether the FF72 per share
was, indeed, a “fair” price to pay for the IPO. Analysts in the U.S. were intrigued by how

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the proposed governance and management structure, as well as the financial changes,
would affect the parent firm, WDC. In particular, they wondered about any potential cash
flow impacts on WDC’s U.S. shareholders, in the event that some of the assumptions
behind the EDL cash flows and discount rates proved too optimistic or failed to
materialize.

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Footnotes

1. Actually, the 17% would be owned by an entity called Euro Disneyland Participations
SA, a wholly-owned subsidiary of WDC. In addition, there would be a management
company to manage the financing company, SNC. See Exhibit 1 for details.
2. Regional lead managers for the issue included Banque Indosuez (Belgium and
Luxembourg), Deutsche Bank Capital Markets Limited (Germany), Mediobanca (Italy)
and Credit Suisse First Boston (rest of EC).
3. This was based on the 11 million in attendance achieved by Tokyo Disneyland during
its first year of operation, and a study conducted by the US consulting firm Arthur D.
Little, which estimated attendance to be between 11.7 million and 17.8 million during
the first year.
4. Disney ticket prices in the U.S. have had a 2.6% real growth since 1972.
5. The offering circular did not provide information regarding how the 12% discount rate
was derived. However, according to another source (Euro Disneyland SCA: The
Project Financing in Case Studies in Finance, R. Bruner (ed.), 2nd edition, Irwin: NY,
1994) it was derived based on assessment of “comparables.” S.G. Warburg
estimated it based on IRR’s from forecasted dividends for WDC (U.S.), Accor (a
French hotel group) and Club Med (a French resort and travel operator), resulting in
respective discount rates of 9%, 11.3% and 11.9%. The 1989 betas (measured
against their respective home market benchmarks) for these three firms are 1.26, 1.02
and 1.14, respectively. Their long term debt-to-book equity ratios are 12.3%, 64.6%
and 48.2%, respectively (Source: Disclosure/Worldscope database). The historical
market risk premium for a well-diversified portfolio of stocks in France, relative to the
French government’s long-term borrowing rate, is approximately 7.5%.

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Exhibit 1 Euro Disneyland SCA: Corporate Ownership and Management Structure.

French/EC 51% Euro Disneyland

Shareholders SCA
(EDL)

Euro Disneyland SA
(Management Company)

(statutory share)
EDL Participations SA

100%
100%
Walt Disney
49%
Company EDL Holding Company

Management Company
for SNC

17%
Euro Disneyland
Participations SA
Euro Disneyland
French SNC
Corporations (Financing Company)
83%

Ownership
Source: Adapated from the EDL Offering Circular.

Management

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Exhibit 2 Equity Ownership of Euro Disneyland SCA before IPO.

Entity # of Shares (‘000) Ownership (%) FF Invested

(millions)
Walt Disney Company 490 49.0 4.9
Investment Banks 510 51.0 7.6
Public 0 0.0 0.0
Total 1000 100.0 12.5

Exhibit 3 Equity Ownership of Euro Disneyland SCA after IPO.

Entity No. of Shares Ownership (%) FF Invested

(millions) (millions)
Walt Disney Company 83.3 49.0 833
Investment Banks 0.9 0.5 9
Public 85.9 50.5 5730
Total 170.0 100.0 6572

Source: Derived from the EDL Offering Circular.

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Exhibit 4 Financial Transformation of Euro Disneyland SCA.
(FF millions)

Stage 1 Stage 2 Stage 3

Initial After Equity & Post-IPO &
Position Debt Issue Debt Clearance

Cash -1010.00 1122.99 5560.13

Other Assets 3709.10 3709.39 3709.39
Total Assets 2699.10 4832.38 9269.52

Payable to WDC 1908.57 1908.57 1908.57

Debt to Banks & 0.00 2120.95 0.00
WDC
Other Liabilities 783.19 783.19 783.19
Total Liabilities 2691.76 4812.71 2691.76

Share Capital 0.25 10.00 1700.00

Share Premium 0.00 2.58 4870.68
Retained Earnings 7.09 7.09 7.09
Total Shareholders 7.34 19.67 6577.77
Equity

Source: Derived from the EDL Offering Circular.

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Exhibit 5 Euro Disneyland SCA's Revenue, Cost and Profit Projections
.
(FF millions)

Revenues 1992 1993 1994 1995 1996 2001 2006 2011 2016
Magic Kingdom 4246 4657 5384 5853 6415 9730 13055 18181 24118
Second Theme Park 0 0 0 0 3128 4565 6656 9313 12954
Resort Development 1236 2144 3520 5077 6386 8133 9498 8979 5923
Total Revenues 5482 6801 8904 10930 15929 22428 29209 36473 42995
Implied Annual Growth Rate 24 31 23 46 7 5 5 3
(%)
Operating Expenses 3439 4337 5592 6340 9129 13358 17448 20948 22138
Implied Annual Growth Rate 26 29 13 44 8 5 4 1
(%)
Other Expenses
a
Lease Expense 958 950 958 962 975 1242 882 83 1
Implied Annual Growth Rate -0 0 0 1 5 -7 -38 -59
(%)
Royalties & Management 357 504 864 1385 2537 3832 5425 7710 10678
b
Fees
Implied Annual Growth Rate 41 71 60 83 9 7 7 7
(%)
Depreciation 596 604 631 637 966 658 723 842 228
Implied Annual Growth Rate 1 4 0 52 -7 2 3 -23
(%)
c
Net Interest Expense -219 -213 -11 -70 376 305 357 352 1
Total Other Expenses 1692 1845 2442 2914 4854 6037 7387 8987 10908

Profit Before Tax 351 619 870 1676 1946 3033 4374 6 538 9949
Taxes (42%) 147 260 366 704 818 1274 1837 2746 4180
Net Profit 204 359 504 972 1128 1759 2537 3792 5769
Dividends 275 425 625 900 1100 1750 2524 3379 5719
Implied Annual Growth Rate 55 47 44 22 10 8 6 11
(%)
Tax Credit 1 138 213 313 450 536 865 1908 2373
Implied Annual Growth Rate 54 47 44 4 10 17 4
(%)
d
Capital Expenditure 392 610 3408 3461 886 641 944 841 310
Implied Annual Growth Rate 56 459 2 -74 -6 8 -2 -18
(%)
Change in Net Working -779 -668 516 997 1548 683 100 45 57
e
Capital
f
Implied Annual Growth Rate -14 -177 93 55 -15 -32 -15 5
(%)
Note: Data for 1992-96 are annual; following that, the data are presented in five-year increments.
a
Lease payments to SNC (the financing company).
b
Royalties and Management Fees payable to WDC.
c
Net interest expense = Interest paid minus interest received.
d
Capital expenditure includes cost of land purchase.
e
Negative values imply an increase in current assets, and positive values, a decrease in current assets.
f
All implied growth rates are projected compound annual growth rates.
Source: EDL Offering Circular and Casewriter Estimates.
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Exhibit 6 Euro Disneyland SCA: Projected Debt Schedule.
(FF billions)

Year Debt Issuance Debt Redemption Net Debt Level

1989 9.30 0.00 9.30
1992 0.99 0.00 10.29
1993 0.69 0.54 10.44
1994 2.95 0.78 12.61
1995 2.95 1.60 13.96
1996 0.00 1.87 12.09
1997 0.00 1.87 10.22
1998 0.00 1.87 8.35
1999 0.00 1.87 6.48
2000 0.00 1.87 4.61
2001 0.78 1.58 3.81
2002 0.78 1.58 3.01
2003 0.78 1.58 2.21
2004 0.78 1.58 1.41
2005 0.78 1.58 0.61
2006 1.15 0.44 1.32
2007 1.15 0.44 2.03
2008 1.15 0.44 2.74
2009 1.15 0.44 3.45
2010 1.15 0.44 4.16
2011 0.00 0.00 4.16
2012 0.00 0.00 4.16
2013 0.00 0.00 4.16
2014 0.00 0.00 4.16
2015 0.00 0.00 4.16
2016 0.00 0.00 4.16
Note: The 1989 debt of FF9.3 bn consists of FF4.5 bn at interest
rate of PIBOR + 1/2% to 7/8%, and FF4.8 billion at 7.85%. From
1992 and on, the interest rate is assumed to be 9%.
Source: EDL Offering Circular and Casewriter Estimates.

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Exhibit 7 WDC's Sensitivity Analysis of Returns to EDL Shareholders.

Internal Rate
of Return
Base Case 13.3

Reduced Attendance (10 million visits in year 1 of 12.7

operation)
Increased Attendance (12 million visits in year 1 of 13.8
operation)

10% Reduction in per capita spending 12.3

10% Increase in per capita spending 14.1

Six month delay in opening 12.8

10% Increase in construction costs 13.2

10% Reduction in resort income 13.0

10% Increase in resort income 13.5

7% Inflation after 1992 and unchanged real interest 15.3

rates
3% Inflation after 1992 and unchanged real interest 11.2
rates

1% Reduction in real interest rates after 1992 13.2

1% Increase in real interest rates after 1992 13.3

14.5 P/E ratio in 2017 13.4

10.5 P/E ratio in 2017 13.1
Note: The company is assumed to be capitalized at 12.5 times net profit
available for distribution in the year ending March 31, 2017. Share value is
derived from gross dividends per share assumed during the life of the project,
plus an assumed residual value in year 2017, discounted at 12%.

Source: EDL Offering Circular.

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