By Liam Proud
(The author is a Reuters Breakingviews columnist.)
LONDON, May 23 (Reuters Breakingviews) - Buyout funds have tons of cash - about $695 billion on Bain & Company's count - and few places to spend it. Even so, private equity managers probably have better targets than 3.4 billion pound Legoland operator Merlin Entertainments .
Investors have been spooked by Merlin's falling returns on employed capital, which dipped to 8.9% last year from 10.6% in 2014. ValueAct agrees with Chief Executive Nick Varney that Merlin should build new parks to boost growth, and hopes another private owner - the group was previously owned by Blackstone Group and CVC Capital - would be more willing than public markets to pay up.
A valuation of 8.8 times forward EBITDA might draw interest, since Merlin's five-year average valuation is 11.2. A consortium including EQT recently bid for Spanish peer Parques Reunidos at a 10 times forward EBITDA multiple, according to ValueAct. The new owner could probably juice returns by reining in capital spending once new parks are up and running.
Still, the returns seem about as thrilling as a ride on one of Legoland's kiddy rollercoasters. Including a 25% equity premium and Merlin's debt, the deal would be worth 5.4 billion pounds. If the new owner could borrow up to 5 times EBITDA, their equity cheque would be 2.8 billion pounds.
Assume the acquirer can grow revenue by 7%, in line with the historic average, keep the EBITDA margin stable and invest the same amount as analysts expect Merlin to over the next three years, before cutting it in half. That would reduce debt to 2.2 billion pounds by 2024. On its five-year average 11.2 times EBITDA multiple, a sale would be worth 8.1 billion pounds, implying an equity value of 5.9 billion pounds. That's just a 16% internal rate of return. And the new owner would be exposed to any collapse in consumer confidence due to Brexit, or the risk of further terror attacks hurting busy attractions like theme parks. Buyout barons won't be queuing up to get on this rollercoaster.
- ValueAct Capital on May 23 urged Merlin Entertainments to sell itself to a private equity fund, and said a buyout could value the company at about 4 pounds a share, or 20% more than its current price.
- The U.S. activist fund invested in the owner of Madame Tussauds, the London Eye and Alton Towers in October 2017 and now holds a 9.3% stake. Merlin shares fell 11.6% between Oct. 31, 2017 and May 22, 2019.
- "We believe the Company's declining valuation is directly linked to the decline in reported return on invested capital," ValueAct said in a statement. "And yet, the Company is right to pursue most of these investments for the long-term value of the business."
- "As the Company deploys an increasing amount of capital that takes time to generate earnings, we fear it will take several years for Merlin to be appropriately valued by public shareholders." The fund supports the current management team led by Nick Varney, who has been chief executive since 1999.
- Merlin shares rose 4.1% to 3.46 pounds at 0730 GMT on May 23. That is 9% above its initial public offering price of 3.15 pounds in 2013.