Our newsfeeds have been buzzing over the past days about LEGOLAND, Merlin Entertainments, and the privatisation of the theme park company. What this means is that LEGOLAND will be back in private hands after going public as part of Merlin in November 2013. Let’s take a journey through the history of LEGOLAND, reflecting back on the ups, downs, and changes of ownership that have led us to today.
The recent news doesn’t mean that LEGO owns Merlin Entertainments, it simply means that it now owns a larger piece of the company — to be precise, increasing from its current position of 29.58% to eventually 50%. This is just half the news, because the other half is about going private — back to a similar position Merlin was in prior to 2013. Technically, KIRKBI owns LEGO, which in turn now manages Merlin Entertainments. The structure of the business as it looks today is illustrated below.
Who is Merlin Entertainments?
Merlin Entertainments operates LEGOLAND today. Merlin acquired four LEGOLAND Parks in 2005 (Billund, Windsor, California, and Germany) while KIRKBI retained a 29.58% stake in the operating group during LEGO’s troubled years in the early 2000s. Today, Merlin also owns or operates scores of non-LEGO theme parks and attractions, from Madame Tussauds wax museums and a variety of aquariums around the world to the iconic London Eye and Warwick Castle.
Who is KIRKBI?
Before we go any further, it’s important to understand that KIRKBI is the Kirk Kristiansen family’s private holding and investment company, which actually owns LEGO. In short, a smart business person will never put all their eggs in one basket. The investment company has stakes in a wider range of other businesses, one of which is sustainability. They’re heavily invested in renewable energy sources such as wind farms and commercial real estate and many, many other areas including private equity bids — which brings us to the introduction of Berkeley Bidco Limited.
Berkeley Bidco is the new company that intends to take over Merlin Entertainments. But who exactly are they? What we’ve learned in the past few days is that the acquisition bid took place as part of an internal work-stream called Project Motion, intended to form a new consortium to privatise Merlin Entertainments. The company Berkeley Bidco Limited was incorporated on 30th May 2019 to formalise the soon-to-be-public announcement about privatisation. What we assume is that there’s likely an unequal investment by CPPIB, since they’re listed as the co-investor. This also suggests that it’s plausible that Blackstone has the larger percentage of the vested interest and we can assume that both KIRKBI and Blackstone will be calling the shots, whereas CPPIB’s role is simply a passive investor.
Who is CPPIB?
CPPIB is the Canadian Pension Plan Investment Board. Yes, so now Canada too has a stake in LEGOLAND, if you want to be specific. It’s basically a sovereign wealth fund — a state-owned wealth management organization. What’s a state-owned organization’s interest in an entertainment company? The answer is simple: To grow money. State-owned funds typically fund long-term investments and looking for returns just like any investor would want. You can imagine that state funds are huge. CPPIB has a total of C$392 billion in investments, managing the Canadian Pension Plan on behalf of 20 million Canadians. You can go to sleep knowing that every time you (eventually) visit LEGOLAND, you’re helping a Canadian retiree. Before you go screaming, it’s likely (hopefully?) your own government is doing something for you in your very own sovereign wealth fund investment plans — so don’t get mad.
Blackstone – who are they, and what do they want out of this?
While everyone wants to make money out of this no doubt, KIRKBI has its own “child,” LEGOLAND, to love and care for. CPPIB has the citizens of Canada to look out for. What about Blackstone? While it may seem crude, they’re just in it for the money. That’s not necessarily a bad thing, it’s just how the world works. Blackstone is an American private equity firm. Private equity firms basically exist to buy companies and fix them to be more profitable and then sell them years later for financial gains to keep their shareholders
Strategies of Private Equity firms
Private equity firms have several investment strategies in mind when they enter into an arrangement such as this, but the primary goal is always making money. Within the company being invested in, employees may experience feelings of uncertainty and uneasiness when they hear words like “investors” and “takeovers.” When it comes to Merlin and its various assets, one hypothetical possibility would be a restructuring. In this scenario, the easiest solution would be eliminating the money-losing businesses to focus resources on businesses that produce profits, before selling them later for great returns. “Making money fast.” – That would be the simplified example of what the leveraged buyouts (LBO) strategy of private equity organisations would be.
With Kirkbi and CPPIB also having a stake in Merlin, it’s more likely that we will see another strategy come into play. As an example, private equity firms are also known for turning to what’s known as a capital growth strategy. Here, the approach would be investigate entry into new markets, explore potential acquisitions, and expand operations. KIRKBI and CPPIB’s priorities and principles may differ from that of Blackstone’s. KIRKBI would not show a renewed interest in LEGOLAND to only give it the axe, so the driving force behind the acquisition is likely the potential for further growth. Other Merlin properties could be at risk, but it’s still too early to tell. The possibility of layoffs would prove undesirable for CPPIB due to the undesirable appearance of a pension fund investing in the disruption of hard working communities. For CPPIB, the capital growth strategy would equate to a long-term planning in which the yield of returns would not be as immediate.
LEGOLAND Park Openings and ownership over the years
This is exactly why going private has its advantages over remaining public. Public shareholders typically report quarterly, have short term visions, and demand quick returns, with such turnaround times making it difficult to transform a company. Going private and seeking longer-term returns seem to be the most likely goals of this acquisition.
Last but not least, Blackstone has historically taken this approach for a large portion of their investment strategies and – surprise, surprise – this is exactly how they built Merlin Entertainments to be the 2nd largest in terms of amusement park rankings since they acquired Merlin back in 2005. The frontrunner in this field is Disney, which was founded in 1923.
Timeline of Merlin, LEGOLAND, and Blackstone
If there’s one person that has remained consistent throughout the growth of Merlin till today, it would be Nicholas John Varney to thank. Merlin Entertainments Group Limited was formed and founded in 1998 when Varney organised a buyout of Vardon Attractions with the help of investment group, Apax Partners. With this foundation, Merlin eventually became the largest European operator of Amusement parks.
In March 2004, Merlin was bought out by Hermes Private Equity for £72.5m. Varney was keen to acquire LEGOLAND when it came up for sale in 2005, but Hermes wasn’t in the position to inject more funds into their acquisition. However, Hermes was willing to sell Merlin to a buyer that could make them an attractive offer. They found their perfect suitor in the form of Joseph Baratta, a Senior Managing Director of The Blackstone Group. Baratta stepped up to acquire Merlin for £102.5m and spent another £259m to add the four LEGOLAND parks to its portfolio. As part of the negotiated deal, LEGO would own a 25% stake in Merlin.
Source: Merlin Entertainments
Madame Tussauds joins the family
Three years later, Merlin continued to expand with the acquisition of world-renowned exhibitor of life-size wax figures, Madame Tussauds. It was purchased from Dubai International Capital (DIC) with £1,028 million in cash and a 20% stake in the company, dwarfing the figure LEGOLAND was acquired for. Yet, the arrangement was indicative of the appetite Merlin, Blackstone, and the LEGO family had in mind when it came to realizing their vision of growth.
A decade later
By 2009, Merlin had experienced over 10 years as a private enterprise. There was talk about taking the company public (IPO), but those plans were put on hold with intentions of doing so at some point in the future. In 2010, the publicly stated reason was that the financial market was still too volatile to take that leap.
Merlin continued to develop the LEGOLAND franchise with midway attractions in the form of LEGOLAND Discovery Centres. From a strategic point of view, these types of attractions are considered “weatherproof” since they are smaller indoor venues, usually located in shopping malls, resorts or city centres. Since operation and attendance of outdoor parks is largely dependent on seasonal conditions and the weather, midway attractions diversify attendance rates by eliminating some of the downtime traditional theme parks often experience. Several of the current LEGOLAND parks (including the upcoming LEGOLAND New York) operate on seasonal schedules.
A new investor
Considering that Merlin has shown steady growth over the years and with the IPO that didn’t transpire, perhaps other investors saw it as a good time to invest. CVC Private Capital saw that potential and bought into a 20% stake into the company. CVC raised those stakes to 28% by buying out a portion from the Dubai Investors (DIC) that had vested during the Madame Tussauds acquisition
In 2013, the time was finally right for Merlin to go public, and the news was well received with a valuation of £3.4 Billion. The share price even increased on the opening day of trade.
According to Merlin, of the 30% of stock they floated in the market, 87.5% was purchased by institutional investors (pension funds) while the remaining portions were from individual retail investors. This reminds us of the current Canadian Pension Plan Investment Board. It’s quite possible that CPPIB may have had a stake in Merlin since that time.
Over the next few years, both Merlin and CVC would slowly decrease their ownership. Their final exit was in March 2015 when they sold their remaining shares at a price of £653 million.
Three months later, on June 2nd, 2015, visitors to one of Merlin’s theme parks Alton Towers experienced a tragic accident in which a loaded roller coaster train carrying 16 riders collided with an empty stationary train. Eleven of the riders required medical treatment and five were seriously injured, including two who required partial leg amputations. Merlin’s stock quickly fell in market value due to this news and general consumer sentiment.
Public sentiment toward Merlin did slowly recover while revenues steadily grew, but the market wasn’t kind. Over the next 2 years, stock value tumbled 20% in October 2017. Blame fell on a series of terror attacks around Europe and unfavourable weather that affected crowd turnout at Merlin’s attractions.
Yet another investor
Not long after in February 2018, a new investor ValueAct Capital announces that it had increased its share in Merlin to a total of 9.3% in ownership. Any single entity ownership of above 5% is required by law to be declared and it is possible that ValueAct did see some value in Merlin after the crash and potentially bought into some of the shares in October 2017 and steadily increased its position, hoping for good returns. At this point, with all other investors already no longer involved in Merlin, and with the total value of ValueAct at nearly 10%, they were considered the second-largest owner (after KIRKBI) giving them a voice at the proverbial table.
It was apparent that ValueAct wasn’t a very patient investor, and in May 2019 the company sent an open letter to Merlin’s board to consider going private again, citing reasons that included Merlin’s struggle as a public company, and that private ownership would be better placed. While they did cite various reasons publicly, we’ll never know what went on behind closed doors. Based on the trend of stocks since February 2018, ValueAct Capital did get a good purchase price, but its market value was reduced by one-third since June 2017, perhaps one of the lowest in trading history. However, the market seemed even more bleak as it dipped below ValueAct’s original buy price in October and December 2018. ValueAct did also openly state that Merlin was the worst performing investment in its portfolio. Merlin’s share value increased by 4% upon the announcement.
Merlin responded publicly with a curt reply saying it received the feedback and will continue constructive dialogue with ValueAct. What transpired between those days and the eventual announcement of the takeover will be a mystery for now. Considering a timeline of fewer than two months, it may seem that there were already plans to go private again.
Where do Merlin and LEGOLAND go from here?
All this leads us to where we are today, with Blackstone joining the owners of LEGO and Canadian co-investor CPPIB buying back full control of Merlin’s fate. But where does this leave us?
Nick Varney, the man behind Merlin Entertainments since the very beginning, seems to care deeply for the company he toiled over for years. From the initial negotiation buyout to various investments from private equity firms, he’s always been steadfast at the helm. Visions that were shared during their public tenure always look towards a longer-term horizon.
Many a CEO would tell you that managing results can be tough on a 90-day basis with fiduciary obligations to public investors while simultaneously maintaining progress toward a long term vision. Going private would give Merlin the leverage, funds, and more importantly time and patience to plan for greater things. The bonus is that they get to do it with investors who have the same vision they had 14 years ago when they all came together — Nick Varney, the Kristiansen family, and Joseph Baratta, today Blackstone’s Global Head of Private Equity. Familiar faces have come together again, and perhaps good old-time friends can make magic happen.
While LEGOLAND is just one part of the greater group for Merlin, LEGO fans are eager to see how things pan out and hope for greater things to come. Let us know your thoughts about this news and your personal experiences with LEGOLAND or Merlin Entertainments.
- Project Motion acquired from metadata of document Blackstone Press Release June 28, 2019.