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Will the lockdown increase or reduce investment?

I was talking with someone on CoasterForce yesterday about the future of park investment, and he pointed out something very interesting to me; if you read through a lot of major companies' financial reports, they talk about cutting "non-essential CAPEX". What he then said to me was that to operators, new rides might be considered essential CAPEX, as they draw people in, and non-essential CAPEX would cover things like major maintenance, repainting facades, repaving pathways and other things like that. He used Cedar Fair as an example; they still plan to invest $85-100million into projects in 2021.

Do we think Merlin has this mentality?
 
General maintenance to keep assets (rides, buildings, parks etc) in their original condition is not classed as CapEx under accounting rules, it’s classed as an expense.

CapEx is only for buying new assets and increasing the value of existing ones.

This is why Merlin have historically spent quite well on new stuff. But woefully low on maintaining existing rides.

You can spread the cost of CapEx across multiple financial years so the full cost of a £15million new coaster doesn’t come out of profits in the year you build it. Expenses are the opposite - the full cost of general maintenance all comes out of profit in the year you do it.
 
AT86 said:
General maintenance to keep assets (rides, buildings, parks etc) in their original condition is not classed as CapEx under accounting rules, it’s classed as an expense.

CapEx is only for buying new assets and increasing the value of existing ones.

This is why Merlin have historically spent quite well on new stuff. But woefully low on maintaining existing rides.

You can spread the cost of CapEx across multiple financial years so the full cost of a £15million new coaster doesn’t come out of profits in the year you build it. Expenses are the opposite - the full cost of general maintenance all comes out of profit in the year you do it.
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Ah right; thanks for the clarification @AT86! In terms of basic maintenance; if that comes out of expenses, would things like what they did under the TLC project come under expenses as well, or would that have been non-essential CAPEX? But it does beg the question; if rides and additions aren't essential CAPEX, what would be considered essential CAPEX?
 
Matt N said:
Ah right; thanks for the clarification @AT86! In terms of basic maintenance; if that comes out of expenses, would things like what they did under the TLC project come under expenses as well, or would that have been non-essential CAPEX? But it does beg the question; if rides and additions aren't essential CAPEX, what would be considered essential CAPEX?
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As far as I know there is no such thing as ‘essential’ or ‘non essential’ CapEx in accounting terms. That terminology will purely be an internal measure made by a business. What is essential to one business won’t be to another.

Merlin will be going through their planned CapEx to decide what they see as essential and delaying/cancelling anything they see as non-essential.

Most of the TLC work will have been classed as expenses, they were just spending money on keeping existing assets maintained. I believe that the money spent on these projects was simply money that was saved elsewhere. I.e. the refurb work on Hex was paid for out of the money saved by not running the ride for a year. So the TLC work didn’t actually increase the overall expenses bill for the park.
 
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Thinking of other businesses. Essential CapEx might be a new datacentre to keep IT services running for existing staff, whereas a new building to help grow staff numbers might be seen as non-essential. There is probably very very little that would be capital expenditure and essential.
 
Ah right, thanks guys!

It's also worth remembering that Merlin still plans to invest 60% of its CAPEX budget; they've only gotten rid of 40% of it. Also, we don't know how long this reduction will be in effect for; for all we know, it could only be in effect for 2021 investments. By this time next year, I'd say that we will have a far clearer picture of the long-term impact this will have on the parks.

My current forecast is that the current crisis won't really have a huge impact on the parks after 2021, with attendance and CAPEX levels returning to normal by 2022-2023 (potentially 2021 if we're being optimistic), maybe by 2025 in a very worst case scenario.
 
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Matt N said:
Ah right, thanks guys!

It's also worth remembering that Merlin still plans to invest 60% of its CAPEX budget; they've only gotten rid of 40% of it. Also, we don't know how long this reduction will be in effect for; for all we know, it could only be in effect for 2021 investments. By this time next year, I'd say that we will have a far clearer picture of the long-term impact this will have on the parks.

My current forecast is that the current crisis won't really have a huge impact on the parks after 2021, with attendance and CAPEX levels returning to normal by 2022-2023 (potentially 2021 if we're being optimistic), maybe by 2025 in a very worst case scenario.
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Worse case scenario is merlin doesn't exist in 2025....

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Merlin will still exist, I think in the worst case situation they will sell off the parks (minus legoland) and focus more on the midways. Can’t see it happening anytime soon but i won’t be surprised if it happened.
 
Resort Theme Parks has always been the smallest division in Merlin. Lego and Midways account for more guests, more revenue and more profit by far. And they have higher profit margins.

RTP would be the obvious candidate for offloading should it become necessary.
 
I also think that Merlin's aims for growth don't really lie in the Resort Theme Parks division. Over the last decade or so, Merlin have exponentially increased the number of Legolands and Midways in their portfolio, but the number of Resort Theme Parks has stayed exactly the same, which I think is rather telling as to which are their main divisions.

However, I think Merlin does still care about the Resort Theme Parks, and will hold onto them for as long as they can. I doubt that they'll be sold any time soon, as even if Merlin did encounter major financial difficulties, I doubt KIRKBI and Blackstone would let them get to the point of needing to offload assets.
 
I have no idea how much it cost to run each midway but I’m guessing it’s cheaper then running a full park. You can see why they prefer midways. easier To run, don’t need massive investments regularly and they can open most of the year. So i can’t see it in the near future but if Merlin ever sold off the park division i doubt it would come as any surprise to anyone.
 
Parks will want to invest in new attractions but really would the normal general public really want to risk themselves and there families by going to places like Alton Towers or Thorpe Park. Also how they gonna get any big coaster or attraction build if the builders have to travel from aboard and keep 2m apart at all times it will take much longer to built which will mean the ride will cost more to build.
 
Investment are there to increase park attendance. If gate numbers are restricted due to social distancing, then there is no need for the parks to increase investment, especially if there is more people wanting to visit the parks than those allowed to enter. The parks will also need to recoup their losses during the lock down. Personally I can only see investment reduced to zero for the foreseeable future until this crisis is fully over and everything goes back to normal.
 
Interestingly the Merlin parks did very well during the 2008/09 financial crisis. If people cut down on holidays abroad during a recession (especially if more airlines go bust) then presumably Merlin's attractions will benefit as they are a cheaper alternative. Blackstone will also want to raise the value of the company so they can sell it on for a profit, which they can only do by investing. It may not all be doom and gloom.
 
I very much doubt they will invest for a few years. The company have lost money across all the attractions. If you lose 100 percent income from up to 30 attractions For 3-5 months possibly longer then the likely hood of investment is low. They will want to recoup the money lost before investing.
 
Short term - knee jerk reaction to loss of revenue. Massive cuts to budgets.

Medium term - realisation that something is needed to get people back - family thrill investment, maybe hyped as an SW, but with a smaller budget.

Long term - Depends on reaction to medium term investment.

We have a fantastic theme park that I love to bits. Hoping we still have one in a few years.

For all our often legitimate criticism of Merlin AT has to be economically viable to continue as what I still consider to be a great theme park.

I hope it will be.
 
In reopening I'm sure they'll increase investment hugely. Sadly that'll be investment in marketing and advertising to persuade people it's safe to return and give them their money. It won't include any investment in hardware, maintenance, entertainment or hours to actually deliver a good day out to those taken in by that promotion spend.
 
pluk said:
In reopening I'm sure they'll increase investment hugely. Sadly that'll be investment in marketing and advertising to persuade people it's safe to return and give them their money. It won't include any investment in hardware, maintenance, entertainment or hours to actually deliver a good day out to those taken in by that promotion spend.
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Very good point. I agree they will put the marketing budget first.
 
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