Merlin Entertainments: General Discussion

[Quantum]

Going hard on building Lego parks on far flung parts of the world has not been the best idea for Merlin. The neverending chase for constant growth has come at a cost.

It's no suprise that Merlin are trying to trim the fat but they are struggling to offload Sealife centres. If Merlin is forced to start selling off parks then they really are in trouble.

Merlin has some big problems coming down the line, first and foremost the aging ride lineups at various parks, the ongoing cost of living crisis, declining standard/ re reduced value across the board and Universal looming in the distance.

They really have a mountain to climb

 

[GooseOnTheLoose]

Going hard on building Lego parks on far flung parts of the world has not been the best idea for Merlin. The neverending chase for constant growth has come at a cost.

I think there's a serious conflation of issues here. The credit downgrade, as I noted earlier was entirely expected after S&P's move, is a macro-economic problem. It's about a high-debt company operating in a high-interest-rate environment. It is not a direct verdict on their specific operational strategy, which seems to be the focus of your post.

The majority of the debt that Merlin has is associated with their original leveraged buyout of Tussaud's, and the second leveraged buyout which enabled it to be taken into private ownership again.

To claim the Legoland expansion has "not been the best idea" flies in the face of the financial facts. You're confusing short term, non-cash impairment charges (the well documented write-downs for New York and Korea) with long-term strategy. The Legoland Parks segment is, by a significant margin, Merlin's largest revenue generator. That's not a cost, it's the core engine of the business.

It's no suprise that Merlin are trying to trim the fat but they are struggling to offload Sealife centres. If Merlin is forced to start selling off parks then they really are in trouble.

Saying they're struggling to offload Sea Life is an exaggeration, as is citing Universal as a problem coming down the line. Universal is, at best, a 2030s issue. It has absolutely no bearing on a credit rating adjustment from Moody's today.

With regard to Sea Life, Merlin had appointed an investment bank to explore the sale, but they didn't accept any of the offers they received. That's not "struggling". Struggling is receiving no offers at all. If the attractions themselves were a major cause for concern they would have already been shuttered.

Merlin has some big problems coming down the line, first and foremost the aging ride lineups at various parks, the ongoing cost of living crisis, declining standard/ re reduced value across the board and Universal looming in the distance.

They really have a mountain to climb

Ageing ride lineups aren't a "problem they have coming". It's a problem they are actively solving across the portfolio. The millions spent on new rides like Hyperia, Nemesis: Reborn, Minifigure Speedway, Bluey, Mandrill Mayhem and the reimaginings of existing attractions is the investment. There's also the massive 5 year multi-million pound refurbishment of the London Eye, which has just started to take place. It's just not the expansionary capex thoosies crave.

In this economic climate, shoring up your core, high-value assets is the most sensible and resilient business plan. This isn't neglect, it's the literal opposite.

 

[Islander]

I think there's a serious conflation of issues here. The credit downgrade, as I noted earlier was entirely expected after S&P's move, is a macro-economic problem. It's about a high-debt company operating in a high-interest-rate environment. It is not a direct verdict on their specific operational strategy, which seems to be the focus of your post.

The majority of the debt that Merlin has is associated with their original leveraged buyout of Tussaud's, and the second leveraged buyout which enabled it to be taken into private ownership again.

To claim the Legoland expansion has "not been the best idea" flies in the face of the financial facts. You're confusing short term, non-cash impairment charges (the well documented write-downs for New York and Korea) with long-term strategy. The Legoland Parks segment is, by a significant margin, Merlin's largest revenue generator. That's not a cost, it's the core engine of the business.

Saying they're struggling to offload Sea Life is an exaggeration, as is citing Universal as a problem coming down the line. Universal is, at best, a 2030s issue. It has absolutely no bearing on a credit rating adjustment from Moody's today.

With regard to Sea Life, Merlin had appointed an investment bank to explore the sale, but they didn't accept any of the offers they received. That's not "struggling". Struggling is receiving no offers at all. If the attractions themselves were a major cause for concern they would have already been shuttered.

Ageing ride lineups aren't a "problem they have coming". It's a problem they are actively solving across the portfolio. The millions spent on new rides like Hyperia, Nemesis: Reborn, Minifigure Speedway, Bluey, Mandrill Mayhem and the reimaginings of existing attractions is the investment. There's also the massive 5 year multi-million pound refurbishment of the London Eye, which has just started to take place. It's just not the expansionary capex thoosies crave.

In this economic climate, shoring up your core, high-value assets is the most sensible and resilient business plan. This isn't neglect, it's the literal opposite.

I’m starting to wonder if you’re actually Fiona Eastwood…

 

[pluk]

However, and this is the crucial distinction, that paper value has very little to do with the company's actual operational performance or its cash in the bank. It's an accountant's correction, not a signal of operational collapse. It's triggered by factors like their newer Legoland parks trading "below initial expectations", which simply means they'll take longer to pay off, not that they are actively losing cash day to day.

It might not mean they are losing cash day to day NOW, but when you have the debt pile Merlin sit on it doesn't take much of a swing to the cost of maintaining and servicing that debt to put you at a very real day to day loss and efective insolvency.

 

[GooseOnTheLoose]

It might not mean they are losing cash day to day NOW, but when you have the debt pile Merlin sit on it doesn't take much of a swing to the cost of maintaining and servicing that debt to put you at a very real day to day loss and efective insolvency.

You are, of course, absolutely correct. That's the fundamental risk model for any business with a highly leveraged, private equity style debt structure like Merlin's.

What you've just described (the risk of a swing in interest rates increasing the cost of servicing that debt) is the precise reason for the credit downgrade, not the result of it. Moody's and S&P have looked at the total debt pile, looked at the new, higher interest rates, and concluded that Merlin now has less financial headroom or cushion to absorb future shocks.

I believe this actually reinforces the distinction I was trying to make in the post you quoted. The discussion was becoming muddled, with some users conflating two very different issues. Future financial risk (the higher cost of debt servicing (your point), which is a very real macro-economic risk that the rating agencies have now flagged.) and perceived current operational failures (the idea that the £150m non-cash impairment charge meant the parks are "actively losing cash day to day").

My post was focused only on the point of perceived current operational failures, which is an accounting correction. Your post is correctly identifying future financial risk, which is the actual news.

We are in agreement though. The downgrade is a statement about future risk, not a sign of current operational collapse.

I’m starting to wonder if you’re actually Fiona Eastwood…

As far as I'm aware, she doesn't have feathers, a beak, beady eyes and a large wingspan. It would be impertinent of me to comment about the size of her caboose though, but mine is rather rotund.

 

[Jb85]

for those who don’t know impairments are accounting adjustments writing down the value of an asset and have to be booked to the profit and loss

They are not cash movements and have no real impact on the operating profit of the business in that they are a below the line adjustment.

In theory - Merlin could reverse this provision and a future date and push it back to profit

 

[Islander]

for those who don’t know impairments are accounting adjustments writing down the value of an asset and have to be booked to the profit and loss

They are not cash movements and have no real impact on the operating profit of the business in that they are a below the line adjustment.

In theory - Merlin could reverse this provision and a future date and push it back to profit

To be fair that’s now been pointed out a good three or four times, so I don’t imagine reinforcing the fact yet again will sway many more minds lol

 

[Jb85]

To be fair that’s now been pointed out a good three or four times, so I don’t imagine reinforcing the fact yet again will sway many more minds lol

You’d think wouldn’t you …..

Just accountant me stepping in. ….

 

[QTXAdsy]

So I guess they got Father Ted to be Merlin's accountant?

Yeah, that extra money was resting in their account.

 

[Hid]

Question if Merlin did collapse what would happen to all their properties would they all or be controlled by another company because that's a lot of Jobs gone overnight and other aspects which would be gone for many parts of the world

 

[Osaka12]

To all the informed and educated this might sound stupid, but if Merlin had just dumped all that overseas investment into their UK monopoly, infrastructure and experience/quality, They could have made it a destination. People would spend here instead of Europe and America? There is a lot of money in this country, but nobody willing to spend it. Merlin could have mopped up. Crazy.

 

[Hid]

To all the informed and educated this might sound stupid, but if Merlin had just dumped all that overseas investment into their UK monopoly, infrastructure and experience/quality, They could have made it a destination. People would spend here instead of Europe and America? There is a lot of money in this country, but nobody willing to spend it. Merlin could have mopped up. Crazy.

This is a part might be why Merlin is less willing to work in the UK is Brexit is the problem making it much more difficult to import components to construct things but getting planning is far more difficult in the UK than anywhere else. Also America, Mainland Europe and Asia have more people just on their own UK also has far higher energy costs to. This speculation of course but something I think might be why the invest less in the UK

 

[GooseOnTheLoose]

To all the informed and educated this might sound stupid, but if Merlin had just dumped all that overseas investment into their UK monopoly, infrastructure and experience/quality, They could have made it a destination. People would spend here instead of Europe and America? There is a lot of money in this country, but nobody willing to spend it. Merlin could have mopped up. Crazy.

Merlin do not have a monopoly in the UK, or even anything anywhere near close to be considered a monopoly.

Merlin's folly is/was, perhaps, their focus on midways for the best part of two decades. It is the midways which have to compete against phones, screen time and videogames, not the theme park destinations. People are still willing to sacrifice a full day, they're not willing to part with a few hours. Certainly not repeatedly for the same product and diminishing returns.

Finance is always raised against a project, or a vision. They would not have been able to raise finance anywhere near close enough to their worldwide spend, for the UK alone.

 

[Tom]

Lenders and equity investors focus on pre-tax earnings to judge creditworthiness and cash-generation capacity because taxes are secondary to whether operations produce sustainable returns.

Merlin is heavily debt laden and is burning cash.

I’d argue pre tax losses are more important and telling than anything else to them right now.

 

[Osaka12]

I see it as a monopoly. I like thrill rides and themed experiences. They own several properties that offer that. In the US there are several places competing for thrill on site guests. Here, only melin on my eyes. Pleasure beach maybe, but I don't hanker for that offering. I don't think Brexit is the issue. Would the EU have funded Merlin like energylandia? I don't think so.

 

[GooseOnTheLoose]

I see it as a monopoly. I like thrill rides and themed experiences. They own several properties that offer that. In the US there are several places competing for thrill on site guests. Here, only melin on my eyes. Pleasure beach maybe, but I don't hanker for that offering.

Merlin has been the largest operator, but falls massively short of having a monopoly, or even behaving like a monopolist. It does not control a minimum of 25% of the market, and even if it did that's not the only yard stick the CMA use.

A monopolist has so much power that they control the industry's price of the product, the servicing and production contracts around the product, and the consumer has no other choice.

Merlin doesn't have industry control over pricing. Entry prices have broadly stayed consistent for the past 20ish years of operations, increasing just under the inflation rate. Their product has got cheaper, not more expensive. Merlin's pricing also doesn't affect the pricing strategy of their competitors, with Paulton's, Blackpool and Drayton regularly being more expensive to visit than a Merlin park.

Merlin does not have exclusive contracts with suppliers, nor do they control how much that contract is worth. Other parks in the UK can, and do, go to the same attraction providers as Merlin and pay the same price as everyone else. Merlin does not have purchasing power to bully their suppliers.

A monopoly means that you don't have another choice, there aren't any other parks one can visit. This isn't the same as not having any other parks of a similar and consistent high production quality.

Merlin isn't the only seller and there are close substitutes.

A monopoly ensures that there are high barriers to entry. Either the costs of starting up are too high, or government intervention makes it impossible, or the essential resources are controlled by the monopoly. Whilst there hasn't been a new park, of considerable note or size, opening in the UK during Merlin's existence, there have been expanding existing players and two new ones attempting to enter the market, with Universal and Puy Du Fou.

I don't think Brexit is the issue. Would the EU have funded Merlin like energylandia? I don't think so.

I didn't bring Brexit onto the conversation, but Merlin's investment model has never been based on public grants, EU or otherwise. They are a high-leverage, private equity owned business. Their capital for new attractions comes from debt, which is financed against their existing assets and revenue.

Whether we were in or out of the EU would make no difference. Merlin's business model would never have been eligible for the kind of regional development grants that a park like Energylandia, building from scratch in a new-growth area of Poland, was able to secure.

Brexit isn't the issue. The real issue, as we've discussed, is a high-debt company operating in a new, high-interest-rate environment. That's the factor dictating their investment decisions, not a hypothetical EU grant they were never going to get.

 

[Hid]

I see it as a monopoly. I like thrill rides and themed experiences. They own several properties that offer that. In the US there are several places competing for thrill on site guests. Here, only melin on my eyes. Pleasure beach maybe, but I don't hanker for that offering. I don't think Brexit is the issue. Would the EU have funded Merlin like energylandia? I don't think so.

Flamingo Land also cater to thrill seekers as well

 

[Osaka12]

Merlin has been the largest operator, but falls massively short of having a monopoly, or even behaving like a monopolist. It does not control a minimum of 25% of the market, and even if it did that's not the only yard stick the CMA use.

A monopolist has so much power that they control the industry's price of the product, the servicing and production contracts around the product, and the consumer has no other choice.

Merlin doesn't have industry control over pricing. Entry prices have broadly stayed consistent for the past 20ish years of operations, increasing just under the inflation rate. Their product has got cheaper, not more expensive. Merlin's pricing also doesn't affect the pricing strategy of their competitors, with Paulton's, Blackpool and Drayton regularly being more expensive to visit than a Merlin park.

Merlin does not have exclusive contracts with suppliers, nor do they control how much that contract is worth. Other parks in the UK can, and do, go to the same attraction providers as Merlin and pay the same price as everyone else. Merlin does not have purchasing power to bully their suppliers.

A monopoly means that you don't have another choice, there aren't any other parks one can visit. This isn't the same as not having any other parks of a similar and consistent high production quality.

Merlin isn't the only seller and there are close substitutes.

A monopoly ensures that there are high barriers to entry. Either the costs of starting up are too high, or government intervention makes it impossible, or the essential resources are controlled by the monopoly. Whilst there hasn't been a new park, of considerable note or size, opening in the UK during Merlin's existence, there have been expanding existing players and two new ones attempting to enter the market, with Universal and Puy Du Fou.

I didn't bring Brexit onto the conversation, but Merlin's investment model has never been based on public grants, EU or otherwise. They are a high-leverage, private equity owned business. Their capital for new attractions comes from debt, which is financed against their existing assets and revenue.

Whether we were in or out of the EU would make no difference. Merlin's business model would never have been eligible for the kind of regional development grants that a park like Energylandia, building from scratch in a new-growth area of Poland, was able to secure.

Brexit isn't the issue. The real issue, as we've discussed, is a high-debt company operating in a new, high-interest-rate environment. That's the factor dictating their investment decisions, not a hypothetical EU grant they were never going to get.

Hey, I'm just voicing my opinion as a member of the working class gp who enjoys visiting parks.

 

[rob666]

...and every opinion is sacred, but Merlin do not have a theme park monopoly in this country, there are at least a dozen competitors in this small nation of ours.
A competetive market, with lots of options to avoid Merlin if you choose.

 

[Funcone]

I don't know whether Merlin has a Monopoly, but Alton Towers certainly has one. I played it with my kids last night.