Merlin making noises about Government Aid

[AT86]

In the short term it was ok. In the long term it isn’t great.

Sounds like a very Merlin thing to do to me.

 

[rob666]

Same as Tesco.
Early expansion made good by renting, not buying, many of its early stores.

 

[WillPS]

I'd disagree, it raised capital to allow the company to operate. A common tactic, Next for example sold 2 warehouses and their HQ to raise operating capital at this time. It allows the creation of operating capital without the raising of debt which may be even more harsh than the rent and is exposed to changes in interest rate, whereas the rent is in a contract and I imagine locked at rate for x years.

Next can open a new warehouse and exit the lease on their existing premises in the future; theme parks cannot be relocated lock stock and barrel.

 

[AstroDan]

If this crisis wasn't happening we probably wouldn't be discussing if it was a smart move or not.

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We would be.

Many regret the sale irrespective of Covid.

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[Poisson]

Next can open a new warehouse and exit the lease on their existing premises in the future; theme parks cannot be relocated lock stock and barrel.

I suppose the balance would if they felt they could get on top of the loan payments v taking the capital and running. The fact the large acquisition was in 2007 suggests that had they taken the debt, viability would have been questionable in the economic downturn the following year.

Annnnnnyway, I digress because this is about Rona and crying for help.

I feel with the publishing of a phased exit to lockdown, the layout of the roadmap, it will massively help companies for returning staff to work but also when their income may return, what little it may be.

 

[Mr Pearse]

When we finally know how and when things are can start reopening that will surely give some indication then. I still can’t see them opening before mid/end of August after Boris said he wants to avoid large groups of people in one place. But who knows it’s all just guesses at the moment and next week should give us more information.

 

[HermanTheGerman]

We would be.

Many regret the sale irrespective of Covid.

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Out of interest - why do they regret the sale?

Did it come at the price of any particular limitations?

 

[imanautie]

Out of interest - why do they regret the sale?

Did it come at the price of any particular limitations?

They have basically sold their business and pay rent to run their business, unlike a warehouse they can't just cut the contract and move.

Saying that I still don't see it as a bad move personally.

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[Rick]

Merlin should NEVER have sold the land to Nick Leslau.

That was Nick Varney and his board's most stupid decision of the Merlin era.

It's not as simple as that. The leaseback arrangement was outlined in the days after the purchase of the parks was announced, the purchase of the parks was predicated on them selling the land as soon as they did. In fact, the sale of the land was completed about seven weeks after Blackstone bought Tussauds - the parks were purchased to sell.

It was buy the parks and immediately sell them off, or not buy them - there's room to argue about the logic of doing that, but it wasn't a decision as described.

There are pros and cons to any leaseback - but you have to understand the finer details of the lease to determine where the flaws are. In this case it wasn't a case of them using cash to purchase the parks, the parks were bought with debt so if you didn't have lease payments during troubled times, you'd be paying interest, or capital repayments with interest.

 

[Dave]

It's not as simple as that. The leaseback arrangement was outlined in the days after the purchase of the parks was announced, the purchase of the parks was predicated on them selling the land as soon as they did. In fact, the sale of the land was completed about seven weeks after Blackstone bought Tussauds - the parks were purchased to sell.

It was buy the parks and immediately sell them off, or not buy them - there's room to argue about the logic of doing that, but it wasn't a decision as described.

There are pros and cons to any leaseback - but you have to understand the finer details of the lease to determine where the flaws are. In this case it wasn't a case of them using cash to purchase the parks, the parks were bought with debt so if you didn't have lease payments during troubled times, you'd be paying interest, or capital repayments with interest.

The flaw however is that with a loan and interest payments the interest rates are fixed or track the BoE rates. Rent is at the control of the landlord (it was fixed for 10 years but my understanding is that has passed and costs went up considerably).

I guarantee whether they had a choice or not the sale and subsequent rent payments are a huge weight around their necks now.

 

[Islander]

They have basically sold their business and pay rent to run their business, unlike a warehouse they can't just cut the contract and move.

Saying that I still don't see it as a bad move personally.

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For clarity, the land was sold and rented back, not the business


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[imanautie]

For clarity, the land was sold and rented back, not the business


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I get that, that's why I say basically, their is no business without the land that's why I say they basically sold the business because they functionally have.

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[Rick]

The flaw however is that with a loan and interest payments the interest rates are fixed or track the BoE rates. Rent is at the control of the landlord (it was fixed for 10 years but my understanding is that has passed and costs went up considerably).

Depends on the value of the loan and what the base rate does over the term of the borrowing. We can look at what the base rate has done in the past thirteen years and decide whether it was a good idea or not, but that's like picking your horse after the race has run.

There is no mention of a ten year period in the IPO document as best I can see after a quick skim. It states (page 275) "The consideration paid by the Prestbury Group was a total of £622.4m (the "Purchase Price"). The rent payable by the Group is linked to the UK Retail Price Index, and with the Group's right to two extensions, the total term of each of the leases is 105 years".

If it's linked exclusively to the RPI, they're winning!

Where is the ten year thing outlined and what does it relate to? That sounds odd to me on a lease of this magnitude.

 

[ChristmasPud]

I get that, that's why I say basically, their is no business without the land that's why I say they basically sold the business because they functionally have.

But Nick Leslau's company would have no say in the running of the business (unless they were also shareholders) and can't get rid of Merlin if they dont make xyz profit like they could if Merlin sold the business to them. They can only get rid of Merlin if they dont pay the rent, so it's not quite the same situation.

Effectively it's Merlin's park, Im sure Prestbury dont own the park hardware, just the property, so they couldnt sell the park on to someone else if Merlin went bust. It just adds a drain on the park's finance that it could do without

 

[imanautie]

But Nick Leslau's company would have no say in the running of the business (unless they were also shareholders) and can't get rid of Merlin if they dont make xyz profit like they could if Merlin sold the business to them. They can only get rid of Merlin if they dont pay the rent, so it's not quite the same situation.

Effectively it's Merlin's park, Im sure Prestbury dont own the park hardware, just the property. It just adds a drain on the park's finance that it could do without

To clarify further what I mean, merlin have no easy way out of the leaseback agreement.

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[Rick]

It just adds a drain on the park's finance that it could do without

Again, I think this is a misrepresentation of the situation and the choices made.

If they have the parks and they're generating revenue and profit for them, there would have been 'a drain' of one kind or another, whether that be debt interest or lease payments. If they're paying rent against the RPI as I just outlined - that's quite interesting if you look at it over time on a chart.

As an operator, there are a lot of instances where it's better to have a landlord than a banker - from a flexibility perspective, but also when there are dark times, it's in the best interest of the landlord to help the existing owner, more than it would be the bank.

 

[ChristmasPud]

Yeah interesting perspective actually

If they have the parks and they're generating revenue and profit for them, there would have been 'a drain' of one kind or another, whether that be debt interest or lease payments.

As in, if they'd kept the land and gone to the banks instead to finance buying the parks?

 

[Rick]

As in, if they'd kept the land and gone to the banks instead to finance buying the parks?

Exactly. Companies can't borrow infinitum, the leaseback allows you to use your 'allocation' of borrowed money more effectively, by using it to open midways, acquire other businesses, etc.

In terms of the landlord vs. bank thing, a landlord is more likely to work with an operating organisation because future lease payments are guaranteed by the ongoing success of the business. Note today that McDonalds are trying to work with landlords to reduce rent during the Covid closure period.

A loan repayment to a bank is less discriminatory and far less pragmatic when things get tough.