PACE UNIVERSITY

EURO DISNEYLAND
INTERNATIONAL CORPORATE FINANCE

Efe Arda Diandra Aditya Kusumawardhani

Executive Summary The largest media conglomerate in the world in terms of revenue, The Walt Disney Company had laid foundation to a $2.5Billlion (FF 15Billion) project called Euro Disneyland in 1987. Advantages provided by the government, project demographics and expected demand for such a theme park pointed to the parks success while the project had to overtake risks such as dependability of government investments and a possible competitor theme park project by MCA Universal planned to be located in London. This paper analyses the financial strengths, weaknesses and risks of this project and concludes with the current financial properties of the theme park.

Introduction The Walt Disney Company, commonly known as Disney, is an American diversified multinational mass media corporation headquartered in Walt Disney Studios, Burbank, California. It is the largest media conglomerate in the world in terms of revenue. Disney was founded on October 16, 1923, by Walt and Roy Disney as the Disney Brothers Cartoon Studio, and was established as a leader in the American animation industry before diversifying into live-action film production, television, and travel. Changing its name to Walt Disney Company in 1986, it expanded its existing operations and also started divisions focused upon theater, radio, music, publishing, and online media. Disney also owns and operates the ABC broadcast television network; cable television networks such as Disney Channel, ESPN, A+E Networks, LifeTime and ABC Family; publishing, merchandising, and theatre divisions; and owns and licenses 14 theme parks around the world. One of these theme parks, The Euro Disneyland is be examined in this paper. The Walt Disney Company had laid foundation of The Euro Disneyland, currently named The Disneyland Park, in 1987. The park was known as Euro Disneyland until May 1994, Euro Disneyland Paris until September 1994, Disneyland Paris until February 2002, and Disneyland Park (English) and Parc Disneyland (French) since March 2002. The theme park is located 20 miles east of Paris and was opened on 12 April 1992. The park consists of five different themed lands named; Frontierland, Adventureland, Fantasyland, Discoveryland and Main Street.

The Project The expected cost of the project as designed in 1987 was $2.5 Billion, or FF15 Billion based on an exchange rate of FF6 = $1. The project was to be financed by The Walt Disney Co. and the money generated by the stock offering of Euro Disneyland. According to the plan, Walt Disney put up $145 Million for %49 of Euro Disneylands equity after spending $350 Million for the planning of the park. In 1989, public investors paid $1 Billion for the rest %51 of the equity. Currently 39.78% of its stock is held by The Walt Disney Company, 10% by the Saudi Prince Alwaleed and 50.22% by other shareholders. The theme parks demographics is the most important property of the land. Located 20 miles west of Paris, 17 Million people could drive and 310 million people could fly to the park in under 2 hours, making the park easy to reach for many potential customers who want to visit. Although it was possible for millions of visitors to reach Disneyland, correct estimation of number of visitors is one of the most important projections for the parks success, and is a great challenge. It should be stated that European theme parks close until spring due to the weather conditions in winter, seasonally causing no customers and no profits. Other challenges the project faced included the correct estimation of average spending per customer, training of 12.000 European cast members, and the possibility of losing customers to the rival theme park project by MCA/Universal, planned to be built in London.

Master Agreement Disney and the French Government signed a master agreement in 1987 for the development of Euro Disneyland. French government agreed to many beneficial terms in order to convince Walt Disney Corporation to locate the park in Paris rather than the Mediterranean coast of Spain. According to the agreement, The Walt Disney Company created a holding company set up as an SCA (Societ Commandite par Actions), which is a French corporate form similar to American limited partnership. The corporate structure made Disney the general partner allowing Disney to control management and development as well as collect royalties on sales of tickets, food and souvenirs. According to the agreement, The Walt Disney Company was given the right by the government to buy 4800 acres of the land at prices of 1971, for $7.500 an acre where similar land in the same area was priced $750.000 an acre. The opening of EuroStar, high-speed railway service connecting London with Paris and Brussels in 1994 further increased the worth of the land. Disney holds the right to resell portions of this land to other developers, giving a great financial advantage and risk tolerance to the company. The Walt Disney Company was given the right to get loans of up to FF 4.8 billion from a French Government Agency carrying a fixed interest rate of 7.85%, much lower than the normal rate of 9.25%. For tax purposes, Euro Disneyland was allowed to use accelerated depreciation to write off the construction costs over a ten year period. The value-added tax (VAT) on ticket sales was fixed to just 7% instead of the usual 18.5%. The French Government also agreed to invest $350 Million in park related infrastructure including sewer and telephone trunk lines as well as subway and road links to Paris.

The Case Study First, we will answer the question of what is the value of the French governments loan subsidy. According to the case, the FF 4.8 billion in government loans carry an interest rate of 7.85% which is lower than the market rate of 9.25%. The loans, using a 10 year amortization schedule, are repaid at the beginning of year 7. To calculate the value, we calculate the difference in the interest rate paid by Disney (the interest rate on the loan) and the market interest rate (.0925 - .0785) which is 0.0140. We multiply this amount by the amount of the loan (FF 4,800,000,000) and we get FF 67,200,000. Loan repayments began on year 7 which is 1997, so Euro Disneyland is paying interest on the first 6 years up until year 1996.

The last column on the table below calculate the interest subsidy caused by the interest rate difference, multiplied by the present value of current market interest rate. This leads to a total of FF 365,694,336 value of government subsidy. The next question we will attempt to answer is What exchange risk is this project subject to from the standpoint of Disney? How can financing be used to mitigate this exchange risk? There are several factors that cause exchange rate risk. One of them, obviously, is the change in Franc:Dollar will greatly affect Disneys operating cash flow that comes from Euro Disney Land. There are several sides to this risk. If Dollar appreciates, European tourists are more likely to stay in the vicinity of their home and go to Euro Disney than to Florida or California. American tourists are also more likely to visit Euro Disney Land. On the other hand, when Franc appreciates against the Dollar it will lower Dollar revenues and profits. As mentioned in the case, a number of tourists come from Germany, a neighboring country, so the Mark to Dollar exchange rate risk will also need to be mitigated. This risks results in financing with three different types of currency, the American Dollar, the French Franc and the Deutschland Mark. This is to attempt to mitigate the risks evenly. A proposed financing
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scheme is as follows: Let XF be the forecast percentage of French tourists, XG be the forecast percentage of German tourists and CF be the Franc operating costs as a percentage of total sales. We can assume that all costs that occurs in Euro Disney Land will be in Franc, so the difference between XF and CF would be financed with French Francs. Consequently, the percentage of German tourist, XG, will also be the percentage of German financing. Franc costs are subtracted because sourcing costs in France hedges some of the exchange risk on the French revenue side. This scheme is open to adjustments when tourists from other countries become a big percentage in attendance, Disney should consider financing with that countrys currency. As for the question: based on purchasing power parity, project the Dollar:Franc exchange rate from 1989 through 1996, we look back at the information given in the case. In 989, FF 6 = $1, or FF 1 = $0.16667, and annual French and U.S. inflation is projected at 5% and 4%, respectively. If we follow the purchasing power parity formula below, where the real exchange rate q measures deviations from PPP that can be defined as follows: We then plug in a number given from the case and the formula becomes:

Based on this formula, the table below shows the dollar:franc exchange rate for years 1989 to 1996

3. What is the range of projected dollar net income for Euro Disney for the years 19921996? The only variation for which we have figures arises from attendance. According to the case, attendance in 1992 can vary between 11 million and 16 million visitor days. Given 1992 attendance, future attendance is expected to grow by 3% annually. Exhibits 1 and 2 show yearly net income based on the two extremes: (1) 1992 attendance is 11 million visitor days, or (2) 1992
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attendance is 16 million visitor days. Individual expenditures on admission fees, food and beverages, merchandise, and parking and other items are each projected to rise at the 5% expected rate of French inflation. Interest expense in 1992 is projected at FF 376,800,000 for the government loans (.0785 x FF 4.8 billion) and FF 65,550,000 for the working capital loan (.095 x $115,000,000/6). The latter figure is expected to grow at the rate of sales increase. The promotional fee is expected to begin at $35 million, converted into French francs at the 1992 exchange rate, and then this French franc figure is expected to grow at the 5% rate of French inflation. 4. Suppose the terminal value at the end of 1996 is estimated at seven times net income for 1996. Using a 15% cost of capital what is the range of net present values of Euro Disneyland as a standalone project

Financial Projections