PROFILE ANALYSIS
Merlin and the money men by Nigel Bland
T
he rise of Merlin to be a truly global operator of attractions has required many investors and nearly all have made very signifi - cant returns along the way.
The most recent investor prior to the
company’s fl oatation last November was CVC Capital Partners Ltd, manager of a €10.8bn (£8.9, US$14.7bn) leveraged buyout fund, which bought a 28 per cent stake in Merlin in 2010, in a transac- tion that valued the company at £2.25bn ($3.7bn, €2.7bn). The fl oatation valued the company at £3.5bn ($5.7bn, €4.2bn) and so, while only 30 per cent of the equity was sold on fl oatation, we can add CVC to the list of investors that have done well out of investing in Merlin. So how has Merlin become a £3.5bn
company in less than 15 years? As CEO Varney has said, “it started with a fi sh.”…
The origin of the Merlin brands In 1974 housewife Annabel Geddes opened the London Dungeon as “a new concept in education and entertainment for the whole family”. Five years later, David Mace founded the fi rst SEA LIFE centre in Oban. The Dungeons expanded
The Dungeon concept began in 1974, and Merlin now owns eight sites worldwide
Blackstone acquired Merlin for £102m... and soon there was an opportunity to double the size of the company – that opportunity was Tussaud’s
slowly, with York opening in 1986 while SEA LIFE grew more rapidly with nine units open by 1992. Meanwhile in 1981, the Foreign & Colonial Enterprise Trust (F&C) estab- lished a direct investment fund by raising £10m ($16.6bn, €12.1bn) on the London Stock Exchange. The three businesses were to come together in 1992, under the name of Vardon Attractions, with F&C backing an experienced manage- ment team (David Hudd and Nick Irens) to “acquire high profi le leisure assets and then grow the operations organically”. To attract such funding you must have
a proven concept and be able to show it can be expanded while generating an attractive return on the capital employed. F&C (now known as Graphite Capital)
did well from its involvement, initially providing cash to buy the Dungeons and continuing to support the company as it acquired the SEA LIFE centres, a bingo business (Ritz Bingo) and a caravan park business (Parkdean). With the parent company listing on the LSE in late 1992, expansion was also supported by other institutional shareholders.
The company’s SEA LIFE attraction is the No 1 global aquarium brand
32
First buy-out When the business was sold in 1999 to a management buy-out – backed by Apax Partners – for £47m ($77.9m, €57.1m), F&C generated 2.4 times its investment.
Read Attractions Management online
attractionsmanagement.com/digital At this point there were 23 SEA LIFE
centres and the two Dungeons, with the management team now led by Nick Varney. The plan was to continue the rollout across the UK and Europe but management also needed to reduce the number of sites in the UK, with some of the older ones being located in seaside resorts where tourism was declining. This is a common challenge expe-
rienced by many multi-site leisure businesses which expand rapidly on the back of readily-available capital, only to fi nd returns are diminishing and a tail of marginally profi table or loss making units has developed. For some businesses this can be terminal, but not for the renamed Merlin Entertainments which weathered the storm and emerged stronger after another round of refi nancing in 2004. Apax did less well than Graphite,
selling for £55m ($91.1m, €66.6m) to Hermes Private Equity (HPE), making a modest return. However, what they and management had achieved was a clean, attractive business that was on the verge of becoming signifi cantly cash generative. The profi t in 2004 was around £10m
($16.5m, €12.1m) but the group was expanding by 2-3 units per year at a
construction cost of circa £3m ($4.9m, €3.6m) per site. This meant that, even in 2004, there was no free cash available and there was an element to which they
AM 1 2014 ©Cybertrek 2014
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