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Merlin Entertainments - Acquisition by LEGO led consortium

Nicholas Hyett | 28 June 2019 | A A A
Merlin Entertainments - Acquisition by LEGO led consortium

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The Merlin board has accepted a cash offer from a consortium led by LEGO holding company, KIRKBI. The consortium has offered to pay 455p per Merlin share, a 36.8% premium to the share price before activist ValueAct suggested Merlin should look for an acquirer last month.

The shares rose 14.2% in early trading to 451p.

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Our view

It will be a shame to see Merlin leave the stock market. An offer price that's below where the shares were trading as recently as late 2017, means some investors will be particularly disappointed. However, with the group's two largest shareholders, KIRKBI and ValueAct, on board, it's hard to see the deal not going through, especially given the comparatively generous price by more recent standards.

We can see the logic for the deal, which returns Merlin to the hands of its former owners Blackrock and KIRKBI. New LEGOLANDs in Korea and New York require hundreds of millions in extra investment at a time when the market is nervous about funding growth. Merlin's new owners have deep pockets and the long term investment horizon the group needs to deliver its potential.

From a corporate perspective - the presence of KIRKBI in the consortium should also mean Merlin avoids the fate of many private equity purchases, which are loaded up with debt and squeezed for every penny. As the owner of the LEGO brand, KIRKBI has an interest in protecting the business's long term future, and ensuring a short term 'dash for cash' doesn't damage the group's reputation with customers.

The deal still requires regulatory and shareholder approval, but is expected to complete in the fourth quarter of this year if all goes to plan.

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Acquisition

KIRKBI already owns 29.58% of the shares in Merlin and will own 50% of the company following the deal. The rest of the shares will be acquired by private equity group Blackstone and pension fund CPPIB.

The deal follows a letter from activist investor ValueAct, which owns 9.3% of Merlin shares, and called for Merlin to consider going private in order to invest appropriately for growth.

The deal values Merlin at £4.8bn, or 12 times EBITDA (earnings before interest, tax, depreciation and amortisation).

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.