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Merlin - results broadly in line with expectations

George Salmon | 1 August 2019 | A A A
Merlin - results broadly in line with expectations

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Merlin has reported a 14.2% drop in operating profits, to £79m, as higher revenues were offset by staff cost pressures and investment in new and existing attractions.

These results are said to be "broadly in line" with board expectations.

No interim dividend will be paid, due to the ongoing takeover situation.

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Our view

It'll 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 offer is at a reasonably generous premium to to where the shares had fallen to..

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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Takeover information

The Merlin board accepted a cash offer from a consortium led by LEGO holding company, KIRKBI on 28 June. 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 in May.

KIRKBI already owns 29.59% 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).

Half Year Results - 1 August 2019 (Changes at constant exchange rates where applicable)

Visitor numbers improved 3% in the first half, to 30.8m. Combined visitor revenue from the group's three divisions reached £629m from £590m.

At Midway attractions, which include the London Eye, revenue improved 8.1% to £324m. That reflects like-for-like (LFL) growth of 4.5%, as trading in London continues to improve. Margins declined as Merlin invested in openings of new attractions, meaning underlying operating profit fell 9.7% to £56m.

LEGOLAND parks saw a 0.7% dip in LFL sales, as trading since a strong Easter period has been weak due to difficult market conditions and weather headwinds. However, 142 new hotel rooms helped revenue improve 4.6% to £296m. Cost pressures and the costs around the enlarged asset base meant underlying operating profit dipped 9.5% to £62m.

230 rooms were opened in Resort Theme Parks, including over 100 at Alton Towers. Revenues improved 4.1%, reaching £137m, with LFL sales rising 3%. Operating losses in this the quiet part of the year narrowed from £10m to £9m.

Merlin spent £81m on the existing estate, and the same amount on new development during the period. The group generated free cash flow of £110m (2018: £107m), and net debt remained level at £2.2bn.

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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.