Going for a ride

The tranquil surroundings of Dyrehaven Park in Copenhagen?an idyllic, hawthorn-laden forest populated by free-ranging deer?stand in stark contrast to the images normally associated with the modern-day amusement park: gravity-defying roller coasters, tourists swaddled in fanny packs snapping pictures of a six-foot tall rodent and lines that stretch beyond the imagination.

These incongruities notwithstanding, the lush Danish forest is in fact home to the oldest amusement park in the world, Dyrehavsbakken, which began life in 1583 after a woman named Kirsten Pill discovered a natural spring nearby. As the local population began congregating at the site?residents of 16th century Copenhagen craved clean water as much as teenagers today crave negative G-forces? savvy entertainers set out to make a quick kroner. One of the first attractions, the legend goes, involved charging a fee for chipped or broken drinking bowls, which were then used by young men for target practice.

Today, the popular imagination of amusement parks is dominated by US-based companies such as Disneyland and Universal Studios. Yet the industry's origins in the woods of Denmark highlight the fact that amusement parks are a global business. In 2004, theme park attendance reached 740 million people, more than half of whom visited properties outside the US according to a report published last year by Pricewaterhouse Coopers. Amusement Business, an industry publication, estimates that four of the world's top ten most popular parks are located in Asia. Even the original Disneyland in Anaheim, California was loosely based on Tivoli Gardens in Copenhagen. And more than 400 years later, Dyrehavsbakken still stands today, attracting more than 2.5 million visitors per annum?albeit with more modern amusements?making it one of the most popular attractions in Europe.

The globalization of the industry has translated into big business for theme park operators. Propelled by strong economic conditions around the globe, worldwide spending at amusement parks reached $21.5 billion (€17.7 billion) in 2004, which represented a five-year compounded annual growth rate of 3.8 percent. Driven by robust economic expansion in Asia and the EMEA (Europe, Middle East and Africa), that growth is anticipated to accelerate. According to PwC, total spending between 2005 and 2009 will increase at an annual rate of 4.5 percent, suggesting that amusement parks could be a $30 billion business by the end of the decade.

Given those numbers, it's not surprising that private equity firms are taking notice.

REAL ENTERTAINMENT
Over the past several years, private equity buyers around the world have acquired a significant number of theme park assets, ranging in size from small, regional family entertainment centers (FECs) such as California-based Palace Entertainment to large, global amusement park companies like Madame Tussaud's (see table). The reason for that interest is relatively straightforward, as theme parks exhibit the one attribute that attracts private equity firms to so many other industries: strong cash flow.

?Unlike many businesses where you have to wait 30 to 60 to 90 days for people to pay your bills, theme parks get paid every hour,? says John Robinett, senior vice president for Economic Research Associates, an entertainment and real estate consulting firm. ?They are cash cows and they have very solid margins.?

?Amusement parks are cash cows and they have very solid margins.?

Other factors that lure private equity buyers to the sector include relatively steady growth, high barriers to entry and, particularly in the FEC market, limited capital expenditures. Yet another attraction is the positive demographics: Not only is the world getting richer, those riches are increasingly being spent on leisure activities.

?Big picture, what theme parks have in common is that consumers in North America and Europe have more disposable income and they are content to spend that income on the pursuit of pleasure,? says Christian Purslow, a London-based partner at MidOcean Partners, which recently acquired Palace Entertainment in a deal led by New York-based partner Tyler Zachem. ?That is a broad-based consumer pattern that we invest in thematically.?

And the final bonus that amusement parks bring to the table? besides the fact that owning your own roller coaster is just cool? is the underlying real estate.

?Theme parks generate demand for other uses,? says Robinett. ?If you have a certain critical mass, you can generate hotel demand, retail demands, resort amenities?particularly at a destination park. When theme parks come in, [the surrounding] real estate values skyrocket. You can make a lot of money on the real estate, whether you want to develop it yourself or whether you sell it.?

More so than other private equity real estate type investments such as casinos or hotels, theme parks are primarily operating businesses with a relatively minor real estate component. Yet most industry practitioners note the important role that real estate nonetheless plays in the economic algebra of theme parks. As Robinett points out, many of the largest destination properties have affiliated hotel, resort and even golf facilities. Some smaller theme park operators have utilized sale-leasebacks to finance additional capital expenditures or grow their operations through acquisitions. And others, most notably Six Flags in the US, are selling off excess land at certain locations in order to pay down debt.

Even those companies that do not actually own their real estate view the land underlying their operations as an important piece of their overall strategy. ?There are high barriers to entry in theme parks and part of that is the real estate,? says Tim Billings, a vice president at MidOcean. ?In a major metro market, it's very difficult to find a sizeable plot of land by a highway to operate a family entertainment center. Even if you did, it would cost so much that people could find a better use for the property.?

Though the industry has gained traction in recent years among private equity players, leveraged buyout firms have been investing in the sector since the 1980s, a decade when they were still known as leveraged buyout firms. In fact, the recent history of Six Flags, one of the largest operators of regional theme parks in the US, is a history of private equity ownership. In 1987, Wesray Capital Corporation, a forbearer of the LBO industry founded by former US Treasury Secretary William Gibson, acquired the company for approximately $600 million. A few years later, The Blackstone Group bought the business in tandem with Time Warner in a transaction valued at $760 million. (Blackstone fully exited the business two years later). Today, the North American business of Six Flags is publicly traded?it recently went through a well-publicized shareholder struggle with Dan Snyder, the owner of the NFL's Washington Redskins. But the European operations remain safely in private equity hands: in 2004, London-based Palamon Capital bought the business for $184 million. It has subsequently been renamed Star Parks.

THEME AMERICA
Though the amusement park originated in Europe, it has still become a thoroughly American institution?witness the Chevy Chase movie ?Vacation? which portrays a family trip to the fictional Wally World amusement park in California. As the largest market in the world, US parks attracted 328 million visitors and $10.7 billion of spending in 2004, driven primarily by growth at the large destination parks, which benefited from a weak dollar and a resulting boost in foreign visitors.

Given the size and maturity of the US market, however, it is expected to grow at a relatively slower rate compared to other regions of the world?less than 4 percent per year according to PwC. Today, most of the US population lives within driving distance of a theme park so new supply, regardless of the lines one might encounter at the local roller coaster, is unlikely.

?People just aren't building amusement parks, be it Six Flags or a water park, given the lack of attractively priced real estate,? says Billings.

According to Billings, MidOcean spent more than a year investigating opportunities in the industry before acquiring Palace, an operator of 32 family-oriented FECs. Billings notes that the firm prefers the local amusement sector to the larger regional theme parks because of its relative affordability and proximity to major metro areas. He also notes that an FEC doesn't rely on the newest roller coaster or death-defying attraction and therefore has comparatively low capital expenditure requirements.

?When theme parks come in, [the surrounding] real estate values skyrocket. You can make a lot of money.?

Robinett agrees. ?Theme parks have a constant need for capex,? he says.?You're talking about 5 to 10 percent of gross revenues that needs to be invested each year in new rides or shows.?

Not all US private equity firms are shying away from these capital-intensive investments, however. In 2000, Blackstone acquired a 50 percent interest in Universal Studios Orlando, which also includes ownership of the Islands of Adventure at Universal Studios, for $275 million. One of the parks' newer attractions is ?Revenge of the Mummy,? an indoor roller coaster based on ?The Mummy? movie franchise that incorporates technology used in magnetic levitation and sand-filled tracks to minimize noise. It cost $45 million to construct.

GLOBAL THRILLS
Though private equity participation in capital-intensive theme parks is relatively rare in the US today, the same can not be said of Europe, where similar types of investments have recently been made. Palamon's acquisition of Star Parks is one example?earlier this year, the firm completed a €135 million debt refinancing that will enable the company to invest significant capital in its Dutch and German properties. The Tussauds Group is another. In addition to its eponymous wax museums in London and other major cities around the world, Tussauds also owns a number of theme parks in the UK, including Alton Towers, one of the region's most popular amusement parks. Last year, Dubai International Capital, in its first ever private equity deal, acquired the company for £800 million from Charterhouse Capital Partners.

But Europe has also seen private equity activity in parks that focus less on the latest roller coaster and more on properties that target families and young children. Last year, for example, Blackstone acquired both Merlin Entertainment, an operator of 28 European theme parks including such brands as Dungeon, Sea Life and Earth Explorer, and Legoland, which owns four family theme parks in California, Denmark, England and Germany. According to Blackstone, by combining the two businesses, the private equity firm has created the second largest visitor attraction in Europe.

One factor driving the activity in Europe is the region's growth prospects relative to other markets in the world. In 2004, amusement parks in the EMEA region welcomed 131 million visitors, with a significant majority of those in continental Europe and the UK. According to PwC, overall spending is projected to increase by 5 percent per annum through 2009.

?We think the industry is growing,? says Juan Díaz-Laviada, managing director of the Spanish office of Advent International, which acquired publicly traded Spanish theme park operator Parque Reunidos in 2003. ?[In Europe], it still represents a fraction of the per capita expenditure in the US.?

Asia has also seen a significant amount of private equity activity in the theme park sector. To date, most of the private equity activity has been focused on distressed opportunities in Japan where the success of Tokyo Disneyland, once the most popular theme park in the world, spurred a construction boom. Soon parks with international motifs such as New Zealand villages? imagine sheep and lots of grass?sprouted up around the country, often in isolated locations. As the Japanese economy slowed, so did foot traffic at many of these amusement parks.

Last year, Goldman Sachs acquired a 50 percent interest in Universal Studios Japan, which had been facing financial pressures due to poor attendance. A few years earlier, Nomura's principal finance group bought Huis Ten Boch, a Dutch-themed amusement park, out of bankruptcy. Even Cerberus' recent takeover of the beleaguered conglomerate Seibu required some theme park due diligence: The company owns the storied Toshimaen theme park and onsen in suburban Tokyo.

One of the most spectacular failures was the collapse of Seagaia, an 850-acre resort that includes the world's largest water park, which filed for bankruptcy with approximately $4 billion in debt. In 2001, it was acquired by US-based private equity firm Ripplewood for less than 10 percent of the park's actual construction costs. Interestingly enough, Ripplewood's primary strategy was to ditch the theme park image: It now has spa facilities, two hotels and a 27-hole golf course. The property is now marketed as an ?international destination resort.?

Outside of distressed opportunities in Japan, the largest international theme park companies have been focusing on the growth markets of Asia, most notably China and Korea. According to PwC, theme park spending in the region is expected to grow at approximately 6 percent per year through 2009.

?Most of the major operators have all been sniffing around China,? says Robinett. ?Disney has been the first by opening in Hong Kong??Disneyland Hong Kong opened to the public in the fall of 2005??but Universal has been negotiating with the [Chinese] government for some time. And everyone is hunting around in Korea. It's a good market.?

RIDING THE ROLLER COASTERSelect private equity deals in the theme park industry