Not everything is awesome at the British-based owner of Legoland amusement parks, and that’s allowing the Canada Pension Plan Investment Board to buy into the business.
CPPIB is joining the founding family behind Lego and a unit of the Blackstone Group LP to purchase Merlin Entertainments PLC, a public company that has struggled with its share price since a 2013 initial public offering.
The take-private deal values Merlin at £4.65-billion ($7.7-billion). Blackstone and the family of Lego founder Kirk Kristiansen already owned 30 per cent of the company; Merlin says after the transaction is done, Kirkbi, the family company, will own half of the company and Blackstone and CPPIB will own the other half. CPPIB and Blackstone did not disclose how they will divide their share.
In a statement, Ryan Selwood, CPPIB’s Head of Direct Private Equity called Merlin a world-class operator of themed attractions and entertainment and said the business “aligns well with CPPIB’s long-horizon investment strategy."
While the company’s eight Legoland theme parks and 20 Legoland “discovery centres” may be the Merlin assets most recognizable to Canadians, the company has a wide range of properties. Merlin owns 23 Madame Tussauds wax museums and 46 Sea Life aquariums.
Including those nameplates, the company has 17 theme parks and 113 attractions across 25 countries and four continents, and posted just under £1.7-billion in revenue in 2018.
While the company has increased its profits since that 2013 IPO, its share price had been stagnant. In October of last year, the stock hit 313 pence, slightly below the offering price of five years prior.
The U.S.-based activist investor ValueAct Capital bought into Merlin in October, 2017, after terror attacks in Britain depressed the company’s share price, and amassed 95 million shares, a 9.3-per-cent stake. In May of this year, ValueAct called publicly for the company to go private, saying Merlin has struggled as a public company. (CPPIB is an investor in certain ValueAct funds, but it declined to say whether it had indirect ownership in Merlin via ValueAct.)
ValueAct has agreed to back the going-private deal, according to Merlin documents prepared for shareholders. With the support for the deal from Kirkbi and Blackstone, investors sent Merlin shares to 449.1 pence, a hair below the 455-pence-a-share offer, suggesting they believe the deal will close.
ValueAct said analyst downgrades and excessive attention to the company’s quarterly earnings per share damaged the share price just as Merlin faced significant, needed capital expenditures to build its businesses, particularly Legoland. ValueAct argued Kirkbi and Blackstone, which together owned the business for eight years before the 2013 IPO, may have taken it public too quickly.
“As the Company deploys an increasing amount of capital that takes time to generate earnings, we fear it will take several years for Merlin to be appropriately valued by public shareholders,” ValueAct wrote Merlin’s board in a letter released to the public. “We can imagine a day in the future when the new investment super-cycle is past, and the Company delivers more easily valued current return. Until then, Merlin would better maximize its enterprise value with private ownership and we believe there is significant private capital interest in partnering with the Company.”
That’s where CPPIB stepped in. As the manager of the pension fund for 20 million Canadians, CPPIB expects a steady stream of contributions that, coupled with investment returns, are projected to result in more than $2.5-trillion in assets by 2050.
That long-term approach allows for ownership of companies that need a few years under the public radar to spend more on capital expenditures, damaging their short-term cash-flow numbers.
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