Losing the magic: How Euro Disney became a nightmare

With a €1.8bn debt mountain to climb, Euro Disney needs more than a sprinkling of pixie dust to bring a sparkle to its finances. Christian Sylt reports

Strikes, suicides and shareholder losses are not usually associated with a Disney blockbuster, but for the past year, they have been the key elements of the script at the company's two theme parks in Paris.

On Wednesday, Euro Disney, the Euronext-listed company which runs six hotels and a 27-hole golf course as well as the theme parks, posted a €45m (£38m) net loss for the year ending 30 September 2010. It was worse than had been expected by analysts but an €18m improvement on 2009. Given the tumultuous year that the company has faced, it can be very thankful for this small mercy.

For a place that proclaims to be a temple to fairy tales, Euro Disney has had its fair share of bad luck in the past 12 months. The black clouds began to gather just one month into its financial year. On 23 December 2009, one of the busiest days of the year for the resort, its staff, known as cast members because of the role they play on a themed set, went on strike through the parks. It was the first time this had ever happened in Euro Disney's 18-year history and it was an unforgettable performance.

Cast members waving flags and placards stormed the cinema-themed Studios Park, leading to the cancellation of its daily parade of Disney characters. The same scenes were repeated later in the day in the neighbouring fairy-tale-inspired Disneyland Park and as its parade was cancelled, the huge crowd of holidaymakers booed and hissed. The entire episode was caught on several guests' camcorders and the footage was soon posted on YouTube.

The frosty atmosphere continued to hang over the resort long after the strikes had finished. Since then, two Euro Disney employees have committed suicide. One was a chef who wrote on a suicide note that he did "not want to return to working for Mickey" and his relatives claimed he was depressed by staff cuts and a policy switch away from freshly made food to frozen produce. The other employee was also a cook, who killed himself after what a trade union insists was "humiliating" conditions at work. The company denies the suicides were work related.

According to one of the unions, the number of jobs in Euro Disney's restaurants and hotels has been slashed and fewer seasonal workers are being hired, which has led to staff working longer hours.

Despite measures such as the pay freeze, Euro Disney failed to keep its costs under control in 2010 and they rose by 3.1 per cent to €1.2bn. Making matters worse, its attendance fell 3 per cent to 15 million. However, revenue increased by 3.7 per cent, largely due to a €47m windfall which the company got in June from selling a shopping mall on its property. This left it with a €34.1m operating profit, but the story doesn't stop there.

Debt is the real villain that Euro Disney is up against as the company still needs to pay back €1.8bn of the loans it took out in the 1990s to fund its construction. Annual repayments weigh down its bottom line and paying €79m in financial charges in 2010 pushed Euro Disney into loss.

It has made a net profit only once in the past five years and, in an attempt to stem the red ink, the company's chief executive, Philippe Gas, announced last month that he had set a target of paying back 25 per cent of its debt by 2013. This would mean making repayments of around €150m over each of the next three years but Euro Disney's latest results revealed that it will pay back only €123.4m in 2011.

As a result of missing performance objectives in 2010, Euro Disney said that for the second year running, it would have to delay subordinated debt repayments of €45m, including €15m of interest due to its biggest lender, the state-controlled Caisse des Dépôts et Consignations. Euro Disney's shares fell 2 per cent to €4.40 on the news and recovery doesn't seem to be in sight.

Earlier this year, Olivier Becker, an analyst from Oddo Securities, which manages Euro Disney's liquidity account, forecast that "even if attendance is increasing in 2011 and the results are better, I think they will be farther from these targets than they were five or six years ago". He added that "the covenants are based on Ebitda targets and they did not take into account any financial crisis".

Euro Disney has been blighted with bad luck since its gates opened in 1992 as a recession loomed and it soon teetered close to bankruptcy. Its gates were kept open by the debt being restructured twice and a bailout from real-life white knight Saudi investor Prince Alwaleed, who injected €263m into the company in 1993.

However, in fairy-tale land lightning can strike twice, and in March 2002, Euro Disney opened the Studios Park, just as the post-11 September tourism downturn began to bite. This time, its saviour came in the form of a €250m rights issue in 2005 with Alwaleed again riding to the rescue by personally putting in €25m. It left 10 per cent of Euro Disney's shares in his hands, with 50.2 per cent floated on the Paris Euronext and the remainder held by the Walt Disney Company.

Becker believes that the Studios Park has been a poisoned chalice. "If you look at the sales in 2001 and 2007, the sales are flat and the park was a €1bn capex so it has not increased the sales enough. This is the number one problem of Disney. They opened this second park but it has not multiplied the sales as it should have. They just need to make €1.5bn of sales to solve the problem."

Euro Disney has raised room rates, and it paid off as its hotel revenues rose 1.2 per cent to €480.2m in 2010. Average spending per room increased by 4 per cent on 2009, which Euro Disney also put down to higher daily room rates. The same strategy didn't work with entrance tickets as theme park revenues slumped 0.4 per cent to €685.3m as attendance fell. A two-day entrance ticket to Euro Disney costs £101, compared with £37.60 at Staffordshire's Alton Towers, the UK's most-visited theme park.

One Paris-based analyst says that "the big problem stopping them making a profit is the debt. If it was not of that size they wouldn't have any problem and they would be very profitable... I don't know if Euro Disney will ever make a profit. Its use is for the Walt Disney Company to get promotion and attendance in Europe."

Euro Disney has long hankered after a third park to increase visitor numbers. Its original agreement with the French government allowed it to build a third park by 2017 but in September this year, it extended this time frame until 2030.

The analyst says that Euro Disney needs to increase its hotel capacity before building a third park: "They need more hotels. They don't have enough to have a third park. They can do it before 2030 but I don't think they will do." A happy ending still seems far, far away.

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