Credits roll on Disney: If the Paris theme park is to come back from the brink, it will be on new terms dictated by Uncle Walt

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EIGHTEEN months ago, when Euro Disneyland threw open the gates of its Magic Kingdom for the first time, the crush of thousands of invited guests was almost unbearable. They overflowed the neat pavements and flooded around the Chateau de la belle au bois dormant, almost blotting it from sight.

But the trademark fantasy castle was not the only thing to be obscured by the hype surrounding Mickey Mouse's arrival on Continental shores. Bankers, brokers and even governments were blinded by the glamour. Recent times have brought them down to earth; Euro Disney is fighting for survival. Like so many companies conceived in the 1980s, it is being dragged under by its borrowings (see box).

The effects of recession and high interest rates have been compounded at the theme park by the high French franc, which has encouraged visitors to keep their wallets in their pockets. Euro Disney also miscalculated on the kind of product that Europeans would be prepared to splash out on.

The losses are mounting, and the shares have collapsed. Euro Disney is all but bust and is forced to survive on handouts from Uncle Walt, its rich American relative.

But not forever. Walt Disney, which owns 49 per cent, has put a spring deadline on its willingness to bankroll Euro Disney. If by then the park, Disney and the bankers have failed to sort out its finances, it may have to close.

Michael Montgomery, the new chief financial officer, candidly admitted what the problem was last week: no matter how many visitors arrive, or how much costs are cut, it is almost impossible to imagine the park generating enough profits to service its debts. Mr Montgomery's colleague, Stephen Burke, another recent import from Disney's Burbank HQ, put it another way: 'We know whatever we do on the operating side will be insufficient without the restructuring.'

The message is clear: without a reconstruction - a polite way of saying more money and debt write-offs - Euro Disney cannot continue.

There are those who argue that Disney could not afford to let the theme park collapse - that the resulting damage to the group's reputation would blight its chances of ever opening another park abroad. It is such hopes that continue to sustain the share price.

Yet from the beginning, Disney has been careful to distance itself from Euro Disney. Its financial involvement had been quite small until the last quarter - it has just set aside dollars 350m ( pounds 236m), half of it for meeting Euro Disney's funding needs, and half in respect of money for services it no longer expects to collect. But otherwise, for its 49 per cent stake - which is worth pounds 314m even at current prices - it paid only dollars 160m. It has neither lent to Euro Disney nor guaranteed any of its borrowings.

Disney is reluctant to discuss its ideas for a refinancing. Michael Eisner, its chairman, has talked in the past about bringing in an outside investor. But while a deal with a hotel operator such as Forte or Best Western, or a theme park specialist such as Pearson cannot be ruled out, the risks would be high for the incoming partner. Outside investors might well think they would be better off waiting for a liquidation and fighting over the assets.

Raising money in the market looks equally improbable. The sums involved are so large, and the share price so battered, that a rights issue is almost out the question. Moreover, Euro Disney's credibility with the markets has been shattered as projection after projection has gone awry.

Disney, of course, could bid for Euro Disney. It could honour its debts and mount an offer for the shares it does not hold.

It has the balance sheet to finance the Fr5bn ( pounds 575m) it would cost to build a second park on the site. This plan was on the drawing board until Euro Disney's crisis. If it was revived, it could persuade visitors to stay overnight and drive up hotel occupancy rates from their low level of 55 per cent. Critical mass might be achieved.

Yet while shareholders might earnestly wish for this solution, the chances of it happening are minimal. Not only would Disney be most unlikely to adopt such a high-risk strategy, it would throw away most of its bargaining cards. For the banks, and the French government, are in a relatively weak position. If Disney refuses to put in extra equity, it is difficult to see anyone else doing so.

To the banks, the alternative to extra equity - liquidation - looks unappealing. Although it might liberate the park from some of the costly charges it is obliged to pay to Disney, this is no time to try and sell a second-hand theme park and six unpopular hotels.

The hotels account for around a quarter of the company's debts, which suggests a value per room (there are 5,200 of them) of about pounds 116,000. It seems unimaginable they could reach that price; the recent valuation of the Queens Moat chain suggested its rooms were worth pounds 38,000 apiece.

The theme park is even more difficult to value. Many of the bankers would argue that only Disney is capable of running a Magic Kingdom theme park - though others would retort that it has hardly covered itself in glory with its achievements in France to date.

But to see the park close, even temporarily, with the loss of 11,000 jobs would be painful indeed for the French state, which originally backed the project primarily to create employment in a depressed region.

So a deal between Disney and the bankers that shares out the pain seems inevitable - even if the respective parties insist on going right to the wire. However, the bankers will almost certainly want a share in the project in return for writing off any loans. Nigel Reed, of the brokers Paribas, estimates up to Fr14bn of the debt will have to be written off before the park becomes viable.

But to get the banks to agree to that, Disney will probably have to agree to cut its high fees and royalties.

As Mr Reed points out: 'To get anyone to put in fresh equity or to swap debt for equity, the profits are going to have to look more attractive; there is going to have to be at least a possible upside in which they can share.' And the only convincing way to do that is for Disney to reduce its take.

'The upside goes to Disney under the current structure. If Euro Disney had 16 million visitors, Disney would get Fr1.7bn, yet ordinary shareholders would only benefit to the tune of Fr267m,' he explains.

The mechanics might vary - the company could issue a convertible bond or options that would be exercised at a rock-bottom price. But in essence they would all add up to the same thing: more equity and a write-off of debt.

The permutations from this point are numerous, however. Disney might offer to build the second park itself - but only in exchange for outright ownership and a higher take from the rest of the project.

The French government might feel it cannot be seen to support a 'cultural Chernobyl' and refuse to bargain. Someone other than Disney might go to the bankers and make them a better offer.

But like the Channel tunnel, the park and the hotels will survive - even if short-term revenues collapse. All the signs point one way: ordinary shareholders will be lucky to leave the table anything but empty- handed. The rich pickings, as ever, will go to the big boys.

(Photographs omitted)