It attracts more discretionary spending than retail and is growing at a faster clip, as millennials – the key demographic target – are supposedly placing greater emphasis on cultural experiences and live events over material possessions. Whether this received wisdom is true or not is difficult to say, but it may have influenced the decision by a consortium led by the founding family of the Lego Group to make a £4.77bn takeover bid for Merlin Entertainments (MERL).
KIRKBI, the investment vehicle of Lego’s founding Kirk Kristiansen family, has tabled the offer, in conjunction with the Canada Pension Plan Investment Board and private equity heavyweight Blackstone. The bid follows pressure from ValueAct Capital, a San Francisco-based activist investor with a 9.3 per cent stake in Merlin. It’s not immediately obvious whether its insistence that Merlin would be better off as a private business precipitated the move, but given that KIRKBI already controls 29.6 per cent of the stock, it was always likely to be given assent from the independent directors.
No one will be surprised in Blackstone’s involvement given the increase in private equity-backed M&A over the past year or so. Figures from the Harvard Law School give an aggregate figure of $384bn (£305bn)-worth of PE-backed deals in 2018, the highest since the private equity boom prior to the financial crisis. Many of the larger transactions, such as Blackstone’s tie-up with Thomson Reuters, depended on strategic partnerships. But the full extent of its involvement in the Merlin business upon completion of the offer isn't fully clear. KIRKBI and Blackstone jointly controlled Merlin in the eight years prior to its 2013 public listing, but some may take the view that rather than simply pursuing a turnaround strategy, the main kicker for the deal is that they’re getting the assets on the cheap.
It may be purely academic, but minority shareholders will be wondering how the bid premium stacks up. Proponents of the deal will point to the 36.8 per cent premium based on the group’s undisturbed share price of 333p on the last business day prior to the publication of ValueAct's letter to the Merlin Board. It’s hard to imagine that such an approach wouldn’t generate speculative interest in the stock, although it should be remembered that the shares had been in uptrend since the start of the year. The premium based on the market price on the previous business day prior to the announcement stands at a less inspiring 15.2 per cent.
Seen in a broader context, the offer price of 455p a share hardly seems extravagant. Last year in the US, the average M&A premium within the Media and Entertainment sector to the four-week average share price came in at 28.1 per cent. The 2018 M&A Report published by the Boston Consulting Group (BCG) gives a long-term average of 32.7 per cent.
Alternatively, the consortium’s bid implies an enterprise value of £5.91bn for Merlin, leading to an enterprise/cash profit (EV/Ebitda) multiple of 12 (or 11 times based on Bloomberg consensus estimates for 2019). Yet the BCG report states that the median transaction multiple in 2017 was 14.2, which chimes with separate research from the NYU Stern School of Business showing that the average enterprise value (EV)/Ebitda ratio in the entertainment sector stands at 14.18.
The group’s shares hit a multi-year low towards the end of last year, as an unusually hot summer put visitors off its indoor attractions. In retrospect, the sell-off seems to have been a little severe given that the group’s net debt had fallen appreciably since the half-year mark and its operating free cash flow had risen by nearly a tenth to £345m. Group chairman Sir John Sunderland blamed sell-side analysts, but you suspect that Lego’s founding family may have been waiting for the right moment to pull the trigger.
