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Merlin Entertainments receives £6bn buyout offer

The leisure company has been made an offer from a consortium comprising the Danish billionaire family that owns Lego, private equity firm Blackstone, and a Canadian pension fund
June 28, 2019

Private equity firms have made headlines recently over the level of 'dry powder' – money waiting for deployment – in the market. It appears that Blackstone is putting some of its own to good use – it’s teamed up with the Danish billionaire family that owns Lego, along with a Canadian pension fund to make a buyout offer for Merlin Entertainment (MERL).

IC TIP: Hold at 450p

The consortium, under Berkeley Bidco Limited, have offered 455p a share, which implies an enterprise value of nearly £6bn. This valuation represents a multiple of around 12 times Merlin’s underlying cash profits of £494m made in 2018. The purchase price offers investors a 15.2 per cent premium to the 395p closing price the day prior to the announcement, or a 31 per cent premium to the undisturbed six-month volume-weighted average price.

Blackstone will be familiar with Merlin, as it co-owned the leisure company with the Danish family owners for eight years before the company went public in 2013. The consortium stated that “significant, long-term investment is required to ensure the longevity of the existing assets and to drive continued growth for Merlin and its stakeholders”. Under the terms of the deal, Merlin with be 50 per cent owned by the Danish family, with the other half split between Blackstone and the Canadian pension fund CPPIB.

The buyout comes after Merlin came under pressure in May from activist shareholder ValueAct Capital to go from public to private. The activist believed that Merlin’s deteriorating return on capital employed, which fell from 9.6 per cent in the 2015 financial year to 8.9 per cent in 2018, has contributed to the entertainment group’s derating since its initial public offering in 2013. Analysts at Numis said this erosion largely stems from the step-up in capital expenditure to develop two major new Legoland openings in New York and South Korea. But exclude £215m of assets under construction and returns were steady at 9.6 per cent, suggesting that reinvestment is responsible for the deterioration, rather than weak fundamentals.

In response to the noise made by ValueAct in May, Merlin management said it “regularly considers all options for driving shareholder value” and maintained that it is “fully confident” in its current strategy to create a high-growth, high-return family entertainment company.