Euro Disney S.C.A.

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Euro Disney S.C.A.

BP100
77777 Marne-la-Vallee
Cedex 4
France
Telephone: (33) 1 64 74 40 00
Fax: (33) 1 64 74 59 69
Web site: http://www.eurodisney.com

Public Company
Incorporated: 1988
Employees: 11,500
Sales: EUR 1.07 billion ($1.05 billion) (2002)
Stock Exchanges: Paris
Ticker Symbol: EDL
NAIC: 713110 Amusement and Theme Parks

Euro Disney S.C.A. operates Disneyland Resort Paris, the leading tourist destination in Europe. Securing 12.2 million visitors in 2001 alone, the 1,943 hectare site includes Adven-tureland, Frontierland, Discoveryland, Fantasyland, and Main Street USA, along with Walt Disney Studios, a new theme park that opened in 2002. Euro Disney also encompasses seven hotels, two convention centers, 68 restaurants, 52 boutiques, Disney Village—an entertainment venue linking the theme parks and hotels—and a 27-hole golf course. After a rocky start in 1992, Euro Disney began posting profits in 1995. However, an economic slowdown, falling attendance, and rising debt related to the opening of Walt Disney Studios left the company strapped for cash in 2002. Euro Disney has turned to its major shareholders, including The Walt Disney Company and Saudi Prince Alwaleed bin Talal, to rescue it from its financial woes.

Mickey Goes to Europe: 1980s

Flush with the huge and instant success of the Tokyo Disneyland, which opened in 1983, the Walt Disney Company immediately began looking for a site to build a European version of the popular tourist destination. On the one hand, Disney sought to capitalize on their first experience gained from operating a theme park in a foreign market—and, given the long-established European embrace of Disney’s products, especially its films, which found even larger audiences in Europe than in America—Europe, with a population of 320 million within airplane distances of less than three hours, seemed a logical choice. On the other hand, Disney looked to correct what it saw as mistakes made with its previous parks. The Tokyo Disneyland was not owned by the Disney company, which meant that Disney was forced to content itself only with royalties on that theme park’s massive revenues. At Walt Disney World in Florida, the company had not foreseen the mushrooming development of hotels and other theme parks and recreation centers outside of the relatively limited confines of the park, reducing Disney’s hotel room take to merely 14 percent of the area’s total.

Between 1983 and 1987, Disney considered sites in various countries, including the United Kingdom, Germany, and Italy, but by 1985 the choice had been narrowed down to the Costa del Sol in Spain and the suburban area around Paris. In 1987, the choice fell to Paris—despite the fairer Spanish climate—in part because of Paris’s larger population, its well-developed transportation system, and its role as one of the primary tourism destinations in the world, but also because of a number of important concessions made by the French government, which was eager to secure the plum job- and revenue-generating theme park, including use of the government’s right of eminent domain to sell the large, principally farmland Marne-de-Vallee site at the cut-rate price of $7,500 per acre; the French guarantee of some FFr 1.5 billion for new road construction, including access to the nearby autoroute; the extension of the RER train system to the theme park, as well as the building of a rail link and station for the TGV train line; an agreement to drop the value-added tax rate on ticket sales from 18.6 percent to just 7 percent; and, finally, the French agreement to provide water, sewage, gas, electricity, and other services. Signing the contract with Jacques Chirac in March 1987, Disney head Michael Eisner was confident that the Paris theme park would be a success, despite France’s winter climate. Indeed, the Tokyo Disneyland experienced much the same weather conditions but remained a year-round tourist draw for an eager and freely spending Japanese public.

The 4,400-acre site purchased by Disney was far larger than the company—now operating through a wholly owned development subsidiary, Euro Disney Associes SNC, which in turn would give way to theme park operator and publicly held company Euro Disneyland S.C.A.—needed to build its theme park. However, remembering the experience of the Orlando-area Disney World, the company proposed to develop the site in several phases, excluding “mosquitoes” from the area. In addition, with the booming French real estate market of the 1980s, the company expected easily to recoup much of its development costs—initially slated at FFr 15 billion for the Phase I construction—by selling off the properties it developed while retaining ownership of the land and maintaining control of both the commercial use and design of the properties surrounding the theme park. These real estate sales were projected to supply 22 percent of Euro Disneyland’s revenues in 1992, when the park was scheduled to be opened, and rise to 45 percent of revenues by 1995.

The Disney Company limited itself to a 49 percent stake in the enterprise, satisfying the French government’s requirement that at least 51 percent of the company would be owned by Europeans. With the backing of the powerful Disney brand name and financial clout, the initial financing for the venture, completed in 1989, took two primary forms. The first was a loan package covering much of the projected Phase I cost raised among seven French banks. The second was a public offering of 51 percent of Euro Disneyland S.C.A., which raised $1 billion to complete the financing. Disney was determined to build a state-of-the art theme park, “perfecting” the concept of its other theme parks, which in turn led to a number of so-called “budget breakers,” that is, last-minute design changes, many of which were initiated by Disney chief Eisner himself. As the Phase I project neared completion two years later, Euro Disneyland, in order to cover construction cost overruns was forced to arrange additional capitalization of $144 million and added loans of $522 million, raised from a collection of what eventually became more than 60 banks. Confidence in the venture ran high, with Euro Disneyland forecasting an attendance figure of 11 million visitors in the park’s first year, rising past 16 million annual visitors soon after the turn of the century.

Disney’s French Folly of the Early 1990s

Euro Disneyland opened on schedule in April 1992—and from there its fortunes quickly dwindled. By the end of 1993, the company was facing bankruptcy—with a first-year loss of more than FFr 5 billion and a rise in its debt load to over FFr 21 billion—and Eisner was publicly suggesting his willingness to close the park altogether. A variety of factors had brought the company to this point.

Euro Disneyland had severely miscalculated the health of the French real estate market. When this collapsed in the early 1990s, the company’s hoped-for property development sales failed to materialize. Indeed, the company was forced to abandon its planned 1994 start of the Phase II development of the theme park, from which Euro Disneyland had expected to pay down much of its debt load. At the same time, interest rates on the company’s vast loans were rising rapidly.

Meanwhile, the company had underestimated the impact of the recession of the early 1990s, by then already taking hold in Europe, and refused to postpone the opening of the theme park or to reduce its risk by allowing outside investors into the park’s hotels and other properties, reasoning that it could weather the course of the economic downturn. However, the recession slashed severely at consumer spending budgets; while Euro Disneyland nearly reached its first-year goal of 11 million, visitor rates swiftly declined, dipping to a low of just 8.8 million. Even worse, visitors proved reluctant to provide the company with important concession revenues, including gift sales and restaurant and hotel revenues. As sales slumped and visitor attendance fell, virtually stalling through much of the winter season, the company was confronted with another serious miscalculation. Pre-opening calculations had projected labor costs would demand just 13 percent of total revenues; instead, labor costs drained 24 percent of revenues in 1992 and rose to 40 percent of revenues by 1993.

While the recession—and the company’s delay in recognizing its effects—bore responsibility for many of Euro Disneyland’s startup pains, the company itself had to be held accountable for a series of cross-cultural gaffes that reduced much of the consumer goodwill it had expected. Chief among these was the company’s seeming ignorance of the fact that its European audience was significantly unlike its American and Japanese audiences. Trouble started in the theme parks marketing efforts, which emphasized the grand size and scope of the project, an issue which played well to an American or Japanese visitor but which left the Europeans largely indifferent. In addition, admission costs—running some 30 percent higher than a Disney World ticket—and a refusal to offer discounted prices for winter admission helped discourage European visitors, who, unlike their American and Japanese counterparts, were less likely to take frequent short vacation trips, particularly during the school year, but preferred instead to spend their vacation budget on fewer and longer vacations. Euro Disneyland hotels, which had geared up for receiving guests for average four-day stays, were surprised to find that the majority of their room bookings were only for overnight stays.

Company Perspectives

Together, let’s bring the Disney Magic to life. Our vocation is to give way to our imaginations and to tell beautiful stories, the type of stories that leave children and adults starry eyed. At Disneyland Resort Paris, each one of us has a part to play and each part has its setting. Everywhere, in each “land” in our world, in each restaurant, in each hotel, in each boutique, we take part in the magic of the moment. We wish for everything to be perfect and call upon the most talented creative artists, the most surprising innovations, and the most attentive of servers. Our “raison d’etre” is to continually surprise and enchant our guests.

Inside the park, visitors found other oversights. Euro Disneyland’s restaurants, geared toward the American feeding style of eating snacks at various times of the day, were not prepared for the more fixed schedules of France—projected to account for as much as 50 percent of all visitors—where the country all but shuts down at 12:30 every day to allow a leisurely lunch. Thus, the park’s restaurants had not been provided with the seating or staffing to accommodate the sudden influx of diners, resulting in long lines. Most famous among the company’s failures to accommodate cultural differences, Euro Disneyland maintained the alcohol-free policy of its other parks, arousing the ire of a country where wine is an integral part of the culture. The company proved no more popular with its employees. Largely French and highly jealous of their individualism, the park’s cast members chafed at the strict and elaborate dress and behavior codes imposed on its employees. Even at the corporate level, the Disney culture found itself at odds with its French hosts, which found the company’s manner to be overbearing and patronizing, an attitude which seemed to reach its peak when Eisner all but threatened to shut down the park in December 1993, arousing bad feelings among Euro Disneyland’s creditors. By then, however, with its losses mounting to FFr 5 billion and its debt load nearing FFr 22 billion, Euro Disneyland was in desperate need of its bankers’ goodwill.

A Princely Rescue in 1994

By the end of 1993, Euro Disneyland had run out of cash. The Disney Company agreed to keep the company afloat but only until the end of March 1994, when it required Euro Disneyland to have completed a restructuring of its finances. Euro Disneyland hoped to convince its creditors to waive up to half of its debt load; in return, the banks, concerned that the Disney Company should bear its share of the liability, sought concessions from Disney as well, specifically in the form of a waiver of the company’s management fees of 3 percent of revenues and a reduction in the Disney Company’s royalty fees of 10 percent on ticket sales and 5 percent on concession sales. Negotiations faltered between the Disney Company and its creditors, in part because of Eisner’s suggestion that he allow the park to close—which was seen as a bullying tactic by the banks—and in part because the Disney Company refused to reduce its royalty fees.

Less than a month before the deadline, the parties reached an agreement to rescue Euro Disneyland. The restructuring plan featured a rights issue, jointly subscribed to by the banks and the Walt Disney Company, which raised some $1 billion in cash. The Walt Disney Company also agreed to pay FFr 1.4 billion to purchase some of Euro Disneyland’s assets in a sale-leaseback agreement; in addition, Disney waived its management and royalty fees for five years—worth some $450 million per year—and thereafter to halve its royalty fees. The banks also agreed to waive interest payments for 18 months and then to defer subsequent payments for three years, adding additional yearly savings of nearly FFr 2 billion to Euro Disneyland’s relief.

With its debt load cut in half, Euro Disneyland next found help from a surprise rescuer: Prince al-Waleed, nephew of King Fahd of Saudi Arabia and a businessman who in just a decade had built up a personal fortune estimated at over $4 billion. The prince announced his intention to buy into Euro Disneyland, eventually spending over $500 million to take a 24 percent stake in the company.

On with the Business of Fun in the Mid-1990s

With its refinancing completed, and with new management in place—American Robert Fitzpatrick, who had overseen the Phase I construction, was replaced by Frenchman Phillippe Bourguignon in 1993—Euro Disneyland began addressing its internal problems. In 1994, the park’s name was changed to Disneyland Paris, emphasizing its proximity to the French capital. The company also made concessions toward resolving its poor labor and press relations. The no-alcohol policy was changed, allowing wine and beer to be served at the park’s restaurants, while the company lowered its admission prices, some of its hotel room rates, introduced lower-priced menu choices, and instituted discount pricing for winter admission. In addition, the TGV link to the theme park was completed in 1994, complete with a direct linkup with the Eurostar Chunnel train service.

After narrowing its losses to FFr 1.8 billion on FFr 4.1 billion in revenues in 1994, Euro Disneyland turned profitable in 1995. The company also began moving forward on its Phase II development, attracting a Planet Hollywood restaurant and an eight-screen, state-of-the-art movie complex, owned by Gau-mont, to the company’s free-admission Festival Disney (renamed Disney Village in June 1997) entertainment complex located next to the theme park. The company also started construction on a second convention center and began eyeing plans to open a Disney Studios theme park on the site. Meanwhile, the passing European recession and stronger marketing campaigns were spurring increasing attendance, rising from 10.7 million visitors in 1995 to 11.7 million in 1996. Posting its second year of profits in 1996, Euro Disneyland seemed finally to be rousing from its European nightmare and moving into the dreamland Disneyland Paris should have been all along.

Attendance had surpassed 12 million visitors by 1997, making the theme park Europe’s leading tourist destination. Hotel occupancy was also strong, encouraging Disney management to go ahead with its plans to open a second park. Construction began in 1999 on Walt Disney Studios, a destination featuring attractions based on cinema, animation, and television. The company believed that the addition would not only bring in over five million new visitors each year but entice travelers to stay longer.

Key Dates

1987:: Disney signs a contract with Jacques Chirac to build a theme park in Paris.
1992:: Euro Disneyland opens.
1993:: The company faces bankruptcy with losses of FFr 5 billion and debts of over FFr 21 billion.
1994:: Saudi Prince Alwaleed purchases a stake in the firm; the park’s name is changed to Disneyland Paris.
1996:: The company secures profits for the second consecutive year.
2002:: The Walt Disney Studios theme park opens.
2003:: Euro Disney faces bankruptcy.

Problems Arise in the New Century

The construction of the new $530 million facility put a strain on the company’s debt load, which had risen to $2.2 billion by 2000. Profits began a downward trend, falling from EUR 38.7 million in 2000 to EUR 30.5 million in 2001, due mostly to expansion costs and royalty payments to Walt Disney Co.

Despite its faltering financial situation, Euro Disney—by now the company had shortened its name from Euro Disneyland to Euro Disney—went ahead with its plans, and on March 16, 2002, Walt Disney Studios Park opened for business. In sharp contrast with the original park’s opening in 1992, Walt Disney Studios was well received by France and the media. A Disney executive commented on the difference in a 2002 Amusement Business article, stating, “We have learned an amazing amount about each other during those ten years and we’ve learned, more than anything, how to be integrated, both socially and culturally, with the French.”

However, since the opening of Walt Disney Studios coincided with a drop in tourism and an overall slowdown in the global economy, it soon became apparent that Euro Disney had once again stretched itself too thin. The firm posted a EUR 33.1 million loss in 2002 and announced—for the second time in its history—that it needed financial help from its major shareholders. To make matters worse, attendance dropped during the spring and early summer of that year. In early 2003, Euro Disney’s parent stopped collecting its royalty fees in an attempt to alleviate some of its financial burdens.

By August 2003, Euro Disney announced that it would be unable to make its debt payments in the following fiscal year. As such, the company began negotiating with the Walt Disney Company and its three major banks in an attempt to restructure its debt. Desperate for a second princely rescue, chairman and CEO Andre Lacroix turned to Prince Alwaleed in September. Euro Disney faced an uncertain future, and it appeared as though the company needed a dose of Disney Magic to get itself back on track.