It is 1987, and in a muddy sugar-beet field 20 miles east of Paris, Walt Disney Co. is creating Euro Disneyland. By the time of its scheduled opening in 1992, Euro Disneyland (EDL) is expected to cost FF 15 billion ($2.5 billion based on an exchange rate of FF 6 _ $1). Most signs point to the park’s success. Two million Europeans already visit its American parks every year. AndParis demographics look great: In two hours, 17 million people could drive to the park and 310 million people could fly to the park.
Disney’s risk appears to be modest. It has invested $350 million in planning the park but has put up just $145 million for 49% of EDL’s equity. Public investors will pay $1 billion for the other 51% in a stock offering in October 1989. The public company, throughits traded shares, will give Europeans a chance to participate in the success of the project once the gates open in 1992. (When the stock begins trading on the Paris Bourse in October 1989, Disney’s stake will be valued at $1 billion—an $855 million gain in value.)
Even if profits are weak, Disney will rake in fat management fees. And it could clean up just on the land: It has rights to buy 4,800acres from the government at just $7,500 an acre—compared with $750,000 an acre for similar land in the area. Disney can resell chunks to other developers for any price it can get. The acreage should jump in value once high-speed rail lines from Paris and London (via the Chunnel, the tunnel under the English Channel) are in place.
But there is risk nonetheless. The most critical variable isattendance. Many experts think surprises may await Disney. They doubt that attendance will meet Disney’s expectations. Others think that the crowds will come but will spend less than Disney projects. Disney faces other unknowns as well. MCA/Universal, which will be bought by Matsushita in 1990, is thinking of building a park in London, which would cannibalize Euro Disneyland’s attendance. There’s alsothe grim winter weather, which prompts European parks to close until spring. Then there’s the challenge of training 12,000 Europeans, half of them French, to be Disney “cast members.” Bowing to French individualism, Disney will relax its personal grooming code a bit. Disney may also decide to change its ban on booze if customers call loudly enough for wine and beer. Disney claims that itsexperience with Tokyo Disneyland, its last major development project, shows that it can deal with non-American culture and bad weather. Tokyo Disneyland was completed on time and within 1% of budget. It has also been a huge commercial success.
In March 1987, Disney and the French government sign a “Master Agreement” for Euro Disneyland. In accordance with that agreement, Disney forms aholding company to control development of the entire site. It pays $145 million for 49% of the holding company’s shares and sells 51% of EDL to European investors for a little over $1 billion; of the latter shares, around half are sold to the French.
The holding company set up as an SCA (Societé Commanditeé par Actions), a unique French corporate form that is very similar to an American limitedpartnership. Disney is the gerant, or general partner. The SCA structure allows Disney to control management, even with a minority shareholding. Thus, even though the holding company owns EDL, Disney will manage it and collect an estimated $35 million a year in royalties on sales of admission tickets, food, and souvenirs.
The master agreement is basically an inducement for Disney to bring EuroDisneyland to Paris rather than to Spain’s Mediterranean coast. The inducements include the following:
• Loans of up to FF 4.8 billion are available from a French government agency. The loans carry a fixed interest rate of 7.85%, in contrast to a normal commercial rate of 9.25%.
• EDL can use accelerated depreciation to write off the construction costs of its extravaganza over a 10-year period.