(FROM THE WALL STREET JOURNAL 16 February 2016)
Minority shareholders in the struggling Disneyland Paris resort say they have been taken for a ride.
In a cluster of legal disputes playing out in French courts, a group of activist shareholders alleges Walt Disney Co., the majority owner of Paris-listed Euro Disney, has siphoned off excessive royalties while Euro Disney’s assets have been undervalued, in an attempt to drive out minority shareholders.
During a restructuring that was concluded in November and that Euro Disney said was designed to, and did, improve its finances, Walt Disney was able to almost double its stake in the firm. The group of hedge funds, led by Paris-based Charity Investment Asset Management’s CIMA fund, says small shareholders weren’t told of the true value of the firm’s assets and the health of its business.
Euro Disney says the claims are baseless and that the restructuring was a positive for Euro Disney. An executive said contracts with Walt Disney had been disclosed since it became public, while royalties were within market comparisons. A spokeswoman for Walt Disney said: “We believe that the case is utterly without merit.”
Another of CIMA’s complaints centers on incentives given to Euro Disney management, which it says present a potential conflict of interest.
While employees are granted stock options in Euro Disney, its management committee was in 2014 granted almost 3 million euros ($3.4 million) in stock options and restricted stock units in Walt Disney — whose shares are up around 240% over the past decade — according to Euro Disney documentation.
Euro Disney raised money from outside shareholders when it went public in 1989 and has remained a separate company from Walt Disney, part-owned by and paying royalties to the U.S. firm.
Lampooned on cartoon series “The Simpsons” for a lack of visitors and financial woes, Euro Disney has been a disaster for shareholders since flotation in 1989, falling around 99%.
Shareholders’ other claims include alleged misuse of Euro Disney’s assets and false accounting.
The group is also demanding the repayment of 930 million euros to Euro Disney, in repayment of “exorbitant” and ” abusive” royalties and other fees paid to the U.S. firm.
There has been “a siphoning off of money and undervaluation of key assets to enable them to buy off the minorities,” said Guy Wyser-Pratte, a French-born New Yorker and veteran investor who heads U.S. firm Wyser-Pratte Management Co. His firm owns shares in Euro Disney and is helping fund the litigation.
CIMA filed a complaint with the French criminal authorities last year against Walt Disney and subsidiaries, alleging misuse of corporate assets, filing false accounts and providing false information. A spokesman for the financial prosecutor said a judicial inquiry had been opened and would be conducted by one or several investigating judges.
Acivil case against Walt Disney subsidiaries, demanding the repayment of 930 million euros to Euro Disney, was filed to the Commercial Court of Meaux in October.
The Autorite des Marches Financiers, the French financial regulator, last year approved Walt Disney’s offer to purchase Euro Disney shares. CIMA’s appeal was rejected by the Paris Court of Appeal in September. CIMA is now appealing to the French Supreme Court.
Issues for the hedge funds, which say they control roughly 3.5% of Euro Disney, came to a head with the highly complex recapitalization, which concluded in November.
The plan involved a cash injection of around 420 million euros, made or guaranteed by Walt Disney, and the conversion of 600 million euros of debt held by Walt Disney into Euro Disney shares.
Walt Disney then offered to buy out other shareholders, before letting them buy shares. As a result, Walt Disney’s stake in Euro Disney almost doubled, from 40% to 76.7%, announced in November.
Rather than being a rescue plan, this was an attempt by Walt Disney to buy up more shares, says CIMA.
“The intent of the plan was to recapitalize the Euro Disney Group — not to increase” Walt Disney’s stake, said the Euro Disney executive, adding that Walt Disney let other shareholders keep their stakes.
CIMA says that during the recapitalization, Euro Disney’s business outlook was too pessimistic. In January of last year, the firm said in a statement it expected annual attendance to fall by around 2.6 million guests and earnings to tumble 45% by 2023.
But results were better, say the funds. In November, it reported a 25% increase in earnings on the previous year and visitor numbers up by 600,000.
The Euro Disney executive said the business outlook had been drawn up a year and a half ago. The results don’t “change the fact” the recapitalization was “critical” to Euro Disney, he said.
Another key battle is the value of approximately 5,510 acres of land near Disneyland Paris, around half of which is yet to be developed.
Ledouble, an expert firm appointed by Euro Disney’s supervisory board during the recapitalization, said it concluded Euro Disney’s total assets were worth less than the 1.25 euro-a-share offer price.
A report commissioned by CIMA estimates the capital gain from the land rights at 1.9 billion euros. This, plus other gains, means Euro Disney had an asset value above 3.7 euros a share, it says. The shares trade at 1.26 euros.
Euro Disney disputes this. “Real estate is a small part of our business,” said the executive, adding that real-estate activities have on average generated a margin of 10 million euros a year.
The Euro Disney executive said that “Euro Disney executives are employees of a Disney subsidiary and like all executives of Disney subsidiaries they receive Disney stock options.”