CIAM accuses Disney of forcing out Minority Shareholders.

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Euro Disney S.C.A. investor hedge fund  Charity & Merger Arbitrage Fund managed by Charity Investment Asset Management (CIAM)  has written to individual members of the Disneyland Paris Supervisory Board  accusing the company of working with The Walt Disney Company to force out minority shareholders.

The Walt Disney Company  last month acquired a further 9%  stake in Euro Disney from Prince Alwaleed, the Saudi billionaire, at €2.00 a share, increasing its holding in the resort to 85.7%, and said it was offering the same price to shareholders  of the remaining shares.

Founded in 2009 by Catherine Berjal and Anne-Sophie d’Andlau, CIAM has long been critical of the scale of the royalty fees payable to The Walt Disney Company and has said that the €565 million depreciation in Euro Disney’s last accounts “would mean that the book value of the park is zero”.  The Euro Disney Group posted a record loss of €858 million last year.

CIAM  who are reported hold 1.4% of Euro Disney’s stock accuses Disney management of exploiting “a clear conflict of interest”, arguing that the write-down appears solely to facilitate the takeover bid.

Euro Disney and The Walt Disney Company have consistently dismissed the allegations as “utterly without merit”.

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Is Disneyland Paris being managed solely in the interests of its majority shareholder?

95ad1-castleThe website The Conversaion has published a very interesting and informative article by The ConversationJulien Pillot, (Chercheur associé en sciences économiques), which goes into great depth about Disneyland Paris possibly being managed solely in the interests of its majority shareholder, The Walt Disney Company.

This article gives some background information to explain why CIMA are pressing on with their legal action against Euro Disney and The Walt Disney Company in France’s Autorité des Marchés Financiers  demanding €930 million for damages suffered by minority shareholders because of biased actions taken by the park’s management.


Disneyland Paris: too big to fail?

By Julien Pillot, Centre National de la Recherche Scientifique (CNRS)

In a recent article titled “The Social Cost of Dishonesty”, The Conversaion showed how imperfect markets – for example, where some parties have more information than others – require the intervention of impartial authorities to adjust the balance of power and maximize the public good. The social cost of dishonesty is even higher when such authorities are absent or when they’re captured by economic, corporate or electoral forces. We concluded with a number of questions that these issues raise in the worlds of journalism and finance.

In this article, the matter at hand is the ability of independent authorities to discipline a publicly traded company, Disneyland Paris, that is possibly being managed solely in the interests of its majority shareholder, The Walt Disney Company.

The agency theory, developed in the pioneering work of Michael Jensen and William Meckling, asserts that honest and efficient corporate governance, through properly designed incentives, can reduce the risk of one party’s making decisions that are contrary to the collective good in order to maximize its own interests.

Good for me, not so good for you

In financial economics, such “harvest strategies” often crystallize around obvious conflicts of interest, which can increase the risk of moral hazard or adverse selection. When corporate management fails to correct such problems, it is the responsibility of outside authorities to restore a level playing field or, if necessary, sanction any misconduct or market abuse.

In the case of Disneyland Paris, the risk of conflict of interest is obvious given that The Walt Disney Company (TWDC) is simultaneously its largest shareholder (39.8%); the holder of the park’s license, for which it collects generous royalties (€61.9 million for 2014 alone); its sole supplier, with no possible competition for new rides, decorative elements, etc; and, since the company was restructured in 2012, its sole creditor. Note that TWDC also controls 51% of the consolidated variable interest entities.

Suffice to say that from the outset, TWDC has been in full control of the choices made by its French subsidiary, allowing it to set the broad strategic objectives, make crucial decisions, set the level of royalties and even to appoint members of the executive board (which are often employed by TWDC itself). At the same time, the company is unlikely to be exonerated of structural losses of the consolidated group or avoid its legal or moral obligations.

This being the case, it’s illuminating to look at Disneyland Paris’s corporate governance. The manager (in this case, TWDC) is remunerated on the basis of a fee set at 1% of annual turnover (€12.9 million in 2014), to which are added royalties for the use of intellectual property that vary between 5% and 10% of turnover depending on the products and services in question (this constitutes nearly 57% of the park’s net losses over ten years). To this one we can add the considerable advantages that the European amusement park gives TWDC for its service activities (merchandising, video-on-demand subscriptions, film receipts, etc) as well as the boost that the park’s colossal advertising and PR expenses (nearly 10% its annual revenue) provide to its galaxy of affiliates (Disney Hachette Presse, The Disney Store, as well as TWDC France via the Disney Channel and DVD publishing).

It should be noted that the CEOs appointed by TWDC in recent years have succeeded in boosting both Disneyland Paris’s attendance (up 18.3% since 2000) and its sales (up 33.4%). But at the same time, the park has shown an annual profit just once, in 2008, and then only because of the sale of assets.

Royalties or profits?

From the economist’s point of view, this intriguing situation – in which growing receipts are accompanied by rising deficits – has only one possible explanation: rising marginal costs bear witness to diminishing returns from the goods and services sold. In other words, under Disneyland Paris’s business model, each new customer costs more than he or she brings in.

Moving from this realization to suspecting that Disneyland Paris is subsidizing its customers for the sole purpose of artificially increasing the company’s turnover, paying hefty royalties to its parent company (suspected to pass through Luxembourg in complex tax-avoidance scheme) and devaluing its stock price (down 95% since 1989) so that it can cheaply buy back shares is not a great leap. It is one that Charity & Investment Asset Management (CIAM) did not hesitate to make. This month it filed a complaint with France’s Autorité des Marchés Financiers (the equivalent of the SEC in the US) and others demanding €930 million for damages suffered by minority shareholders because of biased actions taken by the park’s management.

While it is not for us to play the judge in this case, there does seem to be a preponderance of evidence from an economist’s point of view. Who benefits from the crime, after all? The intentional increase in Disneyland Paris’s turnover has allowed TWDC to reap substantial returns. The park’s repeated financial losses and the endless fall of its share price have, in turn, paved the way for the buyout of third parties: the park’s creditors in 2012, and a substantial portion of minority stockholders in 2015 after yet another recapitalization. This now gives TWDC ownership of nearly 82% of the company’s shares. At the same time, remaining minority stockholders – for whom the payment of hypothetical dividends now seems like a dream – received a proposition from Disney for a mandatory buy-back at €1.25 per share. CIMA has challenged this calculation, which it said intentionally undervalued the company.

A good source of taxes

During this time, the French government examined its own situation with Disneyland Paris. It has no hope of tax receipts on nonexistent corporate profits and had already provided an endless series of gifts to the US company, including subsidized infrastructure, 4,800 acres of land sold at cost and loans at sub-market rates. In this situation, does it still have the ability to discipline – should such a thing happen – a company that pays millions of euros annually in local taxes and VAT, provides thousands of direct and indirect jobs, and which constitutes one of the top tourist destinations in France?

And even as this question reminds us of the debates around corporations that are so large or important that they can’t be subject to any decisions or actions that might weaken them – the famous “too big to fail” – the words of French playwright Jules Renard resonate: “It would be beautiful indeed to see an honest lawyer request the conviction of his own client.”

This article was originally published in French

Phase 3 of the Euro Disney public offering to close on 24 September 2015

Logo_Euro_Disney_SCAFollowing the ruling by the Paris Court of Appeal on 8 September 2015 the AMF announced today in document number 215C1279 that Phase 3 of the Euro Disney S.C.A. public offering will closed on 24 September 2015.

The AMF’s decision follows the Paris Appeal Courts rejection of the appeal made in April by CIMA (Charity & Merger Arbitrage Fund) against the decision made by the AMF to authorize the Euro Disney mandatory cash tender offer which is part of the Disneyland Paris recapitalization plan by The Walt Disney Company.

The Euronext Paris will publish a detailed timetable for the closure of the offer in due course.

Source: AMF and Association des Petits Porteurs d’Actions EuroDisney.

The Walt Disney Company Q2 results 2015

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The Walt Disney Company announced its second quarter and six months earnings for the fiscal year 2015 today and the full report can be found here (PDF).

The section of the report that relates to the companies Parks and Resorts division is included below.  It is interesting to note that TWDC has reported  lower operating income  due to lower attendance at Hong Kong Disneyland Resort, higher operating costs at Disneyland Paris and Hong Kong Disneyland Resort, and higher pre-opening expenses at Shanghai Disney Resort.

They also report that these decreases were partially offset by higher average ticket prices and food, beverage and merchandise spending at Disneyland Paris.

We expect a further new release from Euro Disney S.C.A. this afternoon once the Euronext closed.


FOR IMMEDIATE RELEASE
May 5, 2015

THE WALT DISNEY COMPANY REPORTS
SECOND QUARTER AND SIX MONTHS EARNINGS FOR FISCAL 2015

BURBANK, Calif. – The Walt Disney Company today reported earnings of $2.1 billion for its second fiscal quarter ended March 28, 2015. Diluted earnings per share (EPS) for the second quarter increased 14% to $1.23 from $1.08 in the prior-year quarter. Excluding certain items affecting comparability, EPS for the quarter increased 11% to $1.23 from $1.11 in the prior-year quarter. EPS for the six months ended March 28, 2015 increased 18% to $2.50 from $2.11 in the prior-year period. Excluding certain items affecting comparability, EPS for the six months increased 16%.

“Our second quarter performance, marked by increased revenue, net income and EPS of $1.23, demonstrates the incredible ability of our strong brands and quality content to drive results,” said Robert A. Iger, chairman and chief executive officer of The Walt Disney Company. “The power of this winning combination is once again reflected in the phenomenal worldwide success of Marvel’s Avengers: Age of Ultron, which has opened at number one in every market so far”.

Parks and Resorts

Parks and Resorts revenues for the quarter increased 6% to $3.8 billion and segment operating income increased 24% to $566 million. Operating income growth for the quarter was due to an increase atour domestic operations, partially offset by a decrease at our international operations.

Higher operating income at our domestic operations was due to increases in guest spending and volumes, partially offset by higher costs. Guest spending growth was primarily due to increases in average ticket prices at our theme parks and cruise line, increased food, beverage and merchandise spending and higher average hotel room rates. The increase in volumes was primarily due to attendance growth at Walt Disney World Resort and sales of vacation club units at Disney’s Polynesian Villas & Bungalows, partially offset by lower attendance at Disneyland Resort. Cost increases were due to labor and other cost inflation and higher pension and postretirement medical costs.

Lower operating income from our international operations was primarily due to lower attendance at Hong Kong Disneyland Resort, higher operating costs at Disneyland Paris and Hong Kong Disneyland Resort, and, to a lesser extent, higher pre-opening expenses at Shanghai Disney Resort. These decreases were partially offset by higher average ticket prices and food, beverage and merchandise spending at Disneyland Paris.

TWDC increase ownership to 78.8%

It was announced today that The Walt Disney Company now own 616,669,469 shares in Euro Disney S.C.A. taking their ownership to a record high of 78.8% of Disneyland Paris.

Company                                Shares        %

The Walt Disney Company              616,669,469   78.80
(EDL Holding Company LLC)
Kingdom Holding Company               38,976,490    4.98
(HRH Prince Alwaleed) 
Invesco Asset Management Ltd.         21,105,711    2.69
Morgan Stanley & Co International     19,627,098    2.51
Ledbury Capital Partners LLP           8,109,570    1.04
Invesco Advisers, Inc.                 4,787,207    0.61
GAM London Ltd.                        2,813,640    0.36
State Street Global Advisors Ltd.        193,515    0.18
Euro Disney S.C.A.                       584,466    0.075
Norges Bank Investment Management        516,124    0.066

GO ETF Solutions LLP                     169,206    0.022




Many thanks to  APPAED (Association des Petits Porteurs d'Actions EuroDisney) for this data.

The Walt Disney Company increases ownership in Disneyland Paris.

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The Walt Disney Company has increased their ownership in Euro Disney S.C.A.  to 78.7% up 1.3% since 20 April according to data published by French financial website zone bourse on 30 April 2015.

This week the share price of Euro Disney increased 0.01€ to 1.26€ after weeks of remaining steady at 1.25€.

Company                                Shares        %

The Walt Disney Company              616,590,598   78.70
(EDL Holding Company LLC)
Kingdom Holding Company               38,976,490    4.98
(HRH Prince Alwaleed) 
Invesco Asset Management Ltd.         21,105,711    2.69
Morgan Stanley & Co International     19,627,098    2.51
Ledbury Capital Partners LLP           8,109,570    1.04
Invesco Advisers, Inc.                 4,787,207    0.61
GAM London Ltd.                        2,813,640    0.36
State Street Global Advisors Ltd.        193,515    0.18
Euro Disney S.C.A.                       584,466    0.075
Norges Bank Investment Management        516,124    0.066
GO ETF Solutions LLP                     169,206    0.022

Many thanks to  APPAED (Association des Petits Porteurs d’Actions EuroDisney) for the above information.

Euro Disney shareholding as of 20 April 2015

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It’s always interesting to know the share  ownership statistics of Disneyland Paris,  so here is the latest breakdown for Euro Disney S.C.A. as of the 20 April 2015.

The major thing that jumps out at you is that The Walt Disney Company now own over 77% of Disneyland Paris.

Company                                Shares        %

The Walt Disney Company              606,275,358   77.40
Kingdom Holding Company               38,976,490    4.98
Invesco Asset Management Ltd.         21,105,711    2.69
Ledbury Capital Partners LLP           8,109,570    1.04
Invesco Advisers, Inc.                 4,787,207    0.61
GAM London Ltd.                        2,813,640    0.36
State Street Global Advisors Ltd.        193,515    0.18
Euro Disney SCA                          584,466    0.075
Norges Bank Investment Management        516,124    0.066
GO ETF Solutions LLP                     169,206    0.022

Many thanks to Edith from APPAED (Association des Petits Porteurs d’Actions EuroDisney) for this very interesting data.