The leveraged buyout of Merlin Entertainments was the largest take-private deal in Europe in 2019 and the £3.7bn-equivalent financing pushed boundaries. For its ability to tap both the US dollar and euro loan and bond markets successfully, while achieving momentous pricing and benchmark documentation, the deal is IFR’s Financing Package and EMEA Leveraged Loan of the Year.
Public-to-private deals dominated 2019, propping up the leveraged finance market in what was otherwise a lacklustre year. It seems only right to recognise the largest – and in some ways trickiest – one of all, for UK theme park and attraction operator Merlin Entertainments.
Merlin was already a well-known credit in the leveraged markets. Blackstone bought Merlin for £102m in 2005 and then Merlin bought control of Legoland. In eight years, Merlin more than tripled its number of attractions to 99 and multiplied its annual visitor numbers ninefold to 54 million, helped by large acquisitions including The Tussauds Group. At the £957m IPO in 2013, Blackstone’s resulting equity stake was worth more than US$1bn.
The latest deal extended the trend of private equity trying to buy back previously owned firms and Merlin epitomised how such deals can be a hit in the debt markets.
As the largest visitor attractions group in Europe and the second largest in the world after The Walt Disney Company, it was liked for being a well-known, strongly performing credit, backed by supportive shareholders, with good branding and geographical diversity.
“While we had to do a lot of selling, people were fundamentally predisposed to Merlin because they have known it for years,” said Jeremy Selway, co-head of EMEA leveraged DCM syndicate at Deutsche Bank. “The shareholders are more than supportive, it has a variety of formats, from Legoland to Madame Tussauds, that cover different weather conditions. It ticked a lot of credit boxes geographically as it spans the US, Europe, and has expanded well into Asia.”
Investors nonetheless raised some concerns over the deal, including a rollercoaster accident at Alton Towers in 2015, which hit the division’s underlying Ebitda by £40m and affected the share price, as well as the 2017 London terror attacks.
During syndication of the financing, they were also apprehensive about Brexit risk and reduced tourist numbers – 31% of Merlin’s revenues come from UK-based attractions – high leverage of six times and questions over minimum wage increases. The presence of animals at certain attractions prompted some resistance, too, on ESG grounds.
“If you look at equity research and Merlin’s share price and performance, it was not being viewed by equity analysts as favourably as it could have been. There are definitely a number of areas debt investors could have focused on in another way. The management team resonated exceptionally well with investors, to get them comfortable,” said Deutsche Bank leveraged finance managing director Altaf Bux.
Staycations were a convincing argument against Brexit, while the establishment of a beluga whale sanctuary in Iceland helped combat ESG fears.
Despite the high leverage, the deal was backed with a 49% equity cushion, while ratings of B1/B+ were better than the B/B2 expected.
And in contrast to other LBOs, adjustments to its £506m Ebitda were minimal, at around £10m.
“We didn’t feel the need to pro forma in other things to reduce leverage given the size of the equity cheque. Rather than adding £30m–£35m of adjustments, it was better from a marketing perspective to present a clean Ebitda, as that is not the market norm. We felt investors would prefer clean Ebitda than a quarter turn less of leverage,” Selway said.
Investors piled into the financing and a £1.26bn-equivalent euro-denominated term loan priced at 300bp over Euribor, while a £946m-equivalent US dollar-denominated term loan priced at 325bp over Libor. It was the lowest pricing for a euro-denominated Single B rated buyout loan since 2017.
The £319m-equivalent euro-denominated and £321m-equivalent US dollar-denominated senior subordinated notes also tightened significantly to price at 4.50% and 6.625%, from initial price talk of around 5% and 7%–7.25%, respectively, making for the tightest euro LBO subordinated bond pricing ever.
The financing also confounded critics who said documentation on the deal was too aggressive.
On the loan, Bank of America and Deutsche Bank were physical bookrunners for the euro tranche, while BofA was physical bookrunner on the US dollar tranche. Deutsche Bank was physical bookrunner on the high-yield bonds.
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