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France will not give up on Euro Disney
So another bailout by the state. But the park loses money unless the
parties make a lot of concessions. Still, it's the biggest tourist attraction in Paris, not to mention the biggest employer? ------------------ PAGE ONE Mutual Attraction Despite Losses and Bailouts, France Stays Devoted to Disney In Latest Rescue, State Bank Offers $500 Million Deal; Parks Seen as Job Creators Counting on 'Tower of Terror' By JO WRIGHTON in Paris and BRUCE ORWALL in Los Angeles Staff Reporters of THE WALL STREET JOURNAL January*26,*2005;*Page*A1 For years, France has fought what it sees as an American cultural invasion, powered by Hollywood movies, U.S. pop music and giant brands like Coca-Cola. Now, it is going to great lengths to save an American cultural icon in its backyard: Disneyland. The French government has just finished helping Walt Disney Co. bail out Euro Disney SCA, the operator of two Disney theme parks outside Paris. A state-owned bank is contributing around $500 million in investments and loan concessions to save Euro Disney from bankruptcy. This comes after 17 years during which French leaders have spent hundreds of millions of dollars and countless hours to ensure that the land of Monet could keep Mickey Mouse. Still saddled with debt, Euro Disney is gambling that expensive new attractions and an improved tourism climate will deliver a turnaround. In an interview last fall as the rescue negotiations hung in the balance, French Prime Minister Jean-Pierre Raffarin vowed not to let Euro Disney go bankrupt. "We are grateful to the American people and have lots of respect for their culture," said Mr. Raffarin. France hasn't always shown such consideration. President Jacques Chirac, during a trip to Vietnam in October, called the spread of American culture an "ecological disaster." France subsidizes its film industry to counter the influence of Hollywood, imposes quotas on non-French movies and songs on the airwaves, and officially discourages the use of English words such as "e-mail." When it comes to Euro Disney, however, the America-bashing yields to another French preoccupation: job creation. Mr. Chirac has made it a top priority to reduce France's stubbornly high unemployment rate, now at 10%, and sees Euro Disney as a job-creation success. The company accounts for an estimated 43,000 jobs and ranks as the biggest employment site in the Paris region. Its parks attract over 12 million visitors a year, more than the Louvre museum and the Eiffel Tower combined, although short of original projections. They have helped transform the once-barren Marne-la-Vallee area east of Paris into a booming urban sprawl. Disney also has a lot at stake in France. Failure would hurt the company's global brand just as it prepares to expand into China. But the Euro Disney saga has exposed shortcomings in Disney's strategy of adding new parks at each of its locations. Its goal is to keep visitors longer while saving on fixed costs. The strategy has backfired in Disneyland's Anaheim, Calif., flagship destination, where the new California Adventure park is a disappointment, and in Paris, where a troubled Hollywood-themed second park was the key trigger of Euro Disney's latest brush with bankruptcy. While the new bailout gives some breathing room to Euro Disney, in which Walt Disney owns a 41% stake, its future is anything but certain. If a planned Tower of Terror ride and other new attractions fail to bring in millions of new visitors, Disney and the French government might once again be forced to consider dramatic measures. Euro Disney got off the ground in 1987 with a deal between Disney Chief Executive Michael Eisner and Mr. Chirac, who was then mayor of Paris and prime minister. Paris, eager to keep its status as a top tourist destination, beat out Barcelona in the competition for Euro Disney. France expropriated land from local farmers and sold it to Disney at a steep discount to market prices. It then funded road and rail links to the resort. A state-owned bank called Caisse des Depots et Consignations lent Euro Disney the equivalent of ¤672 million, or $878 million at the current exchange rate, and the French government guaranteed the loan. Disney received full managerial control. "Welcome to the Walt Disney Company -- it's the best," Mr. Chirac told television cameras in accented English when the French realm of the Magic Kingdom opened in the middle of sugar-beet fields on April 12, 1992. 'Original Sins' But Euro Disney soon ran into debt trouble. Mr. Eisner had decided to make Disneyland Paris into Disney's nicest park with the fanciest centerpiece castle, and construction costs soared to ¤2.4 billion. Disney also imposed annual royalty payments of around 6% of revenue on Euro Disney in exchange for using Disney characters and other intellectual property. Antoine Jeancourt-Galignani, chairman of Euro Disney's supervisory board, calls those financial constraints "the original sins." Operational blunders compounded the debt burden. The American executives Disney first sent to Paris priced tickets too high and decided not to serve alcohol in a country accustomed to wine with meals. French labor inspectors bridled at the company's strict dress code, which regulated perfume and makeup while banning beards and mustaches. A French theater director called the park a "cultural Chernobyl." Less than two years after it opened, the first park faced closure because Euro Disney couldn't meet interest payments on its loans. A restructuring ensued, under which Disney agreed to give up some royalties temporarily. Euro Disney's fortunes brightened in the mid-1990s under a French chief executive, Philippe Bourguignon, who took over as CEO in August 1993. He introduced wine at the resort's restaurants, shrank their menus, made peace with the most troublesome unions, cut ticket prices and introduced the popular Space Mountain roller coaster based on French novelist Jules Verne's "From the Earth to the Moon." From 1995 to 2001, Euro Disney eked out small profits. Walt Disney executives were confident enough in the recovery that they decided to add a "second gate" in Paris, part of Disney's global plan to improve performance by building new parks at each theme-park destination -- Anaheim, Orlando, Tokyo and Paris. The idea is that visitors will extend their stays, filling up hotel rooms and buying more Disney T-shirts and stuffed animals. The company can then enjoy better profit margins because the new park shares fixed costs such as maintenance and food service with the old one. Euro Disney called its new park Walt Disney Studios, with Hollywood-themed attractions such as a ride called "Armageddon -- Special Effects" that is based on a movie starring Bruce Willis. It took out another loan worth the equivalent of ¤381 million from Caisse des Depts et Consignations, or CDC, to help pay for it. The new park flopped. Some guests said it lacked attractions to justify the entrance price, and other detractors complained it focused too much on American, rather than European, film-making. Jay Rasulo, who oversees Disney's theme parks world-wide, blames other factors: the post-9/11 tourism slump, strikes in France and a summer heat wave in 2003. Mr. Rasulo says the "second gate" strategy is successful on the whole, pointing to the popularity of Orlando's four parks and the DisneySea park next to Tokyo Disneyland. However, Anaheim's California Adventure park has struggled since its 2001 opening, in part because of complaints that it offered young families too little to do. Disney has added family fare -- an area based on the animated film "A Bug's Life" -- and a Tower of Terror thrill ride. Mr. Rasulo notes that parks are meant to last for decades. "One thing we know for sure is that you never get it 100% right the first time," he says. "We open every one of our parks with the notion that we're going to add content." The 1989 initial public offering prospectus for Euro Disney had projected that the first park would have around 16 million visitors in 2004. It predicted the second park, whose completion date wasn't clear at the time of the IPO, would record eight million visitors in its first year. Instead, the second park received only 2.2 million visitors in 2004, according to Amusement Business magazine, and together the two parks had slightly more than 12 million visitors. Euro Disney reported a record loss of ¤145.2 million, or nearly $190 million, for the year ended Sept. 30, 2004. By the summer of 2003, Euro Disney was at risk of bankruptcy. Back in Burbank, Calif., Disney's board was briefed on a range of options, such as letting the company go bust or pulling the Disney name off the park, according to a person close to Disney. But while Disney wanted to give the impression that it might take such extreme measures, that was the outcome it favored the least, this person says. Negotiations between Disney, the French government and creditors over saving Euro Disney soon stalled. Francis Mer, the French finance minister at the time, insisted that the state-owned bank CDC, Euro Disney's largest lender, not be forced to contribute more than the other lenders, according to people familiar with the matter. Disney, meanwhile, refused to do what it had agreed to once befo give up its royalties. It felt it would set a bad example for other theme park partners around the world who pay royalties. After collecting royalties of about ¤70 million during Euro Disney's first two years of operation, Disney had suspended payments for five years until 1998. Since the payments had resumed in 1999, Disney had collected more than ¤140 million from Euro Disney. At one meeting in March 2004 near the Champs Elysees, James Hunt, the chief financial officer of Disney's theme-park unit, insisted that Disney's royalties were "sacrosanct," according to a person who was there. Pressed on this point by the other creditors, he banged his fist on the table in frustration and made good on a threat to fly back to the U.S. Disney declined to make Mr. Hunt available for an interview. With Euro Disney just months away from running out of cash, the French government grew nervous. Nicolas Sarkozy, who succeeded Mr. Mer in late March and was intent on using the finance ministry as a springboard for his presidential ambitions, asked his top aides to reach out to more senior Disney executives. They phoned Thomas Staggs, Disney's chief financial officer, and asked him to come to Paris, according to people familiar with the matter. But Mr. Staggs begged off because Disney faced two more urgent crises in California: a shareholder revolt that ultimately led the Disney board to strip Mr. Eisner of his chairmanship, and an unsolicited takeover bid from Comcast Corp. He asked the French side to keep talking to Mr. Hunt and Christine McCarthy, Disney's treasurer. Mr. Sarkozy then tempted Disney back to the table by proposing that it enter into direct talks with state-owned CDC, without the other creditors. Francis Mayer, the head of CDC, invited Mr. Hunt, Ms. McCarthy and the then-head of the French Treasury, Jean-Pierre Jouyet, to CDC's palatial 18th-century mansion behind Paris's Musee D'Orsay. A friend of Mr. Chirac, Mr. Mayer has tastes that run more toward opera and German literature than amusement-park fare, but with his coaxing the parties found a basis for a deal to keep Euro Disney alive. Under the agreement, Disney would pay around ¤100 million to buy new shares in Euro Disney. It would also forgive some debts and defer other debts as well as some royalty payments. CDC would pitch in by underwriting new shares and forgiving some loan payments. It was not "simple" to get Disney to "do its duty," Mr. Sarkozy later told France's parliament. Disney officials chafed but held their tongues. Hedge-Fund Interests Euro Disney still wasn't out of the woods because other creditors had to agree to the restructuring. According to bankers involved in the talks, U.S. hedge funds including Cerberus Capital Management LP had bought some of Euro Disney's debt from the original lender banks. The hedge funds were holding out for higher interest payments on the debt in exchange for allowing the deferral of some principal payments. They figured France would do anything to avoid a Euro Disney bankruptcy because of the jobs at stake, according to a banker involved in the negotiations. A spokesman for Cerberus declined to comment. CDC and Disney eventually made further concessions to allow the hedge funds to get what they wanted. Disney agreed to forgive an extra ¤10 million in loans and CDC agreed to forgive an additional ¤20 million in interest payments. In the final deal, Disney's contribution totals up to ¤1 billion. CDC is paying ¤75 million to underwrite new shares and forgiving or deferring loan payments worth up to ¤320 million. As shareholders gathered last month to vote on the restructuring plan at the Hotel New York, a property inside the Euro Disney resort modeled on New York skyscrapers, French Transport Minister Gilles de Robien led a cheer from a giant video screen. Shareholders approved the plan. Last week, Euro Disney formally offered new shares to investors for just nine European cents apiece, in an offering expected to raise ¤253 million. The offering will increase the number of shares to about 3.8 billion from one billion now, meaning investors who don't participate will see their stakes severely diluted. Euro Disney shares, which made their debut on the Paris stock market in 1989 at ¤11, have lost 98% of their value and closed yesterday at 23 European cents. The company continues to carry around ¤2 billion in debt, costing it ¤100 million a year in interest payments. To meet those payments, the parks need more visitors. Euro Disney's French CEO, Andre Lacroix, is lobbying the government to open up Charles de Gaulle airport to more low-cost airlines to make Euro Disney a cheaper vacation destination. Under his stewardship, Euro Disney has created its first original character tailored for a European audience: the Halloween-themed "L'Homme Citrouille" or "Pumpkin Man." Mr. Lacroix, a former Burger King executive, also introduced a one-day pass giving visitors access to both parks in place of two separate tickets. He's planning to spend most of the money raised from the share issue on new rides, such as the Tower of Terror, a ¤140 million simulation of a hair-raising elevator ride. Laurent Vallee, a portfolio manager at Paris investment firm Richelieu Finance, thinks it might not be enough. "If Euro Disney had been left to operate like any other public company," says Mr. Vallee, "it would have gone bankrupt a long time ago." |
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