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?

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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."