Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The company wants to dramatically change its geographic sales exposure
Thursday 07 Mar 2019 Author: Lisa-Marie Janes

China and the US could become more vital for growth for theme park operator Merlin Entertainments (MERL) as it aims to generate approximately 33% of sales each from the Asia Pacific, Europe and the UK, and the US over the long term.

Merlin currently generates over 50% of sales from Europe and the UK, compared to 27.5% from North America and 17.6% from Asia Pacific.

The company wants to expand across China and the US through investment over the next 10 years, yet the principles behind its strategy remain the same.

Merlin plans to develop new attractions and boost visitor numbers via promotions, annual passes and use its e-commerce ticketing platform with Accesso (ACSO:AIM) to upsell services and cut queues.

It also wants to target visitors taking short breaks by opening more themed rooms based on the Lego and Gruffalo brands.

Expanding Legoland overseas is a priority with new parks set to open in New York and Korea over the next three years, and potentially another Legoland in China if ongoing discussions are successful.

However, Merlin is not solely dependent on organic expansion as it is constantly looking for the right acquisitions to drive growth in a fragmented market.

Yet its ability to do deals may be affected by significant net debt, which totalled £1.2bn at the last count, and its substantial capital expenditure requirements.


Merlin hopes its core strategy will help it bounce back from underwhelming trading over the last few years, which has been affected by extreme weather, concerns around terrorism and operational performance.

Analysts have expressed scepticism over whether the company can deliver the targeted returns for its Midway roll-out, particularly as the upfront investment is impacting returns in the short term.

People may already be familiar with many of Merlin’s UK Midway attractions, including the London Eye and Madame Tussauds. Merlin also generates sales from its Legoland theme parks and resort theme parks, including Thorpe Park and Alton Towers.

Shares in Merlin have plummeted by more than 25% over the last two years thanks to a combination of headwinds and negative market sentiment.

This spurred activist investor ValueAct Capital to take a 5.4% stake in the company in early 2018. While ValueAct has not made its aims public, there has been speculation Merlin could be broken up.


Merlin is looking to the US and China for future growth as people are spending more time and money in these countries enjoying leisure activities.

Instead of focus purely on opening expensive theme parks, the company plans to launch smaller attractions, based on the likes of Peppa Pig in locations such as shopping centres.

A Peppa Pig attraction traditionally measures up to 1,200 square kilometres, has a capital cost of between £2.5m and £3m and can be built usually within a year. In comparison a Legoland theme park takes five years to construct and has a much bigger footprint and involves significantly more initial capital expenditure.

In 2017, Merlin struck a deal with Entertainment One (ETO) to gain multi-territory rights for the Peppa Pig brand, allowing it to roll out attractions and themed accommodation based on the popular children’s TV character.

Merlin wants to open Midway attractions that match the interests of populations in specific markets by, for example, opening Legoland Discovery Centres for the US market and launching Sea Life exhibitions in China.

In 2019, the company plans to open 10 new Midway attractions.


It’s early days but Merlin is starting to see an improvement in trading as Midway London recently returned to growth and record levels of accommodation openings supported Legoland’s growth.

A better performance is expected this year at Legoland by analysts as the latest Lego movie should drive more visitors to the park amid a rebound in Lego sales.

In its financial results for the year ending 29 December 2018, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of £494m beat analysts’ forecasts of £488m.

The earnings beat was supported by Merlin’s investment in its brands, including the high profile launch of Alton Towers’ Wicker Man, which helped attract more visitors.

Following the high-profile Smiler rollercoaster crash in 2015, the company has been working hard to restore Alton Towers’ fortunes.


Berenberg analyst Owen Shirley remained sceptical about future growth in a research note from October. He argued Midway’s issues are structural and are unlikely to go away anytime soon.

‘We believe visitation on a same-site basis has been declining since the end of 2013, and that Merlin’s ability to mitigate that with pricing is diminishing,’ comments Shirley.

Not everyone is so pessimistic. Barclays analyst Vicki Stern expects the firm to deliver long-term earnings per share growth at a compound annual growth rate of 8% underpinned by a ‘structural growth story’.

Stern also flags several short-term catalysts at Merlin, including continued growth at Midway and the potential trading boost to Legoland from the latest Lego movie.

‹ Previous2019-03-07Next ›