Activist ValueAct pushes for a private equity takeover
Thursday 30 May 2019 Author: Martin Gamble

Shareholders in theme park operator Merlin Entertainments (MERL), have plenty to digest at present, not least a downgrade by investment bank HSBC on 28 May, which pushed the shares 4% lower to 337p.

On 23 May, the second largest shareholder, ValueAct, sent an open letter to management, claiming that the business could attract a bid from private equity of 450p, giving the shares an 8% boost to 379p.

Merlin is no stranger to the world of private equity, having been owned by a string of different private equity companies, ever since Apax Partners financed the original management led buyout of Varden to form Merlin Entertainments in 1998.

Apax sold the business to Hermes private equity in 2004 and a year later, after the Legoland theme parks came up for sale, Hermes didn’t want to commit further capital and the business switched hands yet again, this time to the Blackstone Group.

Blackstone negotiated the purchase of Legoland, and as part of the deal, Kirkbi A/S, the investment vehicle of the family behind Lego, became a major shareholder in Merlin.

PRICED FOR PERFECTION?

Whether the group would operate better in the hands of private equity is an open question, since much of the uplift in value seems to have been made in the years leading up to the initial public offering.

All-in-all Blackstone is estimated to have made 3.5 times its original investment over a five-year period. Merlin was eventually floated in 2013, valuing the business at £3.4bn.

One contributing factor to the lacklustre share price since flotation could be that investors perceived the valuation to be pretty full. Shareholders therefore need to be patient, to see how Merlin’s planned investments pan-out over the medium term.

According to PitchBook Data, unspent capital committed to private equity touched $962bn last year, putting pressure on firms to deploy capital.

Meanwhile, Cambridge Associates reports that private equity returns have lagged their benchmark over one, three and five years. This shouldn’t be surprising as capital is being deployed at higher and higher valuations.

Debt to earnings before interest, depreciation and amortisation (EBITDA) levels have entered territory not seen since the financial crisis, close to six times.

ACTIVE PLAY

ValueAct, the San Fransisco based activist asset manager, usually works behind the scenes, using its board representation to coerce managements into adopting shareholder focused strategies. With Merlin, it clearly wants to speed things up. Whether it would be willing to sell its position to a private equity buyer is unknown.

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