Global Economics

No Mystery In Blackstone's Wax Museum


The group's purchase of the Tussauds franchise is not an asset-stripping play, but further buildup of a profitable amusement-park strategy

Theme parks and other visitor attractions are more than just fun and games for private equity giant the Blackstone Group. They're serious business. On March 5, the company's Merlin Entertainments Group shelled out £1 billion ($1.92 billion) for Tussauds Group, owner of the famed, London-based Madame Tussauds wax museum franchise. At a stroke, the move will create the No. 2 operator of tourist attractions after the Walt Disney Co. (DIS).

In an age when buyout firms have a notorious reputation for "stripping and flipping," or buying assets, disposing of parts, and then selling the properties again, could this mean we'll now see our favorite celebrities melted down for a quick buck?

Not a chance. When Blackstone bought Merlin for £102.5 million ($197.3 million) two years ago, the British company had revenues of $86.7 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $27.9 million.

Going Public?

With Blackstone's deep pockets financing takeovers such as the 2005 acquisition of Denmark-based theme park chain Legoland, Merlin's revenues soared to $524.5 million last year and EBITDA jumped to $192.5 million. The Tussauds purchase will double that figure.

"It's not a cost take-out at all," says Joseph Baratta, a senior managing director at Blackstone in London. "It's very much a 'buy-and-build' growth strategy," he adds, noting that it's likely the entertainment group will someday be floated in a public offering.

To be sure, the previous owners made a tidy profit. Blackstone is purchasing Tussauds from Dubai International Capital, which bought the small museum group for £800 million ($1.5 billion) two years ago and will retain a 20% stake in the venture. Before that, Tussauds was owned for several years by private equity group Charterhouse Capital.

Six Flags Experience

But Blackstone knows a thing or two about amusement parks and other visitor attractions. It was a partner in Six Flags theme parks in the U.S. in the early 1990s, selling it for a profit after two years. It currently holds 50% of Universal Studios resort in Orlando.

And in the marriage of Merlin and Tussauds, Blackstone clearly sees a fine romance. The deal will combine Merlin's four Legoland parks and 18 Sea Life aquariums with Tussauds' six wax museums, the British Alton Towers leisure park, and the London Eye Ferris wheel in an empire spanning Europe and the U.S. "Each business separately has many avenues of growth, and we will back that," says Baratta.

Those efforts are already well underway. Since Merlin bought Legoland for €375 million ($491.4 million) in 2005, it has spent $15 million on advertising to raise the brand's profile as a theme park, independently of the famous toy. It has also poured $10 million in capital expenditure into the Legoland in Carlsbad, Calif., and will spend a similar amount on the Legoland near London this year.

Building, One Lego at a Time

It's expanding its Legoland franchise, too, planning more parks with on-premise hotels and adding an indoor center in Berlin that will open later this month. Tussauds, meanwhile, will add to its stable of museums—now located in New York, Las Vegas, and several European cities—by opening new venues in Washington and Los Angeles in the next two years.

"They are truly building a formidable group," says Dennis L. Speigel, president of International Theme Park Services, a Cincinnati consultancy. Speigel, who got his start in the industry as a teenage ticket-taker at Coney Island, predicted the Merlin-Tussauds hook-up last fall at a conference. The move, he added, is part of a "wider industry rollup" that has recently seen Six Flags sell several of its properties.

One of the key strategies is to exploit synergies across the combined brand, says Nick Varney, Merlin's chief executive. At its Italian Gardaland theme park, for instance, Merlin plans to open a Sea Life center next year, and eventually an indoor Legoland. Merlin is also planning a second hotel at Gardaland, which it bought last year, to encourage visitors to stay longer.

We're No Disney

"We're building a mini-Disneyland [at Gardaland] for all intents and purposes," says Varney, who got his start in the early 1990s as marketing director for Alton Towers, a theme park and resort near Manchester that's a part of the Tussauds group.

Still, Varney says, the group has "no desire or aspiration" to challenge Disney head-on. Even as the second-largest operator, Merlin's annual visitors, at 30 million, pale in comparison to Disney's 100 million. What's more, the business model for its city-center attractions, such as the London Dungeon, Sea Life aquariums, and now the wax museums, is entirely different—they're designed for shorter two-to-three hour stays.

Minding the Gaps

Varney is also not aiming to win the Disney demographic in the theme park arena. Instead of promoting them as Disney-like, week-long, holiday destinations, he's aiming to promote Gardaland, Legoland, and other parks for "short break" stays. That will boost customer spending on current attractions and let the company add new revenue streams, such as would be garnered from building a Sea Life aquarium adjoining the original Legoland in Denmark.

Blackstone's Baratta says the group currently has no plan for additional major acquisitions, though there may be a few minor purchases to "plug in gaps" in the portfolio. What's more, Blackstone has no view to exit its investment in Merlin, though when it does, the size of the venture means that it's likely to be in the form of an initial public offering.

Should Merlin keep growing at these rates—excluding acquisitions, earnings rose 18% last year—Blackstone is likely to be entertaining thoughts of a very nice profit indeed. Not bad for an industry built on fun and games.

Norton is a BusinessWeek.com correspondent in London.

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