LEGOLAND, Alton Towers and Madame Tussauds are amongst the biggest visitor attractions in the UK. The company that owns these — and others — is Merlin Entertainments (LSE: MERL), which floated on the London Stock Exchange on Friday.
Shares in the private equity-backed firm surged 10% above their offer price of 315p when trading started on Friday. So far this week, they have held onto that premium and are trading at around 348p, valuing Merlin at £3.6bn.
Royal Mail’s flotationseems to have rekindled public appetite for share offerings, but Merlin is a different kind of beast altogether. In this article, I’m going to run over some key numbers for Merlin and look at whether this firm is likely to be a profitable investment for private investors.
A strong performer?
Merlin’s headline revenue figures for the last five years suggest that it is a strong performer. Revenue has risen by an average of 12.9% per year, and the firm’s operating profits have kept pace, rising by an average of 13.5% per year since 2008.
However, Merlin has been on an acquisition binge, and once its recent purchases are stripped out, 2012’s 15.2% increase in revenue becomes a 0.5% fall. Similarly, headline visitor numbers rose by 16.1% last year, but on a like-for-like basis, visitors were down by 1.4%.
Debt-fuelled growth
Merlin’s growth has been fuelled by debt, and the company currently has net debt of around £1.1bn, which equates to net gearing of 178%.
This bumper debt burden resulted in interest costs of £110m in 2012, which swallowed 31% of Merlin’s operating cash flow, which seems uncomfortably high to me.
A pricey package
Another risk is that Merlin’s shares are currently priced for aggressive growth. The firm’s 348p share price gives it a historic P/E of 30 and a price to book value ratio of 5.6. Although Merlin is expecting to start paying a dividend, its debt commitments mean that the yield is only expected to be between 0.5% and 1%.
If this growth fails to materialise, shareholders could be in for a painful surprise.
A big overhang…
My final concern is that Merlin’s private equity backers, BlackRock and CVC, are expected to sell more of their stakes in the firm in 2014. This wave of selling could well result in Merlin’s share price falling to a more reasonable level, leaving early investors sitting on a loss.