28-08-2014, 11:49 PM
*WARNING.. Long post*
With no other terms and details, it’s hard to understand what’s the impact of this acquisition.
Turning to my favourite search engine.. here’s what I found.
Merlin was in the running, given that they own and operate the London eye, until they dropped out in May 2014. As the acquirer, there’s potential synergy for them in acquiring Singapore Flyer and setting up a Madame Tussauds. Merlin Entertainments plc (MERL.L), the operator of Madam Trussauds, Legoland and Sea World, has a market cap of GBP 3.5B and a ROE/ROA of 22% and 6.9% respectively. Maybe they have already committed to a MT on Sentosa and having the Flyer doesnt make sense. But whatever it is, Merlin has a track record of delivering 13 years of double digit profit growth since 2000 at the point of its IPO on the LSE. So when Merlin walks away, it could be a sign.
The London Eye welcomes an average of 3.5 million visitors a year. (Do you know? The London Eye was originally put up primarily by British Airways for the millennium and was to be taken down after 1 year. Much like the Effiel Tower!)
According to the UK govt website, the total number of visitors to London in 2013 was a record 16.8 million. And the tourism receipt totalled more than 11.2 billion pounds. There’s also the domestic travellers in the UK and I am not sure if those are included in the statistics. So very roughly, 1/5 of all visitors to London go to the London Eye!
Based on historical facts - in 2009, the London Eye made Merlin 25m pounds. Now, in 2014, adults pay about 20 pounds each and 15 pounds for a child. There’s an extra savings of 15% if tickets are bought online. Working back, if we say that there were about 3.2 million visitors in 2009, net of costs and interest, Merlin earned about 8 pounds from each visitor. At 17.5 pounds (average of adult and kid), that's more than 40% margin!
*****
Back to Straco
*****
Straco, on the other hand, has a prized asset in the SOA. Market cap of $700m with ROE/ROA of 21% and 18% respectively. Management has said that SOA is unique and the proposed acquisition will not be in the same league in terms of financial returns. As long as the acquisition is not losing money and can earn more than bank interest rates, it will be earnings accretive.
Without considering the capital structure and ignoring the 10% partner for the time being:
Using Merlin’s ROA (because it’s the “industry” for the attraction business):
Purchase price $140m
ROA at 6.9% = $9.7m or $10m for convenience
Arbitrarily using the 80/20 rule - the Flyer must make $8m and the real estate must make $2m a year.
$8m over 365 days = $22k a day from the Flyer.
It runs 830am to 1030pm currently, so that’s 14 hours, if we average out the peak and the off peak utilisation.
At the average price of $27 (adults $33, child $21), say with 10% commission going to the travel agencies, and arbitrarily using a margin of 80% (low variable cost business), each passenger earns them $19.5.
So to make $22k a day from the flyer, Straco would need just over 1,100 visitors a day.
Sanity check: Flyer’s capacity is 28 capsules x 28 passengers x 37 mins per trips every x 14 operating hours = 17.8k a day or 6.5m annually
So it may seem like $140m is quite a steal as you need about <6.5% utilisation to get the “normal” industry returns. Has anybody counted the human flow at the Flyer? 1,100 sounds doable. It’s about 30 bus loads for a 14 hour day.
For reference:
London Eye annual ridership is just over 3.5m.
Capacity = 32 capsules * 25 people * 2 /hr * 11 hours * 365 days = 6.4m
So the London eye is operating at 55% utilisation! What a gem!
Conclusion: Given the current disclosure, it seems like $140m is indeed a steal. So was it national service for Straco to take over the assets? I guess not. Only time will tell. Perhaps, there was pressure not to sell(out) the icon to Merlin (*ahem* foreigners) too cheaply. So there’s a price for Straco and there’s a price for Merlin. Of course, I have no idea about the tenure, the land cost, etc etc....
******
Realistically what can happen?
******
Using a ROA of 10% (a higher hurdle, especially given how profitable SOA is)
NI required = $16.8m
Again, with all the same margins as before, daily ridership required = 1.9k
So why did the original owners SFPL fail?
The figure $240m has been widely quoted. From what I have read, that is the amount that the banks have loaned to SFPL. Assuming that its 20/80% financed, SFPL put in another $60m (equity) and obtained $240m (debt) as loan. So $140m is less than half priced. Coincidentally, the London Eye costs 70m pounds or about S$140m to build.
For SFPL:
Debt level = $240m
Interest payment = $7.2m annually at 3%!!!!
I guess that is the reason why it failed!
******
Turnaround play
******
Once again, there are many things Straco can try to do to turn the business around… They sort of have done it once at Xiamen to turn around UWX.
- Improve the returns from the real estate (better shops, better restaurants, better marketing, Zouk? etc)?
- Change the pricing system to maximise profits?
- Use WTS and bring in more visitors?
- Get more corporate events?
Till we get more details and numbers, I think it's a decent acquisition as opposed to money sitting in the bank (in SG or China).
With no other terms and details, it’s hard to understand what’s the impact of this acquisition.
Turning to my favourite search engine.. here’s what I found.
Merlin was in the running, given that they own and operate the London eye, until they dropped out in May 2014. As the acquirer, there’s potential synergy for them in acquiring Singapore Flyer and setting up a Madame Tussauds. Merlin Entertainments plc (MERL.L), the operator of Madam Trussauds, Legoland and Sea World, has a market cap of GBP 3.5B and a ROE/ROA of 22% and 6.9% respectively. Maybe they have already committed to a MT on Sentosa and having the Flyer doesnt make sense. But whatever it is, Merlin has a track record of delivering 13 years of double digit profit growth since 2000 at the point of its IPO on the LSE. So when Merlin walks away, it could be a sign.
The London Eye welcomes an average of 3.5 million visitors a year. (Do you know? The London Eye was originally put up primarily by British Airways for the millennium and was to be taken down after 1 year. Much like the Effiel Tower!)
According to the UK govt website, the total number of visitors to London in 2013 was a record 16.8 million. And the tourism receipt totalled more than 11.2 billion pounds. There’s also the domestic travellers in the UK and I am not sure if those are included in the statistics. So very roughly, 1/5 of all visitors to London go to the London Eye!
Based on historical facts - in 2009, the London Eye made Merlin 25m pounds. Now, in 2014, adults pay about 20 pounds each and 15 pounds for a child. There’s an extra savings of 15% if tickets are bought online. Working back, if we say that there were about 3.2 million visitors in 2009, net of costs and interest, Merlin earned about 8 pounds from each visitor. At 17.5 pounds (average of adult and kid), that's more than 40% margin!
*****
Back to Straco
*****
Straco, on the other hand, has a prized asset in the SOA. Market cap of $700m with ROE/ROA of 21% and 18% respectively. Management has said that SOA is unique and the proposed acquisition will not be in the same league in terms of financial returns. As long as the acquisition is not losing money and can earn more than bank interest rates, it will be earnings accretive.
Without considering the capital structure and ignoring the 10% partner for the time being:
Using Merlin’s ROA (because it’s the “industry” for the attraction business):
Purchase price $140m
ROA at 6.9% = $9.7m or $10m for convenience
Arbitrarily using the 80/20 rule - the Flyer must make $8m and the real estate must make $2m a year.
$8m over 365 days = $22k a day from the Flyer.
It runs 830am to 1030pm currently, so that’s 14 hours, if we average out the peak and the off peak utilisation.
At the average price of $27 (adults $33, child $21), say with 10% commission going to the travel agencies, and arbitrarily using a margin of 80% (low variable cost business), each passenger earns them $19.5.
So to make $22k a day from the flyer, Straco would need just over 1,100 visitors a day.
Sanity check: Flyer’s capacity is 28 capsules x 28 passengers x 37 mins per trips every x 14 operating hours = 17.8k a day or 6.5m annually
So it may seem like $140m is quite a steal as you need about <6.5% utilisation to get the “normal” industry returns. Has anybody counted the human flow at the Flyer? 1,100 sounds doable. It’s about 30 bus loads for a 14 hour day.
For reference:
London Eye annual ridership is just over 3.5m.
Capacity = 32 capsules * 25 people * 2 /hr * 11 hours * 365 days = 6.4m
So the London eye is operating at 55% utilisation! What a gem!
Conclusion: Given the current disclosure, it seems like $140m is indeed a steal. So was it national service for Straco to take over the assets? I guess not. Only time will tell. Perhaps, there was pressure not to sell(out) the icon to Merlin (*ahem* foreigners) too cheaply. So there’s a price for Straco and there’s a price for Merlin. Of course, I have no idea about the tenure, the land cost, etc etc....
******
Realistically what can happen?
******
Using a ROA of 10% (a higher hurdle, especially given how profitable SOA is)
NI required = $16.8m
Again, with all the same margins as before, daily ridership required = 1.9k
So why did the original owners SFPL fail?
The figure $240m has been widely quoted. From what I have read, that is the amount that the banks have loaned to SFPL. Assuming that its 20/80% financed, SFPL put in another $60m (equity) and obtained $240m (debt) as loan. So $140m is less than half priced. Coincidentally, the London Eye costs 70m pounds or about S$140m to build.
For SFPL:
Debt level = $240m
Interest payment = $7.2m annually at 3%!!!!
I guess that is the reason why it failed!
******
Turnaround play
******
Once again, there are many things Straco can try to do to turn the business around… They sort of have done it once at Xiamen to turn around UWX.
- Improve the returns from the real estate (better shops, better restaurants, better marketing, Zouk? etc)?
- Change the pricing system to maximise profits?
- Use WTS and bring in more visitors?
- Get more corporate events?
Till we get more details and numbers, I think it's a decent acquisition as opposed to money sitting in the bank (in SG or China).