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Rating Action:

Moody's assigns B1 to Merlin's new holding company in anticipation of the announced acquisition

07 Oct 2019

London, 07 October 2019 -- Moody's Investors Service ("Moody's") has today assigned a B1 Corporate Family Rating ("CFR") and a B1-PD Probability of Default Rating ("PDR") to Motion Midco Limited which plans to acquire Merlin Entertainments Plc ("Merlin" or "the company"). Moody's has also assigned Ba3 ratings to the proposed EUR and USD term loan Bs ("TLB") as well as the GBP400 million revolving credit facility ("RCF") falling due in 2026 issued by Motion Finco S.a.r.l. Concurrently, Moody's has assigned a B3 rating to the proposed EUR and USD senior unsecured notes due 2027 issued by Motion Bondco DAC. The outlook on all three entities is stable.

Moody's has also downgraded to Ba3 from Ba2 the rating assigned to the existing USD400 million bond due in 2026 issued by Merlin. Merlin's Ba2 CFR, Ba2-PD PDR and Ba2 rating on the existing EUR700 million notes due 2022 remain on watch and will be withdrawn upon closing of the acquisition.

Proceeds from the proposed term loans and bonds will be primarily used to repay existing debt and partially finance the acquisition of Merlin by a consortium of the three investors, including KIRKBI, Blackstone and Canada Pension Plan Investment Board ("CPPIB").

"The B1 rating assigned to Motion Midco Limited is two notches lower than the existing Merlin's CFR, which reflects significantly more levered capital structure post-acquisition. The rating is weakly positioned at this category and is based on our expectation that the company will achieve meaningful earnings growth over the next 12-18 months, which will be supported by the planned opening of LEGOLAND parks. Merlin's significant scale and diversification, both geographical and by type of attractions, improves stability of earnings in an industry which is otherwise vulnerable to external shocks, ranging from weather to terrorist attacks.", says Egor Nikishin, a Moody's lead analyst for Merlin.

RATINGS RATIONALE

The company's rating is supported by (1) its portfolio of internationally recognised brand names such as The Dungeons, SEA LIFE, LEGOLAND Parks and Discovery Centres, Madame Tussauds and the London Eye, which positions Merlin as the second-largest operator of visitor attractions globally by number of visitors in 2018; (2) its diversity of theme parks and midway attractions (that is, city centre or resort-based attractions with a one-to-two-hour dwell time); and (3) its mixture of indoor and outdoor activities. Solid diversification and ongoing investments into its attractions allowed Merlin to achieve topline and EBITDA growth in all but one year over the last 10 years. More recently, in 2018 Merlin reported solid 6% revenue growth, including 2% on a like-for-like basis, and 4% underlying EBITDA growth. In spite of the company's resilient performance, Merlin is not completely immune to economic cycles and weather conditions, as well as accidents, such as the roller coaster collision at Alton Towers in June 2015 and terrorist attacks in London in 2017.

Moody's gross adjusted leverage at the outset is very high at around 7.5x, with deleveraging reliant on Merlin's strategy to grow earnings because Moody's expects limited debt amortization in the first years. The company's interest coverage, as measured by Moody's adjusted EBITA / Interest will also deteriorate to around 1.5x pro forma for the new capital structure from 3.3x in 2018 -- a relatively weak level compared to the peers.

Moody's expects that Merlin will reduce its leverage to around 7x and improve interest coverage to circa 2x over the next 12-18 months. EBITDA growth will come from a combination of low single digit organic revenue growth and from the opening of LEGOLAND New York in 2020, followed by LEGOLAND Korea in 2022. The two parks require around GBP300 million investments in capex and pre-opening costs from Merlin over the next two years, which will likely result in negative free cash flow (after interest and capex). More positively, Moody's considers that execution risk is mitigated by Merlin's experience and previous track record of successful development and opening of similar parks, including LEGOLAND Japan in 2017.

Merlin's EBITDA margin has been under pressure by ongoing inflation in labour costs. The company has been focused on cost discipline and expects to achieve GBP35 million savings by 2022 through its Productivity Agenda by standardising processes and more efficient staff allocation. Moody's views the initiative positively, although it will require some upfront investments. For instance, in 2019 the company expects to deliver GBP10 million of savings and to incur GBP16 million of one-off costs, negatively affecting cash flows. This is planned to turn into GBP20 million cumulative savings and will require GBP10 million in investments in 2020.

Following the acquisition 100% of Merlin's shares will be controlled by a joint venture between KIRKBI, which owns LEGO brand, Blackstone and CPPIB. Moody's notes that a private-equity sponsored structure often results in higher tolerance for leverage, a greater appetite for M&A and dividends. Nevertheless, Moody's views Merlin's ownership structure as more conservative and with a longer investment horizon compared to a typical LBO. KIRKBI, which will own 50% of the company, is Merlin's partner and a major investor in the company for almost 15 years. KIRKBI has been increasingly relying on Merlin as one of the major avenues to promote its LEGO brand and hence is interested in Merlin's long-term development. In addition, Blackstone is investing in Merlin via its longer dated Core fund. Moody's also positively note that the sponsors support Merlin's strategy and do not plan significant changes in the management team. Merlin's management, including CEO and several other key officers has been in place for 15-30 years with previous experience of bringing the company through large M&A transactions and operating during downturn with significant leverage.

LIQUIDITY

Merlin's liquidity is good. At closing, the company plans to have cash balances of GBP133 million and a fully undrawn GBP400 million RCF. In addition the company will have access to a USD172.5 million deferred draw term loan (DDTL). Moody's also expects Merlin to generate approximately GBP300 million of operating cash flows after interest per annum in 2020 and 2022. The main uses of cash over the next two years will include GBP350 - 400 million capex per annum, which includes the two new LEGOLAND parks in New York and Korea, but also circa GBP180 million annual maintenance capex. The RCF contains a springing net leverage covenant tested at 40% drawing with an ample headroom at closing. The term loans and bonds have incurrence covenants only.

Despite increasing geographical diversification and more indoor offers, which lower the cash flow seasonality, the company's cash flow remains characterised by material seasonal swings, with nearly all earnings and net inflows generated in the second and third quarters. Cash flow from operations tends to be negative in the first quarter as a result of lower earnings and seasonal capital investment, although there is a working capital inflow in the quarter, in part owing to prepayments by ticket-holders for activities during the summer.

STRUCTURAL CONSIDERATIONS

The proposed senior secured credit facilities and Merlin's existing USD400 million bonds are rated Ba3 - one notch above the Motion Midco Limited CFR as they benefit from the cushion provided by structurally and legally subordinated senior unsecured notes, which are rated two notches below the CFR at B3. The credit facilities and the existing USD400 million bonds will be secured, but will only include security over material intercompany receivables of obligors, shares in each obligor and material company and bank accounts of each obligor. Bondholders for the Merlin's existing USD400 million bonds provided their consent to not execute change of control in exchange for a fee and for obtaining the same security and ranking as the new senior secured lenders.

OUTLOOK

The stable outlook reflects Moody's expectation that the company will likely continue to grow earnings but that free cash flow generation will be limited, owing to investments in its growth strategy. It also reflects the rating agency's expectation that Merlin will de-lever towards 7x over the next 12-18 months, open new LEGOLAND parks in line with the plan, maintain positive like for like sales growth and stable margins. The outlook also reflects the company's strong business profile including its good market position and diversification.

FACTORS THAT COULD LEAD TO AN UPGRADE

The rating is weakly positioned and upward pressure is not likely in the near-term. However, over time a higher rating will require (1) Moody's gross adjusted leverage to be sustainably below 6x, (2) EBITA / Interest to be above 2.5x, (3) to maintain its margins and (4) positive free cash flow. A higher rating will also need a solid liquidity maintained at all times.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Moody's would consider downgrading the rating if the company's liquidity profile and credit metrics deteriorate as a result of a weakening of its operational performance, acquisitions, or a change in its financial policy. Quantitatively, negative pressure could materialize if the company's (1) Moody's-adjusted debt/EBITDA does not decrease towards 7x over the next 12-18 months and (2) EBITA / Interest falls below 1.5x

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Merlin Entertainments PLC, based in Dorset, the UK, is the largest European and second-largest global operator of visitor attractions in terms of visitor numbers in 2018. The company generated GBP1.7 billion in revenue and underlying EBITDA of GBP494 million in 2018, and attracted around 67 million visitors to its 124 locations in that year. Since its incorporation in 1979 and opening its first SEALIFE centre in Scotland the company has grown significantly through acquisitions, as well as organically. Acquisitions included LEGOLAND Parks (2005); Gardaland (2006); the Tussauds Group (2007) and other. In more recent years, the company has targeted expansion in Asia-Pacific and North America. Following the planned acquisition, the company will be de-listed from the London Stock Exchange and owned by a group of investors, comprising KIRKBI (50%), Blackstone (32%) and CPPIB (18%).

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Egor Nikishin, CFA
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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