Hong Kong Disneyland

In the same vein as the blog I wrote about Euro Disney last week, let's take a brief look at Hong Kong Disney this week.

There are a few major difference between Hong Kong Disneyland and Euro Disney that make their financial situations different (irrespective of the age of the parks).  

For one, unlike the domestic parks and Euro Disney, Hong Kong Disneyland is NOT a publicly traded company.  So no convoluted relationships among limited liability companies, stock holders, management companies and property owners. 

Instead, it is a partnership between The Walt Disney Company and the Hong Kong government called Hong Kong International Theme Parks Limited.  The government of Hong Kong owns 57% and Disney owns the other 43%, so they aren't quite equal partners, but partners non-the-less.

The government of Hong Kong also put up most of the money for the construction:  $2.9 billion.  While Disney put up only about a reported $314 million.  Additionally the Hong Kong government chipped in an additional $13.6 billion in infrastructure to make the area usable and provide public transportation, etc. (which they presumably would have had to do anyhow, regardless of Disney).

Likewise, the Government and Disney apparently both hold the right to 'sell down' their equity in the project to outside investors once the resort area is operating to their satisfaction. 

That keeps the deal cleaner than the Euro Disney deal on the front end anyhow, and allows for each to make money in the long term if they sell their shares.  Though presumably each has the right of refusal over who it actually gets sold too.

Disney shows that the total current debt in the park is about $3.6 billion (they call it net borrowings on the press release), of which Disney has potential liability for about $1.2 billion according to the GAAP measures filed with the SEC. 

On the income side as part of the agreement Disney earns somewhere between 5-10% of gates receipts as royalties plus an annual management fee. 

I'm not certain if the Hong Kong Government gets anything directly out of the parks.  My guess is given the way the deal was announced that they have been banking on long term tax revenue and other area growth to pay back the investment on their side. 

Of course all the hulalaboo right now is over a small paragraph in Disney's SEC filing here about the current state of the loan agreements for the park, which as partners Disney and the Government presumably were they guarantors for (otherwise Disney would only have a liability of their initial investment on the books for GAAP measures). 

There are two loan types in use by the Hong Kong International Theme Parks Limited:  a commercial term loan and a revolving credit facility (kind of like a credit card).  The loan facility had specific performance metrics built into it that would have kept the credit line in effect originally until 2015.  The park didn't meet those goals in 2007, so the loan facility had to be renegotiated.

That renegotiation got rid of the performance goals, but it also made the entire loan due at the end of the 2008 fiscal year.  Currently the partnership owes about $300HK million (or $38 million US) on the credit facility due at the end of the year.

Disney has agreed to waive the management fee for 2008 and 2009 and defer the payments from the gate until a future date.  Unfortunately that just shows how little the gate has taken in recently.

Likewise, Disney has offered to payoff the closing credit line and issue back a loan from TWDC company as well as offer to invest more money in other expansions to the park.

If Disney and government can't come to an agreement, then the LLC will have to choice but to seek new commercial credit to replace the facility.  That would presumably cost more (partly due to the financial conditions).  Additionally the LLC would probably also have to pay fines and extra interest in the event they could not get such a loan in place in time.

That all sounds great.  However, the Hong Kong Government no doubt is weighing their options as the primary stakeholder carefully.  There is a lot of concern expressed in the press about Disney's overtures in Shanghai to build another resort there. 

People in HK are none to pleased about that prospect at the moment given that they aren't making back what they expected on their initial investment.

It just goes to show that investing overseas is always interesting, rarely dull and expected and sometimes makes for strange bedfellows.

Maybe HK will pay to keep Disney out of Shanghai like the Green Bay Packers are trying to do to keep Brett Favre from playing in the NFL next year?