UVA-G-0477

EURO DISNEY OR EURO DISASTER?

In March 1994, the Walt Disney Company and Euro Disney S.C.A.1 announced a financial
restructuring plan for Euro Disney that was meant to ensure the future viability of the European
theme park. The park had been performing below expectations since its opening in April 1992.
Plagued with heavy debt ($3.5 billion), image problems, foreign-exchange developments, and a deep
European recession, the theme park had never achieved the level of success initially envisioned by
Disney and the management of the theme park. In November 1993, worse news arrived when Euro
Disney reported a loss of $900 million for the fiscal year ending September 30, 1993. The park was
in serious trouble and faced a possible cash crisis early the following year.

Struggling to avert bankruptcy and possible closure, the park looked to the Walt Disney
Company, which had a 49% stake in Euro Disney, for help. Disney’s venture into the European
market was the company’s “first real financial disappointment” in an industry in which the company
was viewed as the leader. Disney’s other theme parks in the United States and Japan had been huge
successes. What were the reasons for Disney’s failure in Europe?

Background

When Michael Eisner, chair and chief executive officer (CEO) of the Walt Disney Company,
and Frank Wells, its president, came to Disney in 1984, they concentrated predominantly on
expanding Disney’s domestic market. They were able to revive a stagnating company, increasing
annual revenues from $1.5 billion in 1984, to $8.5 billion a decade later. During the same period, the
value of Disney’s stock increased 1,500%. The challenge in the early 1990s was to expand the
business internationally. Disney realized that foreign markets represented the highest potential for

1
Euro Disney S.C.A. was created in 1987, and became a publicly held company in 1989. The principal role of the
company consisted of carrying out the development and operation of the Euro Disney resort. The company was in the
form of a société en commandite par actions (s.c.a.), similar to a limited partnership. The company was managed by
Euro Disney S.A. (société anonyme, or publicly held company), a wholly owned subsidiary of the Walt Disney Company.

This case was prepared by Golnar Sheikhoeslami under the supervision of Professor Leslie E. Grayson. It was written as
a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright  1994 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To
order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
 -2- UVA-G-0477

growth for the company’s three businesses: theme parks, filmed entertainment, and consumer
products. By 1994, Disney had established 16 offices serving 45 countries worldwide.

Disney’s Consumer Products division, which oversaw licensing, retail, publishing, and
recordings, had also made major strides into foreign countries by 1994. There were 268 Disney
stores worldwide, and the company planned to open at least 70 new stores every year. The Disney
store on the Champs-Elysées in Paris was the company’s top-grossing store worldwide. The
company’s animated films had also proven to be an enormous success in foreign markets, with many
of Disney’s releases dubbed in 25 languages.

Plans for a European Disneyland, the first Disney theme park in Europe, had begun more
than a decade earlier. Studies had shown that the demographic profile of Western Europe was ideal
for a number of reasons. First, West Europeans were already familiar with Disney entertainment and
Disney merchandise. Second, tens of thousands of Europeans visited Orlando, Florida, every year to
vacation at Walt Disney World. Third, and perhaps most important, Disney’s animated films had
traditionally done better in Europe than in the United States. Fourth, the “Image Power Study”
(Lauder Associates, San Francisco, 1988) found that the Disney name ranked sixth in the world in
public esteem, trailing only such commercial icons as Coca-Cola, McDonald’s, Toyota, Sony, and
Levi Strauss. Therefore, for the management of the Walt Disney Company, the question was never if
it should expand into Europe, but where.

The company’s search for a location took four years. Disney looked at sites in the United
Kingdom, France, Germany, Spain, and Italy. By the end of the search, the options had been
narrowed to two locations: a site in Spain near Barcelona and the other in Marne-La-Vallée, France,
20 miles outside Paris. Although Spain was an attractive candidate because of its pleasant climate,
the site in France had the advantage of being accessible to more people. Of the 350 million Western
Europeans, 17 million could reach the French site within two hours by car. In the end, Marne-La-
Vallée was chosen as the site of the new, state-of-the-art Disney theme park. Marne-La-Vallée was
environmentally beautiful. It was much in-line with what Bambi’s mother said in the “Bambi”
movie: “We have to protect nature, it’s where we live.”

Disney’s first task was to negotiate an incentive package and financing for Euro Disney with
the French government. Included in the French site’s main attractions were the major concessions
and loans promised by France’s government. A master agreement between Euro Disney and the
government was finalized in 1987. Many financial analysts viewed the agreement as a brilliant
arrangement engineered by Disney management. First and foremost, the French government agreed
to assume most of the project’s financial risk. Walt Disney put up a mere $160 million of its own
capital to fund the $4 billion theme park. French national and local authorities—primarily, the
Caisse des Depots, the state investment institution—provided approximately $1 billion in low
interest loans.
 -3- UVA-G-0477

The French government also provided an equal amount of funds for infrastructure projects
connecting the park to Paris and to the rest of Europe. These projects included new roads, a subway
stop on park grounds, and a guaranteed linkup with the new high-speed railroad system. Euro Disney
also received tax breaks and full control over any activity within a six-mile radius of the park,
making the park a sort of duchy or principality with regard to decision-making powers. The park
also borrowed $2.5 billion from a syndicate of more than 60 international banks. The remainder of
the capital for the $4.4 billion project came from investors through a public stock and bond offering.

The French government was motivated by the economic benefits that it believed would result
from the Euro Disney project. France was in a recession, with an unemployment rate of close to
14%. Euro Disney—a massive construction project worth $4.4 billion—would create 12,000 new
jobs. Furthermore, the park expected an annual throughput of 11 million visitors, mostly non-French,
which would result in a boost to the French economy.

Tokyo Disneyland

In the early 1980s, the drive for international expansion led to the construction of the first
Disney theme park outside the United States: In April 1983, Tokyo Disneyland opened in Urayasu,
Chiba prefecture, 10 kilometers from Tokyo. Thirty-five million people lived within 90 minutes of
the theme park. Disney’s first international venture was a phenomenal success. Tokyo Disneyland
broke California Disneyland’s attendance record when 94,378 people visited the park in a single
day. In its first decade, 125 million people visited Tokyo Disneyland.

The history of Tokyo Disneyland began in 1962, when the local government of Chiba
prefecture entered into a contract with the Oriental Land Company for the reclamation of more than
2,000 acres of land east of Tokyo Bay. The Oriental Land Company had been formed in 1960, as a
partnership between Keisei Electric Company, the railway company that operated the trains between
Tokyo and Chiba, and Mitsui Real Estate, the property arm of the Mitsui industrial group. When the
landfill was completed, approximately 600 acres were set aside for leisure activities. In 1974, the
Walt Disney Company contacted the Oriental Land Company about using the land to build the first
Disney theme park outside the United States. The Walt Disney Company was anxious to expand and
believed the Japanese would be amenable to an American theme park.

Under the terms of the contract that was signed in 1979, Disney chose to play a passive role
in the arrangement. The park carried Disney’s name, but was wholly owned by the Oriental Land
Company. The Walt Disney Company had no equity stake in Tokyo Disneyland. Its only source of
revenue from the park was royalty fees. Under the terms of the contract, Disney received a 10%
royalty fee on admission revenue and a 5% fee on revenues from food and beverage sales. The
royalty fees were to be in effect for 45 years. In retrospect, Disney was unsatisfied with the
arrangements under the 1979 contract. Under the terms of the agreement, Disney was not able to
receive a share of the huge profits the theme park generated. This experience prompted Disney to
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demand a 49% equity stake in Euro Disney. The Tokyo theme park cost $1.4 billion to construct and
was entirely financed by the Oriental Land Company, which borrowed 80% of the capital. The
company was able to pay off the debt after just three years.
 -5- UVA-G-0477

The opening of Tokyo Disneyland coincided with the introduction of a five-day work week in
Japan. The Japanese economy experienced strong growth, and the Japanese people were spending more
time on leisure activities. Tokyo Disneyland became the symbol of a new Japanese lifestyle—enjoying
free time with friends and family rather than constantly working. The park was a replica of the original
Disneyland in Anaheim, California. Although 95% of the visitors were Japanese, there were few
concessions to the Japanese culture. One restaurant served sushi and tempura, and Mickey and Minnie
appeared in kimonos for the New Year’s festivities—everything else was American.

Some skepticism greeted the success of Tokyo Disneyland; but, in general, the news of the
opening of the theme park was received well. Disney cartoons and films were extremely popular in
Japan, and more than 200,000 Japanese visited Disneyland in California each year. The theme park
became a popular destination for young couples. In contrast to the other Disney theme parks, Tokyo
Disneyland was geared toward adults, who constituted 70% of all visitors. Admission prices were
steep ($40 for adults, $37 for children aged 12 to 17, and $28 for children under 12), but families
sacrificed other activities in order to visit Tokyo Disneyland. The average guest spent $74 for a day’s
outing, including food and merchandise.

Tokyo Disneyland’s sales and attendance figures rose steadily in its first 10 years of
operation. For the fiscal year ending March 31, 1993, however, the number of visitors attending the
park fell by 2% to 15.8 million. The park’s management attributed the decrease in visitors to the
1993 Japanese recession. In 1994, Tokyo Disneyland’s main challenge was to attract repeat visitors
to the park and stay competitive with the new theme parks opening in Japan. In order to address
those problems, Oriental Land decided to invest nearly $75 million a year to create new attractions.
The company also had tentative plans to build a large marine park next to the theme park. The
marine park would be constructed with the cooperation of the Walt Disney Company.

Euro Disney

When Euro Disney opened in April 1992, Michael Eisner was not the only person with high
expectations. Euro Disney’s stock price had more than doubled to (French francs) FRF165 from the
FRF72 at which it was first offered in late 1989. Disney had high hopes of duplicating the huge success
of its first overseas theme park venture, Tokyo Disneyland. Disney management was determined,
however, not to repeat the mistakes that were made in the Tokyo deal, in which the company did not
take an equity position. The company took a 49% equity stake in the Euro Disney venture.

All parties involved with the Euro Disney project expected instant success in the European
market. In October 1992, Eisner was awarded the Chevalier de la Légion d’Honneur by Prime
Minister Pierre Bérégovoy. In its first three years of operation, however, the park suffered a series of
dramatic setbacks that caused many to question Disney’s future in Europe. The park was faced with
multiple problems. The opening of the park coincided with Europe’s worst recession since World
War II. Euro Disney was not only a theme park, but also a major real-estate development. A major
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source of capital was expected from the development of commercial and residential property
surrounding the theme park. Euro Disney had also planned to sell several hotels located on the
property to private investors. But the property slump and depressed real estate market that
accompanied the recession rendered the company’s ambitious plans unattainable.

The recession also resulted in low hotel-occupancy rates and an impression by the general
public that the park was overpriced. Park visitors were simply not spending money on food and
merchandise in the park. Moreover, many Europeans took their vacations differently from
Americans and Japanese. By law and custom, Europeans tended to take longer vacations: “For
Europeans, a vacation is an airplane. Euro Disney is just a place where you spend a day.” 2 Other
problems included an initial cost overrun of 30% on the construction of the theme park. Disney
spared no expense in building Euro Disney. The French government’s franc fort (overvalued franc)
policy made the resort less attractive to Spaniards, Italians, and Britons. The recession meant that
those tourists who did come spent far less than expected. Other problems included labor discontent
over Disney’s strict dress code, long work hours, and low pay.

From the beginning, the park came under attack from two groups: French intellectuals and
financial analysts. Intellectuals saw the creation of Euro Disney on prime French farmland as an
example of “American imperialism” and dubbed the theme park a “cultural wasteland.” Financial
analysts were principally concerned with what they saw as unrealistic expectations for the park that
artificially inflated the stock price.

Financial concerns

One of the concerns of financial analysts was the special arrangement between Euro Disney
and the Walt Disney Company. The Walt Disney Company not only established an equity stake in
the venture, but it also demanded an attractive set of royalty and management fees. Euro Disney
essentially had three main financial obligations. First, Euro Disney was to pay royalties of 10% on
admissions, 5% on food and drink sales, and 10% on fees from firms that paid for the right to help
mount Euro Disney’s attractions. Second, Euro Disney was to pay management fees equal to 3% of
revenues. The original contract called for an increase of those fees to 6% by 1997. Third, incentive
fees were to be paid based on the level of the firm’s cash flow. Those incentive fees were designed
to reward Disney, which provided Euro Disney with its top management. This special arrangement
allowed Disney to make money even if Euro Disney was operating at a loss.

The major cost driver for Euro Disney was the enormous interest payments on a debt burden
of FRF21 billion (U.S. $3.56 billion). The debt was owed to a syndicate of 60 international banks.
When the headline losses of $900 million for the first full year of operations were announced, Euro
Disney executives admitted for the first time that the original business plan had weaknesses (see
Exhibits 1 and 2). It became apparent that the theme park was not generating enough cash to cover
2
Economist (26 September 1992).
 -7- UVA-G-0477

the debt service on a short-term basis. As Steve Burke, Euro Disney’s executive vice president for
operations, admitted in a November 1993 interview: “We have too much debt for the level of
business we are doing. The company is cutting costs and improving facilities, but whatever we do on
a financial front will still be insufficient without a financial restructuring.” The royalty and
management fees, combined with the debt service, were sapping the life out of Euro Disney.
Following the announcement of losses for fiscal year 1993, Euro Disney’s stock plummeted and, in
November 1993, was trading at FRF23 per share (Exhibit 3).

Cultural imperialism

Aside from its financial problems of high interest payments and the European recession,
Euro Disney was plagued by yet another problem. Many believed that the very concept of an
American-style theme park was incompatible with European and, more specifically, French culture.
Worse yet, French intellectuals had deemed Euro Disney a “cultural Chernobyl” and had attacked
the park since its inception as an “unforgivable” attack on French culture by the forces of “American
imperialism.” According to the proponents of that argument, the selling of American products
worldwide was, in effect, imposing American culture on the entire world. Some French people
believed they were losing their cultural identity. French intellectuals envisioned a world where,
“children would wear baseball hats and Nike tennis shoes, go to Euro Disney for amusement, listen
to rap music, eat American-style pizza, watch The Simpsons on TV, and speak English.”

Although Euro Disney tried to stress the European roots of some of the classic fairy tales, the
park was viewed as a stronghold of “Americana.” The restaurants offered coffee and brownies as well
as espresso and croissants. After an initial alcohol-free policy, Euro Disney started to serve wine in the
park’s restaurants, although sales remained low. The staff was trained to smile perpetually and wish
visitors a nice day—a concept that was completely contrary to the French personality. French
intellectuals also had a distaste for Disney’s message of “universal happiness.” They saw this message
as fake and more pointedly, unrealistic. Some criticized the artificiality of the park. They viewed the
operation as a slick marketing ploy. Above all, some resented the fact that 5,000 acres of prime French
farmland, an area one-fifth the size of Paris, had been given to an American corporation.

Disney was determined to stay its course. As Philippe Bourguignon, Euro Disney’s CEO,
said in the company’s 1994 Annual Report: “Some have suggested that we change the winning
formula, because ‘European habits’ are different. Our vision continues unchanged and is reinforced
by guests who tell us to be nothing else but Disney, and not a ‘Euro’ concept.”

Possibility of closure

After the huge losses of the first full year of operation, management of the theme park and of
the Walt Disney Company realized something had to be done to save Euro Disney. The park was
hemorrhaging cash and facing bankruptcy. Euro Disney’s management had already taken some steps
to attract more visitors to the park. In October 1993, the park announced it would cut its winter hotel
 -8- UVA-G-0477

prices. As of January 1994, a family of four could stay in the Santa Fe, the park’s cheapest hotel, for
$60 a night rather than $75. Earlier, the company had said it would cut winter admission prices by
30%. A new marketing strategy was also implemented in November that aimed to attract more
visitors by selling the park as a day-trip destination and targeting different market sectors with
different price packages. In addition, the marketing strategy was designed to smooth the seasonal
fluctuations, and a number of alliances were forged with leading travel companies to widen the
market. Euro Disney had three more or less equally important distribution channels: direct sales, tour
operator packages, and travel agencies.

Another option that was discussed was the permanent closing of the park. This option,
however, had always seemed highly unlikely. Too much money and prestige had been invested in
the theme park for it to close. Closure would result in an embarrassment for both the French
government and the Walt Disney Company and would not solve the problems of the creditor banks.
The French government had lobbied vigorously for locating the theme park in France. Moreover, the
government could not handle the employment consequences of closure, which would add 10,000 to
the 3.2 million already unemployed in France. Actually, according to the 1993 Annual Report, Euro
Disney had created 47,700 direct and indirect jobs.

For Disney, the embarrassment would be equally difficult to endure. The strength of Disney’s
management and marketing reputation had convinced many investors and lenders that the theme
park could not fail. Closing Euro Disney would be a severe blow to the untainted reputation of the
Walt Disney Company.

More importantly, however, closure would not solve the problems of the French banks and
financial institutions, including the Caisse des Depots, the state investment arm. A syndicate of banks
was owed the bulk of Euro Disney’s FRF21 billion debt. If the park closed, the syndicate would lose it
all. The best, and perhaps only, option for saving Euro Disney was a capital restructuring.

Restructuring

Restructuring negotiations began in November 1993. The aim of the restructuring was to
reduce Euro Disney’s debt to a manageable level. The Disney camp’s hope was to persuade the 60
banks to exchange roughly half of their FRF20.3 billion net debt for equity as part of the
restructuring package, which could also involve a rights issue. Shares hit a record low of $4.50 at the
end of November. They were first sold at $11.70 and were quoted as high as $26.70 just prior to the
park’s opening in April 1992.

The banks—which included the Banque Nationale de Paris, Banque Indosuez, Credit
Agricole, Deustche Bank, Citibank, Bank of Tokyo, and Midland Bank—were divided into two
main groups. One syndicate, led by Banque Nationale de Paris (BNP), represented the 39 institutions
that helped to finance the construction of the theme park. The second syndicate, with Banque
Indosuez as its leader, included the 30 banks that provided capital for the Euro Disney hotels. Some
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banks, notably Citibank and Deustche Bank, were members of both groups. The banks agreed, in
principle, to create a single steering committee to coordinate negotiations with the Disney camp and
to be led by BNP and Indosuez. The Caisse des Depots negotiated independently over the terms of
its FRF4.8 billion fixed interest rate loans.

On March 14, 1994, the Walt Disney Company and Euro Disney announced the financial
restructuring plan to shareholders. The plan, which had to be reviewed by all lenders before final
approval could be given, had five major components. First, it provided for the forgiveness of the
equivalent of about 18-months worth of interest on the outstanding debt. Second, the plan provided
for the deferral of all principal payments for three years. Third, the plan eliminated all royalty and
management fees to Disney for five years, with a reduction of the fee structure beyond the five-year
period. The main crux of the plan was a FRF6 billion rights offering. The plan envisioned the
formation of a syndicate of lenders that would underwrite 51% of the rights offering. The Walt
Disney Company would subscribe to the additional 49%. Finally, the Walt Disney Company agreed
to a FRF1.4 billion lease financing of certain existing theme park attractions. In order to address
Euro Disney’s liquidity problems, Disney also agreed to arrange for a FRF1.1 billion standby 10-
year line of credit, at the market interest rate.

On June 1, 1994, a Saudi financier, Prince Al-Waleed, agreed to invest up to $500 million for
as much as 24% of Euro Disney. Technically, the prince would acquire whatever shares that were
underwritten by banks and not purchased by other stockholders as long as his holdings did not
exceed 24% of the total shares outstanding. If the prince bought the 24% block, the Walt Disney
Company’s stake in Euro Disney would be reduced to 36% from its original 49%.

At the company’s annual meeting, held the same day as the restructuring announcement,
Philippe Bourguignon, chair of Euro Disney S.A., stated:

We are very pleased that the Walt Disney Company and the Steering Committee for
the banks share our confidence in the potential of Euro Disney and our new business
initiatives. We are especially excited about the future in light of the opportunities
presented by the restructuring plan. All of our cast members should be thanked for
the great tenacity and outstanding dedication toward making Euro Disneyland a
unique destination resort.

The Future

From the start of its troubles, Euro Disney claimed that the major cause of its poor financial
performance had been the European recession and the strong French franc. The timing of the
opening of the park could not have been more inopportune. If the recession had been the only cause
of Euro Disney’s problems, the financial restructuring need only carry the park forward to more
clement economic times. Only when Europeans began spending freely again would investors learn
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the answers to some uncomfortable questions: Was the whole idea of Euro Disney misconceived?
Were there other fundamental cultural problems that would inhibit the success of the park? Would
Euro Disney fail to recover even when other European companies recovered? And, if so, why was
the Disney theme park concept successful in Japan and not in Europe?
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Exhibit 1
EURO DISNEY OR EURO DISASTER?
Euro Disney S.C.A.: Consolidated Balance Sheet
(French francs in millions)

September 30
1994 1993
Fixed assets
Intangible assets 145 173
Tangible assets 3,140 5,111
Long-term receivables 9,568 5,451
12,853 10,735
Current assets
Inventories 184 221
Accounts receivable
Trade 271 313
Other 763 966
Short-term investments 899 861
Cash 308 343
2,425 2,704
Deferred charges 448 510
Total assets 15,726 13,949

Shareholders’ equity
Share capital 3,825 1,700
Share premium 2,818 4,880
Accumulated deficit (1,147) (5,063)
5,496 1,517
Bonds redeemable in shares (ORA) 1,002
Provisions for risks and charges 392 601
Borrowings 6,678 8,278
Current liabilities
Payable to related companies 77 1,753
Accounts payable and accrued liabilities 1,853 1,640
1,930 3,393
Deferred revenues 228 160
Total shareholders’ equity and liabilities 15,726 13,949

Source: Euro Disney, Annual Report 1994.

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Exhibit 2
EURO DISNEY OR EURO DISASTER?
Euro Disney S.C.A.: Consolidated Statement of Income
(French francs in millions)

September 30,
1994 1993

Revenues
Theme park and resorts 4,147 4,874
Construction sales and related services 114 851
4,261 5,725
Costs and expenses
Theme park and resorts, direct operating expenses (2,961) (3,382)
Cost of construction sales and related services (114) (846)

Operating income before fixed and administrative expenses 1,186 1,497

Depreciation and amortization (291) (227)
Lease rental expense (889) (1,712)
Royalties (262)
General and administrative (854) (1,113)
Financial income 538 719
Financial expenses (972) (615)

Loss before exceptional loss (1,282) (1,713)

Exceptional loss, net (515) (3,624)

Net loss (1,797) (5,337)

Source: Euro Disney, Annual Report 1994.

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Exhibit 3
EURO DISNEY OR EURO DISASTER?
Euro Disney S.C.A.: Share Prices1
(French francs)

High Low
1992
October 34.93 26.39
November 35.14 26.09
December 28.76 24.19
1993
January 29.54 25.87
February 34.93 28.09
March 42.69 34.28
April 41.65 29.84
May 33.07 27.90
June 31.05 27.94
July 30.05 23.33
August 28.35 23.50
September 28.31 23.85
October 25.79 20.70
November 21.56 10.22
December 16.30 12.12
1994
January 16.49 13.11
February 16.30 13.80
March 17.16 13.07
April 14.62 13.37
May 14.88 12.16
June 18.70 11.70
July 12.15 9.80
August 11.70 7.55
September 9.85 7.70
October 7.95 6.15
November 9.75 6.70
December 11.90 8.70
1995
January 12.50 9.80
February 12.45 11.00
March 13.05 11.60
April 15.00 12.70
May 19.40 14.95
June 16.40 15.20
July 16.50 15.35
1
Following the rights issue and the free distribution of warrants, the Société des Bourses Françaises applied a
correcting coefficient of 0.431 to the share prices prior to the financial restructuring in June 1994.
 -14- UVA-G-0477

Source: Euro Disney Annual Report 1994, and updated Bloomberg, 6 September 1995.