US activist investment group ValueAct has urged Merlin Entertainments, the owner of Madame Tussauds and Legoland, to seek a buyer to take it private, after a sharp fall in the market value of the company following a series of earnings downgrades.
The San Francisco-based group said in an open letter to Sir John Sunderland, the Merlin chairman, that it believed “there is significant private capital interest in partnering with the company” and that it could attract a bid of about £4.50 a share. Shares in Merlin were trading at about 332p each on Wednesday, having fallen from a high of 375p this month. They rose to 352p on Thursday after ValueAct’s intervention.
“Private ownership is simply better placed than current public shareholders to underwrite the investments Merlin must make, and to align employee incentives appropriately,” ValueAct chief investment officer Mason Morfit and partner Jake Welch wrote.
ValueAct said the current trading price of Merlin — one of the worst performers in its portfolio — “does not reflect the underlying value of the company and may not in the foreseeable future” because analysts were wary of Merlin’s plans to invest an increasing amount of capital while returns were declining.
“And yet, the company is right to pursue most of these investments for the long-term value of the business,” the investors concluded.
Merlin was valued at £3.2bn in its 2013 initial public offering when it issued shares at 315p each to raise £975m. The company, based in Dorset, southern England, is one of the world’s biggest operators of theme parks and attractions, with a portfolio that includes the London Eye, Alton Towers Resort, Sea Life Aquariums and The Dungeons.
ValueAct holds a 9.3 per cent stake in Merlin, making it the second-largest shareholder. It has been invested since October 2017, though the stake was first disclosed by the company in February 2018 after ValueAct’s holdings rose above the 5 per cent threshold. Merlin’s main shareholder is Kirkbi, the investment company of the family behind Lego.
“As the company deploys an increasing amount of capital that takes time to generate earnings, we fear it will take several years for Merlin to be appropriately valued by public shareholders,” Mr Morfit and Mr Welch wrote. “Three recent downgrades by analysts citing fears of lower capital returns and like-for-like growth underscore this challenge; together the reports sent the stock down 17 per cent.”
Merlin said on Thursday it had had recent discussions with ValueAct about options for the company but had concluded “that it remains in the best interests of all its shareholders to continue to pursue its current strategy”.
Merlin has struggled as a public company since it was floated on the London Stock Exchange by its private equity owners. In 2017, it downgraded its full-year profit expectations in the aftermath of UK terrorist attacks, and it has been hit at other times by bad weather, an accident at Alton Towers and flatlining sales at Legoland.
ValueAct, which manages about $13.5bn, has built a reputation as one of the more constructive activists, favouring behind-the-scenes manoeuvring over public overtures, making the letter to the Merlin chairman all the more notable.
The last time ValueAct publicly lobbied for a company to be taken private was in 2013, when it urged Gardner Denver to sell itself, arguing it would be “the most effective way to deliver maximum value to shareholders”.
ValueAct said it backed management at Merlin, and agreed with its strategy of making long-term investments in the business.
In the letter, the managers said they had already had conversations with the company about their views but wanted to make the matter public “due to the urgency for change and actionability of a potential transaction at the current share price”, and to allow Merlin to discuss it with other shareholders.
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