The rise of Merlin to be a truly global operator of attractions has required many investors and nearly all have made very significant returns along the way.

The most recent investor prior to the company’s floatation last November was CVC Capital Partners Ltd, manager of a E10.8bn (£8.9, US$14.7bn) leveraged buyout fund, which bought a 28 per cent stake in Merlin in 2010, in a transaction that valued the company at £2.25bn ($3.7bn, E2.7bn). The floatation valued the company at £3.5bn ($5.7bn, E4.2bn) and so, while only 30 per cent of the equity was sold on floatation, we can add CVC to the list of investors that have done well out of investing in Merlin.

So how has Merlin become a £3.5bn company in less than 15 years? As CEO Varney has said, “it started with a fish.”…

The origin of the Merlin brands
In 1974 housewife Annabel Geddes opened the London Dungeon as “a new concept in education and entertainment for the whole family”. Five years later, David Mace founded the first SEA LIFE centre in Oban. The Dungeons expanded slowly, with York opening in 1986 while SEA LIFE grew more rapidly with nine units open by 1992.

Meanwhile in 1981, the Foreign & Colonial Enterprise Trust (F&C) established a direct investment fund by raising £10m ($16.6bn, E12.1bn) on the London Stock Exchange. The three businesses were to come together in 1992, under the name of Vardon Attractions, with F&C backing an experienced management team (David Hudd and Nick Irens) to “acquire high profile leisure assets and then grow the operations organically”.

To attract such funding you must have a proven concept and be able to show it can be expanded while generating an attractive return on the capital employed.

F&C (now known as Graphite Capital) did well from its involvement, initially providing cash to buy the Dungeons and continuing to support the company as it acquired the SEA LIFE centres, a bingo business (Ritz Bingo) and a caravan park business (Parkdean). With the parent company listing on the LSE in late 1992, expansion was also supported by other institutional shareholders.

First buy-out
When the business was sold in 1999 to a management buy-out – backed by Apax Partners – for £47m ($77.9m, E57.1m), F&C generated 2.4 times its investment.

At this point there were 23 SEA LIFE centres and the two Dungeons, with the management team now led by Nick Varney. The plan was to continue the rollout across the UK and Europe but management also needed to reduce the number of sites in the UK, with some of the older ones being located in seaside resorts where tourism was declining.

This is a common challenge experienced by many multi-site leisure businesses which expand rapidly on the back of readily-available capital, only to find returns are diminishing and a tail of marginally profitable or loss making units has developed. For some businesses this can be terminal, but not for the renamed Merlin Entertainments which weathered the storm and emerged stronger after another round of refinancing in 2004.

Apax did less well than Graphite, selling for £55m ($91.1m, E66.6m) to Hermes Private Equity (HPE), making a modest return. However, what they and management had achieved was a clean, attractive business that was on the verge of becoming significantly cash generative.

The profit in 2004 was around £10m ($16.5m, E12.1m) but the group was expanding by 2-3 units per year at a construction cost of circa £3m ($4.9m, E3.6m) per site. This meant that, even in 2004, there was no free cash available and there was an element to which they were betting the company every year on the success of the new ventures.

However, the investment model had been tried and tested by this stage and the business now fully understood the way to ensure good financial returns.

Going global
In 2005 management were drawing up a much more ambitious plan to create a global player. This plan involved bringing together midway and destination attractions to give a diversified portfolio of brands and formats to create a global platform. To achieve this plan, much deeper pockets were required, as the plan envisaged acquiring larger businesses such as Legoland (which was on the market) and The Tussauds Group.

One financier interested in this type of ambition was Blackstone, one of the largest private equity firms in the world and the Merlin management team approached them with their expansion plans.

The expansion of private equity in the 80s and 90s had created an elite tier of fund managers whose excellent investment track record had enabled them to raise ever increasing funds. Blackstone started with $400,000 (£242,000, E293,000) in 1985 and now has circa $250bn (£151bn, E183bn) under management. With funds of this size, fund managers proactively research markets to see if they can bring together a number of players to create a more powerful, market leading business.

Things now moved fast, with Blackstone acquiring Merlin for £102m ($165m, E121m) in early 2005 giving Hermes a substantial profit in a relatively short period of time. Blackstone then funded the acquisitions of Legoland at a price of E375m (£309m, $512m) and Gardaland at E470m (£387m, $642m). The profitability of these assets was significantly improved on acquisition, maintaining the momentum of the rapidly growing business. The family fund behind Lego retained an investment, but the new capital was from Blackstone and from the debt markets – and soon there was a new opportunity which was to double the size of the company. And that opportunity was The Tussauds Group.

Earlier – in 18th century France
Marie Tussaud was an artist who lived during the French Revolution, who had a talent for making waxworks. She started touring with her waxwork collection in the early 1800s, finding a permanent home for it in London’s Baker St in 1835. That was largely that for another 143 years until the business was acquired by S Pearson and Son (listed as Pearson plc), an engineering company that built the Blackwall Tunnel and then diversified into media. Pearson also owned Chessington and during its 20 years’ of ownership added Warwick Castle, Alton Towers and Thorpe Park to the portfolio.

Tussaud’s was sold to Charterhouse Development Capital (CDC) for £352m ($582m, E427m) in 1998. The company raised £200m ($331m, E242m) through a bond issue and overall a further £300m ($496m, E363m) was invested in improving the product, supporting the London Eye and acquiring Heide Park in Germany. After a failed attempt to list on the London Stock Exchange, the business was acquired for £800m ($1.3bn, 1970m) by Sheikh Mohammed al-Maktoum, the crown prince of Dubai, through his Dubai Investment Capital (DIC) vehicle in 2005.

The big consolidation
Blackstone and the Merlin team decided to bring the two businesses together (rather than refinance Merlin) and in 2007 bought The Tussauds Group for £1bn ($1.6bn, E1.2bn), creating the second largest player after Disney in the global attractions industry. Following the acquisition, the company entered into a sale and leaseback with Prestbury Investment Holdings, selling the freeholds of Madame Tussauds London, Thorpe Park, Alton Towers and Warwick Castle to raise £622m ($1bn, E754m).

Whilst Blackstone held the majority of the equity, both the family fund behind Lego (Kirkbi A/S) and DIC owned significant minorities, while a wide group of senior management also held shares.

Who made the money?
While the list of investors is long (Apax, Blackstone, CDC, CVC, DIC, F&C/Graphite, HPE, Kirkbi A/S, Pearson plc) this is only a list of the investment vehicles. Of these, two represent private money – DIC investing for the crown prince of Dubai and Kirkbi for the founding family of Lego. HPE is the odd one out, as at the time it was owned by the BT pension fund, so a lot of the benefits will go back to those with a BT pension.

It’s worth noting that at the time of the floatation, Blackstone/ CVC and Kirkbi retained significant interests in Merlin.

The other five private equity firms (Apax, Blackstone, CDC, CVC, F&C/Graphite) all raise funds from a wide variety of sources. For example, the current fund being invested by CVC raised 46 per cent of its money in the US, 17 per cent in Europe and 16 per cent in the UK, with the balance coming from Asia, the Middle East and Canada. So Merlin’s success has been supported by capital from all over the world.

This is one of the benefits of increasingly efficient global financial markets, far removed from the highly structured investing that contributed to the global financial crisis. Some of the infrastructure evolved contemporaneously with Merlin’s increasingly rapid expansion.

For much of this journey the management team has remained the same – a remarkable achievement considering the scale of change and the range of shareholders they’ve had over the years.