Less a Sleeping Beauty, more a rude awakening at Euro Disney

It has withstood mudslinging, cash crunches, strikes and bouts of anti-Americanism. But now Disneyland Paris, 12 years old and slowly being strangled by debt, is undergoing the challenge of its life. The biggest tourist attraction in Europe is facing a standoff with its creditors that could send operator Euro Disney into bankruptcy.

Last week a host of hedge funds, which had snapped up the company's distressed debt from its banks, rejected a rescue plan that would have hauled it back from the brink of insolvency. They agreed to keep talking for two more months, but without their unanimous backing, Disneyland Paris will have to hang up its Mickey Mouse costumes and hand the Space Mountain keys to the bailiffs.

"If the creditor banks say the agreement is not acceptable, then [Euro Disney] will have to declare bankruptcy," said a source familiar with the situation. "They are not meeting the financial agreements they signed with the banks in 1994: that 100 per cent of their debt could be called in if they failed to honour one payment. They have been in that situation for a year."

Euro Disney, with its Sleeping Beauty castle towering over the windswept sugarbeet fields 20 miles east of Paris, has been in intensive care since its debt problems became public a year ago. It is being kept alive on a drip-feed of credit lines from 39 per cent parent the Walt Disney Company, and debt waivers from its banks.

Compounding its woes, the company opened a costly new theme park, the Walt Disney Studios, on the doorstep of the original Magic Kingdom. Its ill-timed launch in March 2002 coincided with a tourism slump that has left Euro Disney struggling to turn an operating profit, let alone meet its commitments on its €2.4bn (£1.6bn) debt.

Thanks partly to cash from its parent, Euro Disney claims that it has "sufficient liquidity" - €62.7m in all - to tide it through until the end of next month. But after that, Mickey Mouse will be destitute.

Last week, Euro Disney twinned news of its debt problems with a profit warning, predicting a "significant increase" in net losses for the full year to the end of September, after a €56m loss last year. Its turnover is starting to be hurt by increased capacity at competitors' hotels, whose building it had encouraged around the site.

This volley of bad news sent Euro Disney's ravaged shares to an all-time low of €0.23 on Friday. The stock has lost more than 40 per cent of its value this year.

How has Euro Disney - which rakes in more tourists than the Tower of London and the Eiffel Tower combined, and runs onsite hotels with occupancy levels among the highest in the trade - gone from fantasy to nightmare? Is this a classic case of an overstretched balance sheet and a business model gone sour? The problems, experts say, have been present all along.

Derided at birth as "a cultural Chernobyl" that would "irradiate millions of children, whiplash their imaginations and manipulate their dreams", Disneyland Paris has never been far from controversy. Unions, when it opened, predicted that workers would rebel against a dress code dictating the size of their earrings and the length of their shoe heels and hair. And the company had to backtrack on rules against ser- ving alcohol in a park built in Europe's pre-eminent wine-growing nation.

"At the start, the construction of the first park went over budget by 30 per cent," a well-placed source said. "When they listed on the stock market in 1991, they immediately issued a convertible bond with the aim of opening a second park two years after the first. In fact, the convertible bond was completely used, 100 per cent, for the overrun on the budget for the first park."

Yet the French state, which provided Disney with tax breaks and low-interest loans, built railways and motorways to the site, and partnered it in real estate ownership, was keen on Euro Disney's plan to open a second park within its first 10 years. That was in keeping with the Disney model of clustering several parks at one location to minimise costs and maximise operational gains.

The payoff for the government would be the creation of an estimated 3,000 jobs; not quite the 12,000 pencilled in for the depressed Marne-la-Vallée region east of Paris at the time of the first park's opening.

As for the theme park operator, it needs to provide a major attraction roughly every three years to create a fresh buzz and bring old visitors back. After its first debt restructuring in 1994, when a property price collapse sabotaged its land-sale plans, Euro Disney revitalised the Magic Kingdom with its Space Mountain roller-coaster in 1995, though investors still blanch at its €70m cost. "In the past, we have noted there are about half a million more visitors after each new attraction is launched," then-chairman Philippe Bourguignon said at the time.

Opening a second park was also meant to meet the thirst for novelty. But with its bond used up, Euro Disney had to finance the Walt Disney Studios with borrowings and a capital increase. It came in on budget, at €610m. But the overheads involved in the labour-intensive theme park business swelled its operating costs just as economic slowdown and the 9/11 attacks wrought havoc on global travel.

And unfortunately, the crowds didn't materialise.

Management had hoped that the Walt Disney Studios, dedicated to the world of cinema with its Armageddon space station and stuntmen freewheeling through walls of fire, would boost overall visitor numbers to 17 million. But after the first full year of operation, entrances barely inched over the 12.2 million who had shown up at the first park alone.

"Their business plan obliged them to sell [entrance] to the second park at the same price as the first, and to fill it 100 per cent. If they had done that, they would have been able to meet their payments and start reimbursing their debt," one insider said.

In the end, it wasn't northern France's massing rain clouds that kept the crowds away, but rather a lack of thrills. With just 10 attractions compared with 43 at the original Magic Kingdom, it was going to be an uphill battle to win over Europe's theme-park-savvy public, and make them pay.

What happens next remains in the hands of the funds that own up to 30 per cent of Euro Disney's debt. France's three biggest banks - BNP Paribas, Société Générale and Crédit Agricole - have to persuade them to back the plan they thrashed out with the state-owned CDC bank, which owns another 50 per cent of Euro Disney's borrowings, and the Walt Disney Company.

That plan involves a €250m rights issue that will once again dilute the stakes of Euro Disney's long-suffering shareholders. But it will allow chairman and former Burger King executive André Lacroix to fund "exciting new rides and attractions", most probably in the second park.

The Walt Disney Company will again defer the royalty payments that Euro Disney makes for use of the Mickey Mouse characters, and extend it a €150m credit line.

Conspicuous so far by his absence is Euro Disney's 17 per cent stakeholder, the billionaire Saudi Prince al-Waleed bin Talal, famously hailed as the "saviour" of the Paris park when he stepped in with a cash injection once before. But Euro Disney is not holding its breath that he will work the same magic again.

A Euro Disney spokeswoman said the firm and its bankers would meet throughout the summer to win over all of its debtors; the source thought it was unlikely, in the end, that they would scupper a deal.

"The hedge funds are trying to make their investment as profitable as possible and are playing for time," he said. "Can they derail a deal? They are capable of it, but if they did so, Euro Disney would have to declare bankrupt- cy, and that is in the interest of no one."

Ultimately, breaking up Euro Disney's assets for a fire sale would make little financial sense, even for them. Without the hotels, the theme park would be worthless. The attractiveness of the Disney village alone would be limited, and the park needs people who know how to manage it.

"It is in everyone's interest to find an agreement and continue operating the park," the source said. Even if it is a Mickey Mouse operation.