AVCJ Awards 2017: Exit of the Year - Large Cap: Universal Studios Japan

Harry Potter came to Universal Studios Japan (USJ) in 2014, but by then the amusement park operator’s private equity owners and management team had already worked their magic. Attractions featuring domestic characters, such as Monkey D. Luffy from pirate cartoon One Piece and Shinji Ikari, the boy hero of science fiction anime series Neon Genesis, helped double EBITDA. The introduction of The Wizarding World of Harry Potter saw it double again.

These were part of a series of initiatives that brought about a fundamental shift in the USJ business model. Having spent eight years trying to emulate Six Flags by rolling out a big roller-coaster every summer, the company repositioned itself in the Disney mold, relying on the strength of intellectual property – attractions based on popular characters rather than thrills and spills – to establish a deeper emotional connection with visitors.

“USJ was a Hollywood-themed theme park and people in Japan went once but didn’t come back,” says Ken Kagasa, a partner and head of Japan at MBK Partners. “We decided to augment the target universe. We didn’t just want to attract young people who enjoy the rides but also families and young females who were more likely to be repeat customers.”

USJ generated revenue of $1.5 billion last year, two-and-a-half times more than the 2009 figure, while EBITDA rose fourfold to $600 million and visitor numbers doubled to 14.5 million. This reflected the resurgence of a consumer-oriented business that took a hit during the global financial crisis – but Comcast NBCUniversal was sufficiently impressed by the brand to buy it for JPY438 billion ($3.9 billion).

The deal was structured across two tranches: Comcast acquired a 51% stake in September 2015 and 49% in March 2017. The second tranche valued USJ at JPY840 billion, including debt. MBK is said to have made an 8x return, having supported a privatization of the business at a valuation of JPY165 billion in 2009, working alongside Goldman Sachs, Owl Creek Asset Management and USJ CEO Glenn Gumpel. PAG Asia Capital joined the investor roster four years later, backing Gumpel in a $250 million deal.

A long association

Kagasa’s involvement with USJ dates back to 2005 when he was part of the Goldman Sachs team that committed $180 million to the company. USJ was established in 1994 under license from NBCUniversal – which was acquired by Comcast in 2011 – and the theme park opened in 2001. NBCUniversal had an equity interest at the beginning but exited via an IPO in 2007 although the licensing agreement remained in place. By this point, USJ was stable; Gumpel had been hired in 2004 and stripped out a lot of inefficiencies to make the business profitable.

“After Goldman invested in 2005 the company had been growing gradually, but then the global financial crisis happened and obviously attendance decreased,” recalls Kagasa, who moved to MBK in 2008. “When MBK decided to invest it was a very tough situation and we needed to have a high level of conviction about the business, but I knew the management team well. Even though the economic situation was uncertain we believed that once it turned around the company would grow.”

The private equity firm was also encouraged by USJ’s highly defensible market position. It was the second-largest theme park in Asia and any new entrant would require a substantial amount of capital expenditure to compete. There was also a recognition that altering the business model to focus more on the emotional experience – elements of which had been envisioned by Gumpel but not fully implemented – could accelerate growth. However, not every stakeholder supported the change.

“Some people were against it. The original concept was that people would go there to enjoy a Universal Studios-related theme park. They were concerned it would dilute the brand image if on one side you had Hollywood content and then Snoopy and Hello Kitty on the other. For serious movie fans, it might destroy the atmosphere and they wouldn’t come back,” Kagasa explains.

For the first couple of years EBITDA was stable as the modified brand image took time to sink in. It wasn’t until the introduction of Universal Wonderland in 2012 – a 30,000 square-meter area with 30 different kinds of entertainment, including Hello Kitty Fashion Avenue, Sesame Street Fun World, and Snoopy Studios – that the investors saw a big jump in family attendance and were convinced the strategy was really working.

Quality counts

The change in business model resulted in a reduction in capex because the company was no longer underwriting complex construction projects for new attractions. In this context, Harry Potter was an unusual bet – it required an investment of $400 million, which amounted to a sizeable portion of USJ’s revenue at the time. Kagasa describes it as a calculated risk, based on seeing the success of the brand at Universal Studios Florida and full market research to confirm its applicability to the Japanese market.

There was also a belief that they were investing in quality – a guiding principle during the holding period, which allowed USJ to increase ticket prices by 30% and eliminate discounts. For example, rather than drop prices during the winter and rainy seasons when attendance is generally lower, the company staged events targeted at diehard fans who would come along regardless of the weather. This was why One Piece and Neon Genesis took up residence in the park.

These efforts were tied together by a smarter approach to marketing from emphasizing the father-daughter relationship in TV commercials that aired at Christmas time or using promotions to cultivate local interest in Halloween. Kagasa identifies this as an area in which many Japanese consumer-oriented businesses could do more.

“In Japan, marketing is not considered a big value creation driver because the results are unforeseeable,” he says. “A lot of companies are well known for the quality of their products but they are not good at marketing, thinking about the target market and getting the promotion right. We think we can continue adding value to Japan’s retail industry by leveraging our experience with USJ.”  

Pictured: Mavis Chang of MBK Partners with Eric Zhang of Alvarez & Marsal

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• Topics
• North Asia
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• Trade sale
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