Hong Kong Disneyland Joint Venture Negotiation
Names: Jasen Turnbull
Class: Professor Tang - Finance 411 - Section 300
Date: 11/22/10
Executive Summary
There are many key value drivers that can affect the negotiation process between Disney and their
proposed joint venture with Hong Kong. One of the main value drivers is the amount of Equity that
Disney will hold after the negotiation process. Since Disney is not a 100% owner, they are more of a
financing vehicle to make this deal go through. The less equity that Disney holds in this project, the NPV
for cash flows relevant to Disney will decrease. This equates to the more equity stake Disney has in the
negotiation, the higher the NPV will be. The variable management fee is also a key value driver. As the
fee increases, the NPV of the project increases as well. Since the management fee can be variable,
Disney will want to analyze the variable and base management fees to determine whether or not Disney
should own or manage the new theme park in Hong Kong. The Royalties that Disney receives is also a
very important value driver. Admissions, merchandise, and any corporate sponsorship agreement are
subject to pay certain percentages in royalties to Disney, and as these royalty rates increase, the NPV of
the cash flows relevant to Disney will increase. We took the variables mentioned a performed sensitivity
analysis on all of them when other variables constant to see the true metric of the changing terms.
Using sensitivity analysis, we can see how each variable affects the project and by how much. By looking
at Exhibit 1 we can analyze our key terms. For Disney, their equity stake in the negotiation highly affects
the NPV of the relevant cash flows to Disney. At the 50% equity holding, the NPV for Disney is
HK$37,305. If Disney’s equity stake is 100% (full ownership of the new park), the NPV will be HK$44,207.
At the 0% equity (no investment in Hong Kong), the NPV is HK$30,403. In other words, the worst-case
scenario for Disney is if they do not hold any equity in the new project, which results in the lowest NPV.
If Disney has 100% ownership, they have the highest NPV but also will have twice the
responsibilities/risks as if they were only 50% equity-holders. The variable management fees also show
how much the NPV of the project can change with different projections. This fee can range from 2-8%.
At the 2% level, the NPV is HK$34,183 whereas at the 8% level, the NPV is HK$40,428. Best-case scenario
would be for Disney to charge the highest possible management fee (in this case, 8%) since is increases
the NPV of the project. The different royalty fees all change the NPV of the project in a similar fashion.
As the royalty fees increase, the NPV increases. Naturally, as the royalty rates increase, Disney is
receiving more revenue per unit of sales, and the NPV of the relevant cash flows increases. The best
case-scenario for Disney would be to maximize these royalty fees, since they all increase the NPV. In
short, increasing the cash inflows such as management fees and royalties will increase the NPV.
Currently the agreed upon rate for Royalties pertaining to Hotels & merchandise are at 5% for both. That
would project our NPV at HK$ 42,308 with all other variables at constant. We would like to see if the
Hong Kong Government is willing to accept 10% for each, which would increase our NPV dramatically.
We will not accept anything lower the already dual 5% rates because in our mind, our initial investment
& branding justifies the royalties. For Admissions however we feel that 10% is on the low end on what
1
we should receive. We feel that we would like to get 15% of the entrance fees, which would increase
our projected NPV to HK$48,875.
The joint venture can be valued differently according to which assumptions and projections Disney uses.
For instance, if Disney were to minimize their holdings in the project, the value would be much different
than if their holdings were maximized. In other words, if Disney were to minimize their management
fees, royalties, and equity-stake in the project, this would be the lowest possible NPV of the project and
could be a good analytical tool to evaluate the overall “worst-case scenario.” At the 0% equity level, and
minimal cash inflows (lowest management fees/royalties), the NPV is HK$27,281. If Disney were to hold
50% equity and have “average” fees/royalties (in the middle of the given range) the NPV will be HK$
37,305. If Disney were to invest in 100% of the equity, and maximize their management fees and
royalties, the NPV of the project is $47,329. From this information, the NPV of the project at different
levels of operation provide insight into which alternative scenario will be the best for Disney. For this
example, Disney could have held 0%, 50%, or 100% of the equity involved in this project, and at these
different levels of equity, the other variable such as management fees were adjusted to fit the
appropriate level of equity (investment). Basically, if Disney would invest as much as possible, and
maximize their cash inflows from the project, this would be the best scenario for Disney, yielding the
highest NPV. The larger the investment (equity holding), the more risk Disney will be exposed to, and it
is likely that they will increase cash inflows, such as management fees, to offset the increased risk of a
larger investment. In other words, if Disney owns 0% equity, they have minimized their risk and would
be likely to accept the minimal amount of cash inflows from fees and royalties. If the equity stake is
100%, Disney will want to offset some of their risk by increasing the management fees and royalties,
increasing the relevant cash flows and NPV of the negotiation.
A small detail that could have giant affects is what Hong Kong Disneyland will charge for the entrance
fee. Currently using the constant calculations we have it set at HK$275, however depending on the
actual attendance & interest the first year we feel that it would be beneficial to change it according.
Anywhere from HK$250-300 is the desirable ticket price & on Exhibit 1 you can see the change in NPV
change for Disney. If we would increase our entrance fee to HK$ 300 from the beginning our NPV raises
to HK$44,463, due to the increase in revenue on a yearly basis. However if attendance is not what we
anticipated we could potential lower the ticker price to HK$250 & since our revenue would drop our
NPV would be at HK$40,152When looking at the projected attendance from 2005 to 2014 we felt that it
was an aggressive ratio for market penetration of business tourist at 15.65%. Instead we used 10% for
our 2005 projected attendees & used 15%. After that we took our total attendance for 2005 & decided
to increase attendance year-to-year by the tourist growth rate of 6.48% to get a slightly higher
attendance record through 2014.
Our negotiation strategy involves balancing the size of our investment with the appropriate risk-level we
are willing to accept. When deciding on our intended negotiation terms we put everything in terms of
how it will affect our NPV (HK$). All of are Sensitivity Analysis displays how the final NPV will be affect
for CF’s relevant to us (Disney). As you can see on Exhibit 1, we are prepared for negotiation by having a
range of inputs that will be acceptable. During the talks we can go back & look at an initial table & see
how it would affect our project NPV with other variables constant. Entering the negotiation table we will
use Exhibit 4, which has the inputs we decided we would demand first. However as the talks progresses
compromises will most likely be made & at that time we can use Exhibit 1 & 2 as reference points on
where we stand on changing variables & terms.