Disney first in line with spending

Need for sizable capital expenditures vital to theme parks' success

It has been a couple of weeks since Disney said it will spend a hefty $1 billion to spruce up its California Adventure theme park adjacent to Disneyland, but few Wall Street analysts have had much to say about it. Perhaps that's because the need for major capital expenditures is key if parks are expected to grow revenue and profit.

According to Ray Braun of the Economics Research Assn., which co-published with research firm TEA the "2006 Theme Park Attendance Report," "Rule No. 1 in the theme park industry is Thou Shalt Reinvest."

While visitor growth last year in the top 20 U.S. parks was estimated at just 1.5% year-over-year, parks that added a major ride or "land" — as Disney plans to do at its California Adventure with the upcoming Cars Land — can boast many times that growth.

The TEA/ERA report indicated that attendance increases at parks that added major improvements was about three times the norm. Legoland California, for example, added Pirate Shores and a few other attractions, and its attendance surged 16%.

Disney's Animal Kingdom in Florida — in desperate need of a boost, according to some analysts — saw attendance climb 8% a year after adding Expedition Everest and Finding Nemo the Musical.

Rick Munarriz, senior analyst with the Motley Fool, said Animal Kingdom before the improvements was a lot like California Adventure is now: "A half-day park with a full-day price."

Therefore, Munarriz said, Disney shareholders ought to applaud the move to upgrade California Adventure despite the hefty cost because the alternative is unacceptable.

"It's a broken park," he said. "Most companies close down their broken parks. But Disney can't afford that kind of egg on its mouse-face."

Despite Disney's proclamation of a massive addition in capital expenditures, or capex, courtesy of California Adventure, other companies running theme parks shouldn't feel a need to keep up with the Joneses, mostly because others target residents within 100 miles of their various parks while Disney is wooing people from across the globe.

Besides, Munarriz said, Disney competitors "Six Flags and Cedar Fair couldn't find their way to a even a half-billion (dollars) in capex investment, let alone a billion."

But on the flip side, while it might be unwise to keep up with Disney's big spending, parks can't be left dormant, either.

Cedar Fair spokeswoman Stacy Frole said the company will spend $80 million-$90 million in capex next year.

"We're constantly reinvesting," Frole said. "Even though we typically try not to take things out of our parks unless once in a while when we think an attraction has lost its appeal."

Cedar Fair has seen the ranks of its guests swell from 11.7 million in 2000 to 12.7 million in 2005. Last year, it acquired Paramount Parks for $1.2 billion, so it now predicts that it will have 20 million yearly visitors.

Cedar owns Knott's Berry Farm and 10 other amusement parks, plus waterparks, marinas and campgrounds.

According to Munarriz, dormancy was the problem with Universal's Islands of Adventure in Orlando, which opened in 1999. "It was an amazing park on first visit," he said. "It out-Disneyed Disney. But they didn't improve on it."

That, of course, is changing with the Wizarding World of Harry Potter, a 20-acre "theme park within a theme park" scheduled to open in 2009 through a licensing deal between Universal Orlando Resort and Warner Bros. Entertainment.

ERA senior vp John Robinett said that spending for the latest technology also is smart, and he praised Six Flags for partnering with Nintendo to make the Wii the official video game platform of its theme parks.

Another trend he identifies is "pre-emptive development of peripheral land," whereby theme parks spend resources to ensure the neighborhoods where they reside are up to snuff.

"You want to preserve the visitor experience, and have it be of your design," he said.

As for Disney, Banc of America analyst Jonathan Jacoby predicted that overall capex will grow from about $1.7 billion today to as much as $3.1 billion annually from 2009-12, given the California Adventure costs and Disney's intent to launch two more cruise ships in the next five years.

"2009 appears to be the inflection for the capex ramp — which could limit free-cash-flow growth for several years," he said.

On domestic theme parks only, a Disney spokeswoman said the company's capex was $726 million in fiscal 2005, falling to $667 million the next year. In fiscal 2007 and 2008, it will remain less than $1 billion per year, and in fiscal 2009 and 2010 it will rise above $1 billion a year.