Thrill ride? NBC to take control of universal as revenues freefall at theme parks.

With the dust settling around NBC's purchase of Vivendi Universal's Universal Studios, it's finally time to nip and tuck. And one of the first things under the knife could be the famous theme park division.

Good luck.

Long living in the shadow of Walt Disney Co.'s resorts, Universal Studios' theme parks have played second fiddle as a destination resort even when times were good--and in a still-sluggish post 9/11 travel climate, business is not what it used to be.

Annual attendance at Universal Studios Hollywood fell 12 percent in 2003, according to Amusement Business, an industry publication, and revenues at Universal's theme parks division tell 41 percent last year over 2002. The division lost $178.3 million in 2003. an improvement over the $329.1 million lost the previous year but mostly because of one-time benefits from the sale of hotel properties adjoining its parks and higher affiliate fees from Universal Studios networks.

Any potential bidder must brave a business that requires lots of cash--especially to cover the cost of labor and new attractions--and which rises or falls by such vicissitudes as weather, competition and now terrorist warnings.

And it's not just Universal Studios. "The feeling on theme parks is negative," said Kit Spring, an analyst with St. Louis-based Stifel Financial Corp., who used to work for NBC parent General Electric Co.

Spring noted that with falling attendance figures at all theme parks, all the Operators are scrambling to find ways to keep up. "I don't know anyone who wants to get in the theme park business," he said.

Still, there are names being suggested: New York-based private equity firm Blackstone Group and Sandusky, Ohio-based Cedar Fair LP, owner of Knott's Berry Farm in Buena Park. (Blackstone spokesman John Ford declined comment, as did Brian Witherow, director of investor relations for Cedar Fair.)

"The Blackstone Group was a partner with Universal in its Orlando parks," ventured Arnold Peter, an attorney who worked in Universal's theme park division and is now a partner at Lord Bissell & Brook LLP.

"They're very aware of this business and very good at managing this business. They've obviously been named as one of the contenders. Then there's other private equity groups of individuals that are rumored," he said.

Debt factor

There is no guarantee that an outright sale is in the offing--at least not near-term. "It was assumed when GE announced its bid for Universal, that they could possibly spin it off," said Spring.

There's also the possibility that GE simply won't sell at all. The reason: debt. As a business requiring lots of cash flow, theme parks are usually leveraged in debt--something that works in GE's favor.

"GE has a very low cost of capital," said Spring. "In some respects they can get more value because their borrowing costs are so much lower. Their debt is investment grade."

The Federal Trade Commission signed off on the acquisition last month, but the two companies still have to hammer out various legal and logistical issues. The deal is expected to close by the end of the second quarter.

Universal declined comment on the potential sale of its parks, which include its flagship at Universal Studios Hollywood along with three others in Orlando, Spain and Japan.

For the moment, the theme park division keeps moving forward with plans to introduce new rides this summer, including "Revenge of the Mummy," which will be based on the 2001 film "The Mummy Returns," at its parks in California and Florida. The ride, which will include pyrotechnics mixed with a roller coaster, is anticipated to be a success by both industry watchers and Universal.

More parks are on the horizon as well, including a fifth Universal Theme Park in Shanghai, China in 2006. That deal, announced in late 2002, made Universal the second U.S. amusement park franchise to open a park in China, an area that Western companies are aggressively targeting. Disney is also slated to open one in 2006.

"Asia is one of the most aggressively growing markets," said Beth Robertson, vice president of communications for the International Association of Amusement Parks and Attractions, which projects a 6 percent to 8 percent improvement in attendance at all amusement parks in Asia this year over last.

Plus, she said, land developers are eager to get in on the action.

Universal signed a partnership deal for the Shanghai Park with Shanghai Waigaoqliao Group, a city-owned company, and the Shanghai Jinjiang Group Co. Universal will own 24 percent of the new venture.

Movie emphasis

But even as Universal pushes ahead, it still suffers from the recent past.

In filings with the Securities and Exchange Commission, Vivendi partially attributed declining revenue at its parks to reduced performance by Universal Studios Hollywood and Universal Studios Japan. According to the filing, the problems were "resulting from ongoing security concerns and associated softness in the tourism industry,"

Such softness has been largely to blame for the 12 percent drop in business at Universal Studios Hollywood, to 4.6 million visitors.

By contrast, attendance at Knott's Berry Farm was down only 4 percent, while Disney's California Adventure, which has been open since 2001, shot up 13 percent in 2003. Attendance at Disneyland was flat for the year. On the East Coast, attendance at the Universal's Orlando park was flat in 2003, while Walt Disney World in Florida stayed flat and its EPCOT Center climbed 4 percent.

One problem exacerbated at Universal is the emphasis on movie-related attractions. These are popular with overseas visitors who in recent years have stayed home. With attractions based on Universal films like "Back to the Future," "Jurassic Park" and "The Terminator," much of the marketing strategy is tied to the assumption that visitors will want to go on an attraction after they've seen the film.

Any potential sale of the park raises the question of whether and how such a synergy could be maintained once its ownership was separate from the studio's. One possibility would be for the new owner to establish a licensing arrangement with NBC in which the Universal brand would perpetuate.

"You might dilute some of the theme park value if it wasn't associated with Universal Studios," said Spring. "There is a pretty strong synergy between Universal Studios and their theme park."

Other parks have similar deals, such as Six Flags Inc., which licenses the Looney Tunes characters from Warner Bros., and Cedar Fair, which acquired licensing rights to the Peanuts characters after its 1997 buy of Knott's Berry Farm. Since then, Cedar Fair has tolled out the Peanuts characters to all of its parks.

Lean beginnings

Now celebrating its 40th anniversary, Universal Studios Hollywood started out as a tour of the sprawling studios, which up to then had been closed to the public (as had the other studios). By today's standards, the offerings were bare-bone: a tram ride that had tour guides point out the back lots where movies and television shows were made.

There is the story about a an old woman who was rumored to be hanging out around outside the Bates Motel, the infamous location for the movie "Psycho."

Visitors reported that the old woman had lunged at them with a knife. Authorities were notified and the suspect was apprehended. Turns out, it was actor Jim Carrey, who was at Universal filming "Man on the Moon," where he played the late comedian Andy Kaufman.

As technology advanced, so did the sophistication of the attractions. The "King Kong" and "Earthquake" attractions essentially became expensive thrill rides. And additional attractions would be needed to bring back old visitors and attract new ones.

The up-front cash required for new rides could run anywhere from $4 million to $5 million every three to four years--and that doesn't include maintenance and repair.

A seasonal business, theme parks also require a large influx of employees every year, leaving park officials guessing about how many people to hire.

While Vivendi didn't break out Universal's employment costs, nearby Knott's Berry Farm employs as many as 2,800 employees during the summer seasons and about 1,000 in the off-season.

Perhaps the biggest liability for Universal Studios is the competition--specifically Disney.

Known as the 800-pound gorilla in the amusement park business, the Burbank-based entertainment giant occupies the top five slots in the North American amusement park rankings, according to Amusement Business. Universal Studios Hollywood comes in 10th.

Cedar Fair's Witherow acknowledged that when tourists want to visit Southern California theme parks, it's usually not Knott's Berry Farm that first comes to mind. It's Disneyland. "Going in, we knew it was a very difficult thing," said Witherow. "We just want to steal a day or two of the people that are at Disney."

Universal Parks & Resorts

Universal Studios Japan

Location: Osaka, Japan

Attendance in 2003:8.8 million

Attendance in 2002:8 million

Change: 10 percent

Universal Studios at Orlando

Location: Orlando, Fla.

Attendance in 2003: 6.85 million

Attendance in 2002: 6.9 million

Change: (1 percent)

Universal Studios Hollywood

Location: Los Angeles County

Attendance in 2003: 4.6 million

Attendance in 2002: 5.2 million

Change: (12 percent)

Universal's Mediterrania

Location: Salou, Spain

Attendance in 2003: 3 million

Attendance in 2002: 3.2 million

Change: (6 percent)

Source: Amusement Business