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Interview: Merlin Entertainments CFO Andrew Carr

THE comparison is irresistible. Asked to characterise his company’s recent history, the chief financial officer of Merlin Entertainments, owners of Thorpe Park and Chessington World of Adventures, turns to the one phrase that makes sense. “It’s the rollercoaster analogy,” says Andrew Carr. There are qualifications, however.

While admitting that it is a “classic pun that everyone uses”, Carr insists the comparison works, not because of the “ups and downs” in Merlin’s past but because of the “speed and adrenaline” that best sums up its development.

It’s true – there haven’t been too many lows for Merlin. With Legoland, Madame Tussauds, the London Dungeon, London Eye and the Sea Life chain of aquaria (including the London Aquarium) on its books, Merlin is now only second to Disney at running family entertainment attractions, and it’s got there in just a few short years.

Look at Merlin’s track record and it begins to resemble the high-speed kick of Alton Towers’ Smiler attraction. Not only that, but financial performance has been good too.

“When you’re doing well, the stress is more about the number of plates you’re trying to spin at any one time, I guess,” says Carr. “In a sense because we’ve traded strongly, and we’ve delivered against everyone’s expectations, it somewhat alleviates quite a lot of the potential stress that you would otherwise suffer if you were on the back foot and people were critical of how well you were performing.”

Merlin has accelerated its way to growth. The ride began in December 1998 when chief executive Nick Varney led a management buy-out from the then Vardon Attractions with support from private equity house Apax. Carr was on board, having joined Vardon three years earlier, and was instrumental in the deal. As his previous post had been to head a corporate finance department at Big Four firm KPMG, his involvement was unsurprising. As soon as the deal was settled and Merlin had come into being, Carr was appointed chief financial officer.

After the buy-out, the business changed private equity hands through Hermes and finally to Blackstone Partners in 2005 – when the thrills really began.

Formulating a plan in the then headquarters above a hi-fi shop in Poole, management took the idea to Blackstone that the business should become a “consolidator” in its field. They liked it and, with Blackstone’s backing, Merlin became the vehicle for acquiring four Legoland parks and Gardaland, Italy’s biggest resort park. A year later, the Madame Tussauds Group, changing hands for an eye-catching £1bn, was added to the stable.

Carr points out that the frenetic takeover activity saw Merlin go through an eight-fold increase in its scale, creating the diverse portfolio of businesses that it is now.
“We said: ‘Look, we can either sit here as a private equity-backed business and become consolidated into somebody else … or, slightly more ballsy, we can actually become a consolidator and be somebody that leads the charge’,” he says.

Since then, Merlin has barely paused for a doughnut between rides. Development has taken over from acquisitions as the headline generator and there are now 104 attractions across 22 countries in the portfolio.

Legoland Dubai will throw open its doors in 2016, with further locations underway in South Korea, China, Japan and the USA. Australia’s Living and Leisure brand, acquired in 2012, is being relaunched, while the recently acquired Turkuazoo Aquarium in Istanbul is due for reopening. This year a new Sea Life centre will open in Charlotte, North Carolina, a Madame Tussauds and Dungeon in San Francisco, and another Madame Tussauds in Beijing. Then there is a new deal with Dreamworks to develop Shrek-branded city centre attractions.

Group growth is up 9.3% for the half year to September 2014 which followed maiden annual results in January revealing revenues were up 10.9% to £1.19bn. EBITDA climbed 12.8%. Visitor numbers were up 10.7%. Last year, the business floated 30% of its stock.

Accelerated growth
With the initial acquisition period amounting to little more than 24 months, it is fair to assume that the extra workload placed a strain on Merlin’s internal functions, including finance. But Carr describes a process that saw the company adapt.

Each acquisition, fortunately, had its own finance function. The Tussauds Group brought with it a highly developed team bigger even than the one in place at Merlin at the time. And by the time the waxworks joined the group, Merlin was in need of the extra resource and few redundancies were needed. It did, however, require that Carr make a decision to hold off from pushing the teams into integrating their finance systems.

“It was happening so fast that we had to just keep our feet on the floor and say: ‘Let’s do this on a needs-must basis, and let’s focus on what we have to do which is that we have to be able to report across this broad group’.

“The actual local accounting, the local management of cash and the local controls are things that the local management teams have already been responsible for … they were all skilled and well-qualified individuals, so we empowered them to look after the day job, so to speak, so that we could focus on organising the finances for the group,” says Carr.

On top of all that came last year’s listing on the London Stock Exchange, an event that had been postponed from 2010 because of adverse market conditions in the wake of the financial crisis. The regulatory requirements that come with a listing are onerous for anybody but Carr is quick to shrug off the implications, preferring instead to focus on what listing had failed to do to Merlin, though he does concede it has been stressful.

“It would be wrong to say it hasn’t,” he says. “I don’t think that you fundamentally run your business differently. But there is a need to record your decisions in a more transparent way.”

And running the business in the same way is where Carr stresses the importance. Merlin has a strategy its executive team and backers are happy with. That’s about creating value in the long term, and it means not being sucked into short-term thinking by the markets, according to Carr.

“You have to continually remind yourself not to get caught up in the trap of worrying too much about the short-term bumps in the road, which inevitably happen,” he says.
“Everyone wants to interpret absolutely everything that occurs in a business and extrapolate it based on short-term information. The market lives and breathes by determining whether you are a share that they want to buy or sell; it’s never about a share they want to hold because people only make commissions when shares are being traded.”

He adds: “They don’t like equilibrium. It just doesn’t pay the bills for brokers.”

Scrutiny
And with that note of scepticism about equity traders and their agendas comes a counter-intuitive acceptance of the scrutiny the markets bring to bear on Merlin’s performance. Carr is quick to explain why everyone having a view on the company is useful. Put simply, it counters the risk of slipping into a corporate “bubble”.

“It’s hugely healthy to have some very smart brains out there who are all the time looking to see if they have spotted a risk or an opportunity in your business,” says Carr.

Of course, one question outside observers might ask is how management keeps an eye on the day-to-day development of the business while also leading the charge to develop multiple new sites in far-flung locations.

The answer is that Merlin keeps a close watch on the KPI it considers key – like-for-like sales. Carr describes this as the “bedrock” of the business while admitting that when he first joined, there had been a preoccupation with new launches. He says the business is more sophisticated now. “I focus as much time on how the underlying business is performing as I do on the new business,” he says.

This is not only important from a performance point of view, but an essential part of heading off trouble. “The underlying business is only a portfolio of new businesses opened in previous years. So, if you don’t understand the dynamics of their performance, are you going to replicate the same issues if you carry on rolling out new business of a similar format and into similar markets?

“There’s such a strong correlation between the existing estate and the new business that you have to look at them – they’re basically the opposite sides of the same coin,” Carr says.

Caution
Merlin’s refusal to be distracted by the excitement of building new rides in distant parts of the world is reflected in its overall view of investment. Despite all the activity and the rush to unveil new entertainment centres, the business sees itself as essentially “cautious”.

“We don’t take too many steps from our core business,” says Carr, adding that Merlin lives by the adage that you can explore new brands in a territory where the business is already present – but you can’t explore new brands in a new territory.

“Some businesses scrabble around looking for growth opportunities and, because their models require them to take relatively high risks, they come unstuck. We’re quite fortunate. We’ve got a business that’s geographically spread but has a number of chainable brands in it. We can therefore take an existing brand and roll it out in a new territory and it’s not a high-risk strategy because it’s a brand we know. We just look for slight variations to make them work culturally in a new market.”

The caution seems to fit Carr’s views of himself – “glass half empty” – when it comes to his function alongside chief executive Nick Varney. For Carr, his is the classic CFO role – a brake on unbridled ideas at the top and he is free to tell the leader when it is time to get off the ride.

“Between us we balance. If we were both optimists, we’d run ourselves into problems. If we were both pessimists, we wouldn’t do anything. The fantastic thing about our roles is that, in a way, we’re a check and balance for each other. I’ve got my foot hovering over the brake – his is hovering over the accelerator,” he concludes. “I’ve got a strong eye on strategy but a strong eye on delivering a strategy where we understand that it is sustainable and where we are totally cognisant of the risk we are taking on.” ?


Merlin's Andrew CarrIN BLACK AND WHITE

2013 – present Director, Merlin Entertainments
1999 – present CFO, Merlin Entertainments
1996 – 1999 Finance director, Vardon
1988 – 1996 Chartered accountant, KPMG

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