GE Could Be In for a Shaky Ride

Now that General Electric Co. owns five theme parks, what’s it going to do with them?

The industrial giant spent $14 billion to buy Vivendi Universal’s armory of entertainment properties, keen on teaming up a celebrated movie studio and collection of cable television channels with the GE-owned NBC empire. Universal’s theme park division and its 15,000-plus employees around the world came along for the ride, which won’t be smooth.

Universal’s signature two-park resort in Orlando has been a money loser for several years. Universal Mediterranea near Barcelona, Spain, has yet to turn a profit since Universal invested in the leisure park. Universal Studios Japan has been in a cash crunch two years after attendance fell off when the public learned that park restaurants were selling food past its expiration date and drinking fountains were spewing unsanitary water. Traffic at Universal Studios Hollywood slipped last year. Plans for a park in Shanghai could be in trouble.

People familiar with the company’s thinking say it’s a long time away from deciding to unload the parks. Despite improvements this year at the division, analysts who follow the industry believe that thrifty GE will prove to have little appetite for the high-cost, low-profit business.

“Theme parks are decidedly not the kind of business GE really wants to be in,” said Kerry Stirton, an analyst with Sanford C. Bernstein & Co. “This thorn remains something they’ve got to deal with.”

Publicly, GE executives have been upbeat about the parks, which, after all, have played important roles in promoting franchise movies such as “Jurassic Park” and “Back to the Future” and in better years generated sizable cash flow.

“We have an excellent theme parks business that is currently experiencing significant growth and gives us opportunities to promote and extend our brands to more than 30 million visitors a year,” said Bob Wright, NBC Universal chief executive and GE vice chairman, at a “town hall” meeting with Universal employees this month.

Privately, though, GE and NBC executives voiced concerns about the division’s finances before the deal closed May 12.

At a meeting in Orlando late last year, Wright reacted bluntly after a presentation by Universal’s senior executives on the state of the theme parks, according to a person familiar with the matter.

“What are you guys running, a 501(c)(3)?” Wright asked, in a reference to nonprofit groups.

In a meeting with Universal executives this year, GE Chairman Jeffrey Immelt questioned the rationale behind the proposed park in China. Universal subsequently laid off two dozen designers hired to work on the Shanghai park, raising doubts about the future of the $1-billion project slated to open in 2006.

Nearly 10 senior executives in Los Angeles and Orlando have left or are in the process of leaving the theme park division. The ranks of its creative design group have fallen from 100 to about three dozen over the last year. And the unit doesn’t have a major ride in the pipeline, several sources close to Universal said. That’s unusual in a business in which new attractions take years to develop and build and are key to bringing customers back again and again.

The retrenchment comes after a heavy period of expansion in 1990s, when Universal’s former owners spent billions in an effort to take on chief rival Walt Disney Co. in Orlando and around the globe. That commitment transformed a humble tram tour into a pioneering entertainment business stretching from Hollywood to Osaka.

Tom Williams, head of Universal’s parks and resorts division, disputed any notion that a commitment to the theme parks had slackened, citing the recent opening in Orlando of “Revenge of the Mummy,” a $40-million ride based on Universal’s hit “Mummy” movies. Universal Studios Hollywood opens a similar attraction next month.

He said the creative team had several projects in conceptual development and that job cuts and layoffs reflected the typical ebb and flow of the business.

“We’ve got a very good business here and we’re going to protect it and build it and get a fair and reasonable profit,” Williams said. “We expect theme parks to be a standout performer this year and next year.”

The business has shown signs of bouncing back as the economy improves, and that’s one reason for GE to wait before posting the for-sale sign: The company needs time to use its leverage with lenders to reduce the division’s debt -- $1.17 billion at the end of 2003 for the Orlando resort alone, according to regulatory filings -- and to recruit bidders.In the meantime, NBC is looking for ways to use the parks to promote content. The network, which is broadcasting the Summer Olympics, may televise some events on wide screens in the theme parks, where athletes may also make appearances.

In any event, selling the parks wouldn’t be easy, in part because Universal doesn’t own most of them outright. Private equity firm Blackstone Group, for example, has a 50% stake in Universal Orlando, and parks in foreign countries are owned in partnerships with governments or investors.

The division’s most nettlesome problem is probably the planned park in China, a country where GE has extensive business interests. “GE has a very good relationship with the Chinese government and [Immelt] wouldn’t do anything to jeopardize that relationship,” said a person close to the company.

Worldwide, the division is “definitely facing some challenges,” said James Zoltak, editor of the industry magazine Amusement Business.

The resort in Orlando lost $52.2 million last year, slightly more than the loss the year before of $51.75 million. In fact, business has been in the red since 2000, according to regulatory filings. The losses mostly stem from Islands of Adventure’s heavy debt.

The $1.4-billion park debuted in 1999 to rave reviews but after its first year failed to draw the anticipated crowds, which many industry experts blamed at least in part on poor marketing.

“Islands of Adventure never got off the ground the way it should have,” said Craig Hanna, principal for Thinkwell Design & Production Inc., a theme park design firm based in Pasadena.

In Barcelona, Universal owns Universal Mediterranea in partnership with Spanish bank La Caixa and other investors. The company acquired its stake in 1998 and has since developed two adjoining hotels and a water park. But its partners say Universal has failed to deliver on promises to expand the site into a major tourism resort.

Universal appeared to hit a home run when it opened the park in Japan three years ago. It had invested $90 million in the $1.7-billion facility for a 24% ownership stake. Operated through a partnership with the city of Osaka, the park drew 11 million visitors in its first year. Then came the food and water fiasco. The park also was squeezed by a recession in the Japanese economy.

After a year during which Universal worked to assure the public that the problems had been remedied and offered discounts to lure crowds back, the park has been short of cash but expects to post a profit next year.

At Universal Studios Hollywood, attendance fell 12% to 4.6 million visitors last year, while Disney’s California Adventure gained 13%, according to Amusement Business. Universal executives blamed the slow economy, the war with Iraq and the lingering effects of the terrorist attacks.

Critics also say Universal’s bottom line has been hurt by an excessive reliance on discounting through Universal’s buy-a-day-get-a-year-free offers. Others point to competition from Disney’s theme parks.

“Disney is a fierce, well-heeled and superbly positioned competition,” said Cathy Nichols, who ran Universal’s theme park group for 2 1/2 years before leaving in 1999. “Because you can’t spend what Disney can spend, you have to be very clever and strategic in how you spend the dollars.”

Leisure industry consultant Steve Baker of Orlando said the division has also suffered from having multiple owners over the years, leading to a lack of focus: “They’ve not been able to develop a brand identity and a culture like Disney.”

But Universal Studios President Ron Meyer said Universal’s theme parks were turning the corner and would benefit from the stability of GE.

“Tourism is coming back to our business,” Meyer said. “I’m very optimistic about the future.”