Universal Puts Growth of New Parks on Hold

The big spender in the theme park industry, Universal Studios, is turning off the cash spigot after the biggest expansion in the company’s history as its new French parent reviews the cost of keeping up with rival Walt Disney Co. in the resort business.

Vivendi Universal--formed in 2000 with the $31-billion buyout of Universal’s Canadian owner, Seagram Co., by 148-year-old French water and sewer giant Vivendi--is waiting to see whether the company has hit pay dirt with its two newest parks before considering further expansion of the world’s second-largest theme park empire.

The decision follows last month’s launch of Universal’s $1.7-billion park in Osaka, Japan, and the recent construction of a $2-billion-plus companion park to its 11-year-old Orlando resort.

In the near term, Universal will concentrate on adding hotels in Florida and in Spain, where it is working to transform its smallest amusement park into a seaside resort.

“Clearly, we are entering an operating stage,” said Ron Meyer, president and chief operating officer of Universal Studios, the Vivendi Universal division that includes the parks.

Vivendi’s construction hiatus has implications well beyond the Universal City offices of its U.S. headquarters. Without the industry’s key technical innovator actively creating new resorts, and with Disney ending an expansion phase that includes the opening of two theme parks this year, dozens of Southern California attraction designers and contractors could face an unwelcome work slowdown.

“Universal is the company most likely to push the envelope,” said Gary Goddard, chairman of Landmark Entertainment Group, a North Hollywood theme park and attraction design company.

A European corporate giant founded by the Rothschild family and the half-brother of Napoleon III, Vivendi has grown in recent years to include a major European wireless business as well as European film and television holdings. It also is the world’s largest water and sewer company, serving 100 million customers in 100 countries.

Acquiring Universal’s movie, television and music businesses fit the vision of Vivendi Chairman Jean-Marie Messier, who hopes his company will dominate the digital and wireless age as it did water utilities during the previous century.

Though bricks-and-mortar theme parks appear an odd fit with that vision, the parks remain an important part of the company, said Pierre Lescure, Vivendi’s co-chief operating officer.

“The parks are part of the game. . . . “ Lescure said, “part of the intimacy with the studio itself.”

Numbers Still Highly Attractive

Employees within Universal Studios Recreation Group, the company’s theme park division, say Vivendi considered looking for a buyer or outside investors for the theme park business. But Lescure said the company has no plans to sell and has a major “evangelist” in Eric Licoys, the Vivendi co-chief operating officer who once served on the board of Parc Asterix, a theme park based on the popular French comic book character.

Vivendi finds itself with an attractive set of parks on four continents and the use of movie director Steven Spielberg as a creative consultant for ride development. If projections hold true, Universal should attract about 30 million visitors to its parks this year, about one-third of Disney’s global attendance.

Lescure describes the parks as a “very good business” with strong cash flow. However, Vivendi officials declined to provide financial details of the Recreation Group’s performance. An analyst at UBS Warburg in New York, Christopher Dixon, estimates that in the 12 months before the opening of the new Osaka park, the parks group generated about $200 million in cash. That will soar to $350 million this year, as the receipts from Japan kick in.

These numbers look especially attractive considering that, with the exception of the theme park in Hollywood, Universal has not paid dearly for these properties, according to Dixon.

Universal has a 24% share and a lucrative management contract with Universal Studios Japan for a mere $90-million investment in the $1.7-billion facility.

Universal’s other partners in the project include the Osaka local government, which owns 25%, Sumitomo Group and Hitachi Zosen. Universal has a 37% interest in Universal Studios Port Aventura in Spain and a 50% stake in the Orlando complex, which includes Universal Studios Florida, Islands of Adventure and a CityWalk shopping district.

“In Florida, they control 65% of the economics for only 50% of the investment,” said one executive familiar with the financial arrangement.

According to Dixon’s estimates, Vivendi will scoop up nearly 55% of the estimated $380 million in cash coming out of the Universal parks this year.

Universal has never liked spending its own money on parks. Any new developments will require “strategic partners” ready to step up with money to leverage “land or some economic goal,” said Tom Williams, chairman and chief operating officer of the Recreation Group.

In Spain, Universal found a willing partner in La Caixa Bank, an original investor in the Port Aventura project. Universal purchased its interest in Anheuser-Busch Cos. In Japan, the city of Osaka wanted to redevelop a portion of its industrial waterfront into a tourist attraction for the 22 million people who live within a 60-mile radius.

Williams believes there are theme park sites in Europe, Latin America and Asia that wouldn’t compete with the company’s existing locations.

These ideas are all in the early “exploration” phase, but Lescure said there is little chance Vivendi would go head-to-head with Disneyland Paris by building in France, he said.

Complacency Could Threaten Gains

When Disney opened its resort outside of Paris in 1992, Universal executives met with Canal Plus, one of the companies now controlled by Vivendi, to measure interest in opening a Universal park.

“I said, ‘Sorry, guys, but this is Paris,’ ” recalled Lescure, who was running the European pay television giant then and remains Canal Plus’ chief executive now that it is controlled by Vivendi. “Why would you want two theme parks? Paris is more than a second park.”

New parks aside, if Vivendi is stingy about investing in its holdings, it risks settling into a complacency that could threaten the gains of its expansion.

This is an industry in which consumers are not afraid to voice complaints, as Disney has found out at its new California Adventure theme park in Anaheim. Disney has handed out hundreds of free passes to the adjacent Disneyland to customers who complained there weren’t enough attractions in the new park, especially for young children.

“We are in a very competitive world and consumer expectations have grown exponentially since people first put robotic figures in dark rides,” said Mark Woodbury, chief creative officer of the Recreation Group.

Universal will continue to add attractions to its parks, Meyer said, “but they will be appropriately priced for us. We can still find ways to give good experiences to our customers.”

Rides on the magnitude of the Amazing Adventures of Spider-Man, a $75-million attraction that has won praise for the way it blends moving simulators, 3-D film and other effects, are not “on the board at this moment,” said Meyer, the most senior American at the company.

Universal’s investments will be in revenue-producing ventures at its existing resorts such as a hotel under construction in Florida.

In Spain, however, Universal remains committed to a modest expansion of its Port Aventura on a 2,000-acre parcel that fronts the Mediterranean Sea along the sunny Costa Dorada. Universal is building two hotels and a water park. There are plans to build a golf course and then add a CityWalk shopping district, more hotels and time shares after that.

With so little development backlog, Universal is taking steps to cut expenses at the Recreation Group. Dozens of designers and producers, many of whom moved from Orlando to Japan, are losing their jobs now that the Osaka park is completed. Most of the remaining creative staff is being relocated from Los Angeles to Orlando.

“This is where our biggest business is, and I want the creative group here because I work with them day in and day out,” said Recreation Group head Williams. “It’s difficult to do that when they are on the opposite coast.”

Bob Rogers, president of BRC Imagination Arts, a developer of theme park rides and a Universal subcontractor, said the lack of deeper cuts is a good indicator of Vivendi’s interest in the division. Universal is keeping a key group of advanced planning designers who develop new rides and attractions and come up with concepts for new parks, Rogers said.

In the end, the Vivendi folks understand “how the film and television product comes to life in the parks,” Williams said. “They see the synergy in this business.”