Disney, China Partner Will Spend $4.4 Billion Building Resort in Shanghai

Walt Disney Co. (DIS) and its state-owned China partner will invest about $4.4 billion building a resort in Shanghai, the entertainment company’s second amusement park in the world’s most-populous nation.

The Shanghai Disney Resort will open in about five years and be the first in mainland China for the world’s biggest theme-park operator, which opened Hong Kong Disneyland in 2005. Shanghai Shendi Group Co. will own 57 percent of the resort with Disney owning the rest, and financing will be proportional to ownership, according to a statement today.

Chief Executive Officer Robert Iger called the investment a “defining moment” as Disney bets on China’s rising middle class to fuel growth, three years after the global financial crisis hurt spending in the U.S. and Europe. The company increased film production in the world’s fastest-growing major economy and plans to open Disney stores there by 2012.

“Disney has the strongest China strategy of all the media companies,” said Alan Gould, an analyst with Evercore Partners in New York who recommends the stock. A longer-term goal is to negotiate wider distribution of films in China and the creation of a 24-hour television channel, he said.

‘Most Significant’

The entertainment company may collect more than $200 million in annual management fees in a decade, plus licensing revenue, Gould estimated. The park will attract 7.3 million visitors annually, the Shanghai government said March 3.

Disney will hold a 70 percent stake in the management company that will develop the resort and collect operating fees, with Shanghai Shendi owning the rest.

“This is our most significant investment in a market that is experiencing dynamic growth,” Iger, 60, said in a separate phone interview.

Disney declined 23 cents to $42.04 in New York Stock Exchange composite trading yesterday. The stock has gained 12 percent this year.

The Asia-Pacific region is the fastest-growing area by sales for the Burbank, California-based company, expanding 25 percent to $2.3 billion, which is 6.1 percent of total revenue, according to data compiled by Bloomberg.

Initial Investment

Disney and Shanghai Shendi today started building the resort, which will occupy 963 acres (3.9 square kilometers) with “room to expand,” the statement said.

The initial investment in the theme park will be about 24.5 billion yuan ($3.7 billion), according to the statement. Another 4.5 billion yuan will be spent building the rest of the resort, which will include two hotels and retail, dining and entertainment areas.

Shanghai Disneyland may be the first of three theme parks on the resort’s 7 square kilometers (1,730 acres), according to a local government website.

About 330 million people live within three hours by car or train from the site, Disney said. Spending on domestic leisure travel in China may double to more than $200 billion by 2015, according to Tom Staggs, chairman of Walt Disney Parks & Resorts.

“China is the most exciting opportunity we’ve had since Walt first bought land in Florida in 1964,” Staggs, 50, said at a Feb. 17 investor presentation.

About 30 million Chinese enter the middle class each year, he estimated.

Shanghai Expo

Hong Kong Disneyland, part-owned by the city government, missed its forecast to attract 5.6 million visitors in its first year and has yet to make a profit. The park, which narrowed its annual loss to HK$720 million ($93 million) in the 12 months ended Oct. 2, has been criticized for its small size, with Disney saying it fell short of expectations.

Tourism growth in China and Asia will support both parks, said Andrew Kam, managing director of Hong Kong Disneyland.

“Every park has to go through its learning process,” he said today when asked if he had any advice to give to the management of Shanghai park, which Staggs said will be larger.

Shanghai’s $44 billion World Expo attracted 73 million visitors from May 1 to Oct. 31 last year, with its 5.28 square- kilometer park drawing 1 million visitors on a single day, local media reported.

“What we saw at the Expo was a major learning process for us,” Iger said. Disney has been “in communication” with China’s government for more than a decade, Iger said.

‘Absorb Large Crowd’

Disney’s Shanghai park was designed “around how to absorb a large crowd and still give them a good experience,” Staggs said.

The Shanghai project will be financed 30 percent with debt and 70 percent with equity, with the companies making proportional investments based on ownership, according to the statement.

Shanghai Disneyland may generate management fees of $65 million-$70 million for the company in the first year and more than $200 million annually within a decade, Gould said.

Disney also will collect a license fee of about 6 percent on ticket sales, revenue for the use of its name on hotels and a separate fee on merchandise, he said.

Theme parks contributed 28 percent of Disney’s $38.1 billion in full-year revenue and 17 percent of its $7.59 billion in operating income.

Shanghai also plans to spend 4 billion yuan ($611 million) on a 9.2-kilometer (5.7-mile) subway line to the theme park in the city’s Pudong area.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Frank Longid at flongid@bloomberg.net

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