I hold in my hand the prospectuses for the public offerings of Vail, Intrawest and American Skiing. The prospectus is the selling document for the offering. It’s half marketing, half-legal and part insurance policy. The authors want it to be as positive as possible, but it has to be scrupulously accurate and warn of risks.
It’s kind of the Full Monty of an IPO. It is what it is, but you try and make it look good given what you’ve got to work with.
At something over 120 pages of single spaced lawyer- and accountant-influenced verbiage, dense financial charts and statements and, in my view, way too few nice color pictures to break it all up, Vail’s is the shortest of the three. A complete analysis can’t be done in the space available here, but what I can do is identify some interesting commonalities among the three, review the business risks and financial leverage and suggest how different kinds of areas can expect to be affected by consolidation. (I don’t mean to ignore Booth Creek, but lacking a prospectus to work from, I am.)
Here is a summary of the offerings:
American Skiing Company
Prospectus Date: 11/5/97
Offering Price: $18
Price as of December 11: 15 7/8
Gross Offering Proceeds: $265.5 million
Net to Company: $249.7 million
Use of Proceeds: Together with borrowings of $137 million, which become available concurrent with the offering, the offering will fund the $290 million purchase price for Steamboat, Heavenly and associated real estate from Kamori, and pay off other debt.
Kamori Results 5/31/97: Revenue of $89 million. EBITDA of $18.7 million. Loss of $3.4 million.
Purchase Price Multiples: 3.26 times revenue and 15.5 times EBITDA.
ASC Results (Assuming Completion of the Deal) 7/27/97: Revenue for the year of $262 million, EBITDA of $57.8 million and a loss of $5.2 million.
Strategy: ASC believes that its “primary strength is its ability to improve resort operations by integrating investments in on-mountain capital improvements with the development of mountainside real estate.”
Intrawest Corporation
Prospectus Date: 3/24/97
Offering Price: $16.875
Price as of December 11: 16
Gross Offering Proceeds: $67.5 million
Net to Company: $64.132 million
Use of Proceeds: “…to reduce bank indebtedness and for general corporate purposes…” The Whistler and Copper acquisitions closed on 3/14/97.
Cost of Acquisitions: For Whistler, 3,970,000 shares of common stock plus some hard-to-value deferred cash payments. Let’s say $90 million total. For Copper, 2,900,000 shares plus $12.1 million in cash plus $15.8 million in “limited recourse” notes. Around $77 million.
Whistler Result 5/31/96: Revenue of $38.7 million, EBITDA of $4.3 million and an after-tax loss for the year of $4.1 million in Canadian dollars.
Copper Results 10/31/96: Revenue of $46.4 million, EBITDA of $6.9 million and after tax income of $977,000.
Purchase Price Multiples: For Whistler, 2.3 times sales and 21 times EBITDA. For Copper, 1.67 times sales, 11.2 times EBITDA and about 79 times after tax earnings.
Intrawest Results (Assuming Completion of Acquisitions) 10/31/96: Revenue of $385 million. Net income of $11.6 million. (Both numbers in Canadian dollars.)
Strategy: Focuses more on traditional strength in real estate development than Vail, but the core of Intrawest’s objective is similar. Intrawest’s operating strategy is to “link the staged modernization and expansion of mountain facilities at its resorts with the controlled development of four-season resort villages focused on high occupancy accommodations.”
Vail Resorts, Inc.
Prospectus Date: 2/3/97
Initial Offering Price: $22.00
Price as of December 11: 25 7/8
Gross Offering Proceeds: $266.2 million
Net to Company: $102.85 million
Use of Proceeds: Reduce debt by $68.4 million with the balance to be used for general corporate purposes. “The Company believes that this reduction in indebtedness will give it the flexibility to make additional borrowings in the future to finance internal and external growth initiatives.”
Cost of Acquisitions: 7.5 million shares of Vail common stock plus assumption of $165 million of debt. Total $331 million.
Ralston Results 9/30/96: Revenues of $137 million, EBITDA of $38.7 million and after tax income of $7.9 million.
Purchase Price Multiples: 2.4 times sales, 8.6 times EBITDA and almost 42 times earnings.
Vail Results (Assuming Acquisition Completion) 9/30/96: Revenue of $326 million, EBITDA of $81 million and earnings after tax of $13.5 million.
Strategy: “Vail Resorts business strategy is not only to increase skier days and guest visits, but also to increase Resort Revenue per skier day by capturing a higher percentage of the total spending by its year-round destination and day guests, by continuing to expand the range and enhance the quality of activities and services offered.”
Common Factors
These three organizations hold certain common beliefs about the ski industry and how to succeed in it.
First, the name of the game is asset utilization. They are going to invest hundreds of millions of dollars in capital improvements and construction. If those assets aren’t utilized they will struggle to be profitable.
Second, their primary customer has to be the baby boomer, because they need people who will come and stay for at least a week and can afford to use all their facilities. (We better hope the snowboarders turn into their parents as they get older.)
Third, how you market and compete in the winter resort business is changing. Size and multiple locations give you critical competitive synergies in marketing, operations and management. From the conversations I’ve had with people who know a lot more about resort operations than I do, it sounds like the marketing synergies are anticipated but unproven. The operations synergies are real, but maybe not as significant as projected. The management synergies could be negative to the extent that each resort is unique.
Fourth, the coordinated development of real estate and other mountain assets can work to significantly increase the value and cash flow of both by improving the quality of the visitor’s experience is the belief of all three companies. The bet being placed by each company (and their investors) is that they can generate the cash flow required to complete the development and that the result will continue to be something customers want and can afford.
Fifth, all three need not only the cash from their offerings, but the liquidity and ability to use their stocks as a currency in acquisitions. Sellers wouldn’t be taking stock if they weren’t convinced of their ultimate ability to convert it to cash.
Sixth, cash flow is everything. A balance sheet, representing a company’s financial condition at a specific date, though not to be ignored, may not be a good indication of ability to meet continuing obligations in a highly seasonal business. Some of the conventional financial ratios calculated from the prospectuses could make ladies blush and strong men turn their heads but they aren’t necessarily indications of looming financial disaster.
Finally, a lot can go wrong. Some of the “Risk Factors,” taken at random from the three prospectuses, include discussions of the following issues: seasonality, capital expenditures, integration of acquisitions, real estate development, growth limitations, competition, unfavorable weather conditions, economic downturn and, lest we forget, substantial leverage and financial risks.
Risk and Financial Leverage
Remember the 1980s and leveraged buy outs? Various kinds of junk bonds were used to purchase companies. This left the former stockholders happy and the companies with huge debts to pay off, which they paid off by reducing expenses and selling parts of the acquired companies. The theory was that what they had left of the company after breaking it up to pay off the debt would be worth a lot more than they paid for it. Sometimes it was and sometimes it wasn’t. in each case, there were investment bankers and company managers who had prepared a cash flow that they reasonably felt could work. Were these deals “too leveraged?” Not for the people who made a lot of money.
In the ’80s, value was “unlocked” by splitting companies apart. in the 90s, resort consolidators are claiming they can create value by putting companies together. They have their own cash flow projections and set of assumptions that show why it will work. Are they right? Refer back to the risk factors mentioned in the previous section and make your own judgment. If it snows, interest rates stay low and the economy strong so they can hope not to be “too leveraged.” But the higher the leverage, the better things need to go. Leverage is a measure of risk, but there is no interest rate or ratio at which you can automatically say “too much,” without looking at the big picture.
Cash flow is even more the critical consideration with resorts because of real estate. The multiples at which resorts are being acquired seem high. But those multiples are all based on operating results.
The multiple calculations depend on revenue. Raw land generates no revenue. All it does is cost money to hold, like a house with a mortgage. It has value, but doesn’t generate income every month.
Resort purchase prices include significant value for real estate. So multiples are distorted by the value of real estate that is not generating revenue.
Of course, that’s supposed to change, which brings us back to cash flow. By developing the land and improving the facilities, new sources of cash flow are created and existing ones increased. The issue is how much and over what period of time.
A company starts the month with a certain amount of money. It adds revenues from operations, borrowings from the bank, sales of stock and other sources of cash. Now the company knows how much it has to spend. During the month, it has expenses to run the place, interest, salaries, the cost of a lift, plumbing forthe new condos and others. At the end of the month, the difference between the cash available and the cash spent better be a positive number.
It’s conceptually not that different from your family budget. There’s just another zero or two. And like the family budget, if there are negative numbers at the end of some months, you manage it by drawing on savings and deferring or reducing expenses.
Let’s say that one of the consolidators runs into trouble and can’t service their debt. Conditions turn out to be different from what was assumed and they find that they are, in fact, “too leveraged.” What is the potential impact on the industry?
The probability is that the typical skier won’t even notice. The resorts are valuable properties that will continue to operate. Debt could be restructured, building and improvements deferred. Some resorts could change hands at lower values in transactions where existing equity and bondholders lose a bunch of money. (How many money-losing major league baseball teams have stopped playing? They all were sold, moved, cut payroll or got their communities to build new stadiums.) There’s always a restructuring deal to be done if the property has fundamental value.
Could the financial problems of one company rub off on others? It’s possible. in the snowboard industry, Wall Street’s interest in the sport and the ability of snowboard companies to raise capital plummeted with the stocks of the two publicly traded snowboard companies as the industry matured and growth slowed.
But that was the result of systematic changes in the industry, not the problems of one company.
Owners of ski areas can reasonably assume that financial problems at other resorts, if any, will affect the valuations of resorts nationwide and will reduce their access to cheap capital. The extent to which a particular area will be impacted depends on its individual circumstances, the extent of the problems at other areas and the amount of publicity such problems receive.
What’s an Owner to Do?
From a strict financial point of view, the answer is probably “sell.” Current valuations are unusually high and will last only as long as the stock market cooperates. Assuming you don’t sell, then the issue becomes how the consolidation affects your competitive situation.
All ski areas fit somewhere on a continuum ranging from day area to destination resort. Those that are closest to the day area category seem to have the least concerns about consolidation. George Willett, president of Showdown, Mont., acknowledges some pressure to upgrade facilities, but says, “We have nice annual natural snow, great employees and a main market of 60,000 people who have to go twice as far to ski if they don’t come here.”
He sees his natural competitive advantages, and relative isolation, as insulating Showdown from most of the consolidation pressures.
Jackson Hole, Wyo., is at the other extreme. It’s exclusively a destination resort. President Jerry Blann acknowledges that he competes directly with Vail, ASC and Intrawest and that the experience Jackson Hole offers, though differentiated by Jackson Hole’s particular circumstances, has to be on par with these resorts.
“We have great name recognition, lots of vertical drop, a high service level and are near national parks. One result is that we’re busier in summer than in winter,” he says. in spite of these advantages, however, Jackson Hole is in the middle of a 10-year program to upgrade its facilities at a cost of $50 million, in addition to an upgraded village. Blann acknowledges that this is in response to competitive conditions.
Time will tell if the deals we are seeing as part of the ongoing consolidation are or are not too leveraged. Traditional financial indicators must be used with caution because of the real estate component. The issue is cash flow, and evaluating it from the publicly available information is difficult. The consolidators all believe that the nature of their market is changing or that they can change it. To a greater or lesser extent, all other areas are being impacted. But financial difficulties for one of the consolidators should not presage a cascading affect on other resorts unless they were already weak. Fundamentally, those that have distinctive competitive competencies will prosper. Those that don’t, won’t, consolidation or no consolidation.
