In the months following the 2010 Winter Olympics in Vancouver, Fortress Investment Group (NYSE:FIG) went to work trying to sell Intrawest, the ski resort operator it bought in 2006 for a whopping $2.8 billion. Its investment has gone downhill faster than Lindsey Vonn did on her gold medal run at Whistler Blackcomb last February. Eight months later, and with no takers for the entire company, Fortress has filed a preliminary prospectus that will see it sell off part of its 75% interest in both mountains to public investors. Hoping to raise $300 million through the IPO, investors are wise to avoid Whistler Blackcomb's big coming out party.
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Fortress, desperate to relieve the huge debt burden that is Intrawest, is taking its crown jewel to market so that it can lessen the pain ever so slightly. In the summer, rumors circulated that Russian billionaire Vladimir Potanin, developer of the Sochi ski resort for the 2014 Winter Olympics, was interested in buying Whistler Blackcomb. Other potential buyers included existing Fortress partner Nippon Cable (owns Sun Peaks Resort in British Columbia) and Intrawest rival Vail Resorts (NYSE:MTN), which owns several resorts in Colorado and California including its namesake. Not one of them was willing to make an offer for arguably North America's best ski resort. This is a telling sign that Fortress is betting the IPO market is frothy enough to overlook some of the inherent risks of owning a ski resort that's not growing. Ignorance is truly bliss.
The Potential Valuation
According to sources close to the IPO, the share price for the offering is between $14-15, meaning at least 20 million shares of the new company are up for grabs. For simplicity sake, let's assume this is the amount. Public investors will own 54.1% of Whistler Blackcomb Holdings, and Intrawest the remaining 45.9%. The holding company will then own 75% of both the Whistler Limited Partnership and the Blackcomb Limited Partnership with Nippon Cable owning the rest.
This would mean the offering values both mountains at $973 million. Its EBITDA for the 12 months ended June 30, 2010 is $65.5 million, meaning its enterprise value is 15-times EBITDA. The Current EV/EBITDA for Vail Resorts is 11. This doesn't seem like much of a concern, until you until you consider the differences between the two companies. Vail Resorts is not just Vail, but also four other resorts, all with reasonably substantial real estate development potential. Whistler has very little left to work with. Vail's total assets for the entire company are almost seven-times those of Whistler, yet its long-term debt is just twice those of its British Columbia rival. There seems to be far more upside in Colorado.
Be Careful Chasing Yield
Most of the media covering this story suggest the dividend yield, expected to be at least 6.5%, is the main attraction for institutional investors. Individual investors lucky enough to be able to get their hands on some stock should ask themselves if the risk they're taking to achieve this above-average return is worth it. The Globe and Mail recently discussed the issue of yield chasing and concluded there are safer alternatives yielding nearly as much, like the Bank of Nova Scotia (NYSE:BNS) at 3.6%, but possessing far greater appreciation potential. The table below highlights a number of alternatives to Whistler Blackcomb that provide a better balance of income and capital appreciation.
|Company||Dividend Yield||Three-Year Total Annualized Return|
|World Wrestling Entertainment (NYSE:WWE)||10.4%||7.0%|
|Suberban Propane Partners L.P. (NYSE:SPH)||6.1%||12.2%|
|B&G Foods (NYSE:BGS)||6.1%||1.7%|
The Truth About IPOs
A good IPO focuses on providing a win/win situation for all stakeholders. How does this occur? First, all the proceeds from the offering go to the company listing its shares for debt repayment, capital expenditures and future working capital. Secondly, existing shareholders aren't selling into the offering and, if possible, have a lock-up agreement beyond the usual 180 days. Lastly, shares are offered at a reasonable price and valuation. Whistler Blackcomb Holdings appears to satisfy none. This is never a good deal for new investors, and seasoned pros like Stephen Jarislowsky know better. In his book, "The Investment Zoo" (2005), Jarislowsky suggests that new issues are well promoted and can be bought for much less, a year or two later. In other words, keep your money in your wallet.
The Bottom Line
Beyond all the talk of valuation and merits of this investment, the main reason you should avoid Whistler's big coming out party is to send a message to Fortress Investment Group that individual investors are not going to risk their retirement savings simply to extricate the company from an incredibly poor investment decision. (For related reading about IPOs, see IPO Basics: Introduction.)
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