American Skiing Sells Steamboat; Leverage and Seasonality- a Tough Combination

How many of you were with me in nineteen ninety whatever at the Transworld Snowboarding Industry Conference when then American Skiing Company (ASC) Chairman Les Otten stood up and thanked the snowboard industry for saving the ski resorts? Apparently we didn’t do enough- at least not for ASC. Its last ten years have been largely a process of trying to deleverage itself after an aggressive expansion left it, judging from its reported results, with an untenable financial model.

The sale of Steamboat to Intrawest for $265 million in cash was announced on December 19th, 2006. At that time it was expected to close on or before March 31, 2007. The sale was the result of a review of ASC’s strategic options that it initiated in July.
 
What are they going to do with all that green stuff? “It is anticipated that net proceeds from the sale will be used to repay all existing senior debt and outstanding revolver balances under ASC’s senior credit facility and certain other indebtedness.”
 
ASC is going to pay down debt, which is what they’ve been doing for a long time. A little bit of historical financial data is instructive. The numbers below are in millions of dollars and are for fiscal years ended July 30th.
 
 
 
 
 
2000
2001
2002
2003
2004
2005
2006
Net Revenue
 
$372
$373
$272
$265
$284
$276
$308
Operating Expenses
 
$377
$441
$385
$262
$274
$269
$289
Interest Expense
 
$36
$53
$50
$47
$88
$82
$87
Net Loss
 
 
$52
$142
$207
$82
$29
$73
$66
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$927
$807
$522
$475
$431
$423
$383
Total Liabilities
 
$540
$538
$416
$414
$671
$737
$763
Shareholders’ Equity
 
$185
$45
($155)
($237)
($241)
($314)
($380)
 
I recall thinking back when this all started that ASC was counting on no bad snow years and very optimistic growth projections. You can see that their revenue has trended down. But so have their operating expenses, which they worked hard and effectively to control. For the last four years, in fact, they managed to show a small operating profit.
 
But it didn’t matter, because that was overwhelmed by their interest expense which grew from $36 to $87 million in six years. Notice the decline in total assets as ASC sold other assets to try and get out from under their debt and interest burden. In spite of their actions, total liabilities grew and shareholders’ equity fell.   
 
There were various kinds of creative financings and refinancings where, to use one example, preferred dividends were accrued, rather than being paid in cash. Why? Because ASC didn’t have the cash to do it any other way.
 
They could do everything right- hell, I think they did do a lot of things right- they were at the forefront of some of the reengineering of ski/snowboard schools and rental programs that took place- and it just wasn’t enough. Even if the snow was good every year and they grew regularly I don’t think they could have gotten out from under their growing mountain of debt without asset sales. It’s interesting to note, for example, that ASC’s resort revenue per skier visit grow from $64.92 in fiscal 2002 to $73.87 in the year that ended last July.
 
Look at the chart again. Consider what happens when too much leverage and seasonality are mixed with some bad luck and perhaps a little too much optimism. Still, I don’t criticize ASC for trying. If nobody ever took a calculated risk, we wouldn’t get in our cars in the morning to drive to work.
 
Look at your seasonal business and your growth plans. How much leverage is enough and how much is too much? Are you going to constructively use debt or is it going to use and abuse you?