Intrawest Files for Initial Public Offering. Will it Happen?

On November 12, Intrawest Resort Holdings, Inc. filed the first draft of a form S1 with the SEC for an initial public offering. Like all first drafts, there’s some significant information missing, including the proposed price of the stock and how much they want to raise. But at 400 pages as a PDF, there’s also a lot of interesting information that I thought you’d want to hear about. Here’s the link if you want to skim it yourself. 

Intrawest, to refresh your memories, owns and operates Steamboat, Winter Park, Mont Tremblant, Stratton Mountain, and Snowshoe. It also owns 50% of Blue Mountain. In the year ended June 30, 2013, Intrawest had total revenue of $517 million. 65.5%, or $339 million, came from the mountain and lodging operations at those resorts. 22%, or $114 million, came from their adventure segment. Mostly that’s Canadian Mountain Holidays that provides heli-skiing trips. The remainder of the revenue, 12.5% or $64 million, came from real estate. That includes real estate development as well as real estate management, except there isn’t any real estate development going on right now.
 
Now, some of you will recall that back in the good old days of “The Best Economy Ever” Intrawest and other resorts made a whole bunch of money developing and selling real estate in coordination with the improvement of the mountain experience. The real estate market has changed a bit since 2007.
 
Intrawest tell us they have 1,150 acres of “core development parcels” surrounding or adjacent to their resorts. They also say, “While we do not have any specific plans for the development of our core entitled land, we are focused on designing strategies for future development of this land in concert with planning for on-mountain and base village improvement.”
 
Sounds like there’s a lot of planning going on, but not much else. When might it move past planning?
 
“As the economy continues to improve, we expect consumers will have more disposable income and a greater inclination to engage in and spend on leisure activities. We also expect recreational adventure and experiential travel to continue to gain in popularity as individuals, including the important “baby boomer” generation, live longer, healthier lives. We believe that our business is well positioned to capitalize on these favorable trends…”
 
I don’t know when consumer spending is going to improve, or how much improvement Intrawest requires before they might put some of these plans into action. But if they’re waiting for consumers to start partying like it’s 1999 again, I suspect they’re in for a long wait. The focus on the baby boomers isn’t new for resorts, and I’ve previously questioned whether that’s an adequate strategy. The focus has to be on people with high disposable incomes, boomers or not, though obviously there’s a big overlap there.
 
But I digress. I do that sometimes. Let’s get back to the impact that resort real estate development had on Intrawest. It will lead us to why they are going public.
 
Here’s what they say the real estate collapse that started in 2007 did to them:
 
“Prior to the collapse in the housing markets in late 2007 and the global financial crisis that followed, we were actively engaged in large scale development and sales of resort real estate, primarily in North America. In light of the then prevailing market conditions, we ceased new development activities in late 2009. As a result, we were left with a portfolio of real estate assets, high leverage levels and litigation initiated by purchasers of resort real estate seeking to rescind their purchase obligations or otherwise mitigate their losses. This confluence of factors had a material impact on our consolidated financial results for the fiscal years presented below.”
 
Material impact indeed. Here’s some summary numbers from their income statement for the last three years ended June 30 (In $000s).
 
       
2011
2012
2013
Total Revenues
   
$559,523
$513,447
$524,407
(Loss) Income From Operations
 
(196,516)
(19,332)
3,478
Interest Expense on 3rd Party Debt
(143,463)
(135,929)
(98,437)
Interest Expense on Notes Payable to Partners
(160,943)
(195,842)
(236,598)
Net Loss
     
(498,506)
(336,063)
(296,714)
             
2011 had almost $150 million in impairment charges for goodwill, real estate, and long lived assets. There was also a $26 million loss on the sale of some assets. These all impacted operating income. The total of such charges fell to about $21 million in 2012 and to almost nothing in 2013, permitting Intrawest to show an operating profit.
 
But now look at the interest expense numbers. This is interest on loans that was going to be paid, and the loans paid off, through the development and sale of real estate. And said real estate is no longer being developed or sold. If we visit the June 30, 2013 balance sheet, we see long term debt of $581 million and notes due to partners of $1.359 billion. With a “B.” What they call partners’ deficit (basically equity) is a negative $1.02 billion, having worsened from a negative $724 billion a year ago. 
 
The people to whom all this money is owed seem to have recognized that there is no imaginable combination of economic improvement, perfect snow conditions, and growing visitor days that will let them get out from under this debt. I’d say they’re right. Shades of American Skiing Company- though they didn’t have the issue of an imploding real estate market.
 
Their solution is to take Intrawest public. But what fool would buy shares in a company with this kind of balance sheet losing this much money? The answer is none, or at least not enough.
 
The partners’ solution is to convert their $1.359 billion in notes to equity, moving it out of liabilities. That includes the accrued, but unpaid, interest of $761.7 million as of June 30, 2013.   The restructuring reduces total liabilities from $2.14 billion to $756 million, producing a much cleaner balance sheet. How clean exactly we don’t know yet because the proforma balance sheet in the S1 is incomplete- no surprise since we don’t know how much money they will be raising.
 
But we do have a proforma income statement for the year ended June 30, 2013 prepared as if the deal had been done a year earlier. It shows net income of $8.5 million instead of a loss of $297 million.
 
Why, you might ask, don’t the partners just restructure the balance sheet without going public? Well, if you’re a shareholder (especially if you didn’t really want to be a shareholder) you might want to be able to sell your stock someday. That’s a lot easier if the stock is publically traded. It may also be the case that Intrawest needs the cash that will be raised in the public offering.
 
Intrawest, you may recall, was acquired by Fortress Investment Group in a leveraged buyout. Wikipedia tells us that “Three weeks before the opening of the 2010 Olympics, Fortress failed to make payment on its loan used to buy out Intrawest. This caused its creditors to force Intrawest to divest itself of several of its resort holdings in 2009 and 2010 which includes Whistler Blackcomb, in order to reduce its debt load.”
 
As part of the restructuring for the IPO, which is a bit more complicated than I’ve bothered to describe in this article, a subsidiary of Fortress is “contributing” $50 million to Intrawest. Why would they do that?
 
“As of June 30, 2013, Cayman L.P. [the legal entity that owns Intrawest’s resorts until this deal happens] had loans due to affiliates of Fortress, consisting of notes payable to partners with a principal balance of approximately $597.0 million and accrued interest of approximately $761.7 million. Pursuant to the applicable loan agreements, Cayman L.P. currently accrues interest at rates ranging between 15.6% and 20.0% per annum on the notes payable to partners.” 
 
There are two more things I want you to know. The first is that after the offering is completed, if it is completed, an affiliate of Fortress will own enough of the equity to be able to appoint a majority of the board of directors. Hardly a surprise as it’s their debt that’s being converted.
 
The second is that somehow Intrawest can be classified as an Emerging Growth Company under the Jumpstart Our Business Startups Act of 2012. No, I don’t really understand that either and find it kind of amusing. But what it means is that they don’t, among other things I guess, have to provide five years of financial statements (which they don’t), have the auditor give an opinion over their financial controls, or disclose as much about compensation as usual.
 
We know that Intrawest management knows how to run resorts. And it’s correct to say that they got hammered by the collapse of the real estate market and, if this deal gets done, the impact of that will have been financially flushed out. But they are planning to succeed doing the same things they did before under very different economic circumstances. The question a potential buyer of this common stock has to ask is if they think that’s a reasonable expectation.

 

 

2 replies
  1. John Fry
    John Fry says:

    Jeff: If I understand you correctly, why would I want to own shares in a public company engaged in a business heavily dependent on weather, generating $8.5 million of net income on revenues of $559 million, with debt of almost three-quarters of a billion dollars?
    — John

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