Rob Cox: Flurry of ski M&A aims to control weather

By Rob Cox
September 30, 2014

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

The ski business is amid a flurry – not of snow, but of deals. At the center of the action is Vail Resorts, a $3 billion publicly traded operator in an industry traditionally dominated by family and local owners. The company is upending winter-sports convention in a variety of ways. Chief among them is trying to prove that it can control the weather with some corporate finance.

Control may be an extreme interpretation, but Vail Resorts is pursuing a model designed to mitigate Mother Nature’s volatility, which has spelled doom for many a ski area. The extent to which it succeeds will determine the future shape of the North American skiing and snowboarding complex.

It’s instructive to understand why Vail Resorts, led by Rob Katz, is battling the elements. Though there has been consolidation – last month his company bought Park City, Mammoth acquired Big Bear and Ontario’s Blue Mountain was taken over – North America counts around 700 ski areas, ranging from sprawling resorts like Squaw Valley and Killington to dozens of suburban bunny slopes.

Most mountains are privately held. Vail Resorts is the big exception, owning a dozen top leisure spots including Vail, Breckenridge, Heavenly and Kirkwood near Lake Tahoe and Park City and Canyons in Utah. Whistler Blackcomb Holdings is a $630 million company traded in Canada. Intrawest Resorts went public last year and owns seven peaks, including Steamboat and Winter Park.

A couple of real estate investment trusts own some trails and lease them back to operators who run the facilities. One is EPR Properties, a $2.9 billion listed proprietor of theaters, water parks, golf courses, and 14 ski slopes, including Mt. Snow in Vermont, most of which are operated by Peak Resorts.

Further complicating the wintry mix are resorts owned by state and local governments, like New York’s Whiteface Mountain, host to the 1980 Lake Placid Olympics alpine skiing. Others are tucked into the balance sheets of corporations. AIG, for one, owns Vermont’s Stowe. Sinclair Oil claims Idaho’s Sun Valley and Snowbasin in Utah.

The fragmentation creates a consolidation opportunity that Vail Resorts is in prime position to lead. One of the ways the company hedges against the vicissitudes of snowfall is by fostering what Katz calls “weather diversity.” While Vail’s first defense is to make its resorts destinations regardless of the elements, by having clusters of ski areas in Lake Tahoe, Colorado’s Rockies and Utah, poor snowfall in one region can be offset by better conditions elsewhere.

Vail takes it a step further by selling season passes that allow its customers to use any of its slopes around the country, as well as resorts in Switzerland, France and Japan. At $749, Vail’s “Epic Pass” is a bargain compared to the deals on offer for season passes to single resorts like Utah’s Snowbird and Stowe.

“The trade we are making is that while customers have a huge savings, we are also locking them in as guests for the season,” Katz said in a recent phone interview. “Our season pass buyers ski more days and more consistently.”

What Vail has created is something like the luxury-demographic equivalent of a Costco or Amazon Prime subscription. By buttoning down a certain revenue stream early in the year from a customer base that on average boasts annual family income over $200,000, Vail can even out boom-and-bust patterns. Indeed, 40 percent of Vail’s lift-ticket revenue last year came from season pass sales, says Katz, who expects to hawk 400,000 of them this season. The company reported $391 million in ticket revenue in 2013.

A former financier equates it to a banking model. “If you look at the revenue and compared it to the costs, it’s really not all that different from the old Merrill Lynch model, where you cover expenses with fixed fees,” says Win Smith, a former member of the Thundering Herd who has decamped Wall Street to be president and owner of Sugarbush in Warren, Vermont.

And, according to Katz, “every time we add an acquisition it adds more value to the pass and to the resort.” That’s certainly the hope with Park City, for which Vail Resorts paid $183 million. The deal ended years of litigation with previous owner Powdr, a private group that owns, among others, Mt. Bachelor in Oregon. In what will go down as one of the most colossal clerical errors in history, Powdr lost the rights to Park City’s upper trails by failing to promptly file the paperwork for its annual, low-cost lease.

Vail Resorts also has acquired smaller ski areas near Detroit and Minneapolis to cultivate new skiers, and feed potential customers to its Epic Pass scheme. Katz won’t say where the strategy goes next, but with nearly 100 or so options near Boston, New York and Philadelphia, the Northeast is almost certainly on the list.

With over $3 billion of equity, the capacity to further puff up its balance sheet and many targets from which to choose, Vail Resorts is ahead of the competition. Rolling up mountains does come with considerations beyond the purely economic, including environmental and social ones.

“As a family business with a vested interest, we have had an advantage as being local, present and nimble and not worrying about quarterly earnings,” Smith says. “We can be a lot more present than if we were corporately owned. On the other hand, any time you see consolidation like this you have to ask if there are certain advantages in size and scale.”

So far, the answer for Vail Resorts is a resounding yes. Before long, the M&A flurry could turn into a blizzard.

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