- Shares of Vail Resorts (MTN) remain fully valued.
- Legal dispute regarding Park City mountain resorts is a distraction.
- New publicly traded comps, including Intrawest Holdings (SNOW) provide relative valuation metrics for Vail.
Here we are in the middle of ski season, and much like the lift ticket prices at Vail Resorts , the shares are no bargain either. To be certain, Vail is the king of the mountain and it is being priced accordingly. To give an idea about the range of its activities, Vail owns:
Vail, Breckenridge, Keystone and Beaver Creek mountain resorts in Colorado; the Heavenly, Northstar and Kirkwood mountain resorts in the Lake Tahoe area of California and Nevada; the Canyons mountain resort in Park City, Utah (subject to a litigation, discussed below); and Afton Alps ski area in Minnesota and Mount Brighton ski area in Michigan.
As one can see, Vail's reach is broad and geographically diverse. Considering that winter sports are a weather driven activity, it is a good thing from a diversification perspective to own resorts in various regions to mitigate a down snow year. Over the last several years, Vail has undertaken a roll up strategy and acquired a number of new properties, including the urban ski areas in Minnesota and Michigan. It also signed a 50-year lease with Talisker for Canyons resort, for $25 million a year and certain contingent value rights based on a percentage of EBITDA over $35 million.
The Park City Mountain Resort Matter
While I am no legal expert (although I did work as a damages expert in litigation matters), the matter seems a bit outrageous to me. Here are the facts as I understand them:
- Park City Mountain Resorts ("PCMR") operated Park City for the last half century under an operating lease it had secured United Park City Mines ("UPCM").
- A Canadian company called Talisker acquired UPCM in 2003, and gained control of the operating lease. The rent was $155,000 a year, with 20 year lease renewal options through 2051.
- In 2011, on account of "clerical error," PCMR sent a letter to Talisker two days after the lease expired to indicate their intent to renew the lease. Talisker responded that they had not legally renewed the lease, and the litigation began.
- In 2013, Talisker awarded Vail a lease to Canyons for $25 million a year. If Talisker/Vail prevail in the litigation, Park City will be rolled into the Canyons lease.
It is hard for me to believe that a simple clerical error and a two day late lease renewal letter can cause a legal battle costing several millions of dollars, meanwhile allowing a prime asset like Park City to sit in the flux.
Leaving my personal beliefs aside, I think there is a very real, negative catalyst attached to Vail on account of the Park City matter. If it is adjudicated that the PCMR, in fact, should retain the operating lease to the mountain it operated for the last half century, that would be a significant blow to Vail. On the other hand, I think the market has fully priced in that Park City will become a Vail resort.
A New, Public Comparable
On January 31, 2014, Intrawest Holdings IPO'ed well below its forecasted $15 to $17 per share range. I understand that Fortress Investment Group (FIG) remains the largest shareholder with 65.3% of the shares.
The SNOW IPO is important because it gives investors another publicly traded comparable from which to assess Vail Resorts. Another publicly traded comparable is Whistler Blackcomb (OTC:WSBHF) which retains a 75% interest in Whistler Blackcomb in British Columbia.
My read on the SNOW financials is that it trades at a similar relative valuation from an EV/EBITDA perspective. Vail indicated in its prior call that it expects $280 to $295 million in reported EBITDA in FY 2014, putting its forward EV/EBITDA multiple at about 11.5x at the current price. While there is less visibility into SNOW's guidance (which is difficult to estimate given the real estate development activities), it too trades at about an 11.5x multiple on last twelve months' figures.
Today, Vail Resorts is priced at $2.5 billion and is encumbered by about $700 million in net debt. While there is a certain "moat" around owning and operating world class ski resorts - these assets that are impossible to replicate - they remain expensive to operate and subject to the whims of the weather pattern.
In my view, the strange Park City matter and the high levels of capex in running a mountain resorts remain inhibitors from investing in Vail or this asset class at current prices. And, speaking to capex, I understand that Vail management is set to unveil its capital spending plan in March which evidently will include some large projects around its lodging segment. Speaking to the capital plan, CEO Robert Katz mentioned (transcript courtesy of Seeking Alpha):
We'll be providing additional detail related to the capital plan in March. I think what we -- we want to announce these 2 projects, which will be 2 of the bigger projects of the entire plan. So I think we're going to look at our -- we'll certainly have a number of additional projects, and to the extent we have something to disclose on the lodge front, we'll talk about that in March.
Even though I think that Vail looks fully priced, Vail has attracted a number of activist, value oriented funds including a large investment from Southeastern Asset Management (which was recently reduced by about 25%). My guess is that these funds are assessing the value inherent in the real estate development possibilities at the various resorts owned/operated by Vail. To that end, the capex announcements around the lodging segment could be another precursor to that thesis.
It is hard to see any margin of safety built into Vail's share price at the current quote. While I don't expect the number of visitors at the resorts to drop precipitously, growth is limited to a roll up strategy in acquiring new resorts or generating extra revenue from existing resorts. Both of these cost money, as does the exorbitant costs of running a mountain resort. On the other hand, with Vail's growing influence, and its ability to offer its "Epic Pass" that includes access to a growing number of resorts, season pass sales could continue to improve. This is important for the business, as it mitigates weather related issues and provides the business cash up front.
That said, because of the capex and high cost of running mountain resorts, I think that owning this asset class at the $2.5 billion price tag the market has set for Vail Resorts is not a particularly attractive investment at this time. That doesn't mean that Vail is not a good company, only that the price to own these assets is too high for risk-averse investors at the current quote.