The ownership soap opera continues

On Tuesday the Globe and Mail reported on what had been rumoured for at least a week and a half, that Fortress Investment Group was considering taking Whistler Blackcomb public. An initial public offering of shares was in the works, according to unnamed sources cited by the newspaper.

It's good gossip, made all the more juicy because it may, in fact, be true.

If so, it also shows how badly Fortress needs to get something out of a very poor investment, its $2.8 billion leveraged purchase of Intrawest in 2006.

After selling some resorts in the Intrawest portfolio - Copper Mountain, Panorama and a stake in a couple of French ski areas were dispatched in the last 12 months - and holding off creditors during the Olympics, Fortress refinanced the loan it used to buy Intrawest. But it's been costly, according to various reports.

In March the Wall Street Journal , citing unnamed sources, reported that Fortress coughed up $150-million of new equity to pay down debt and satisfy creditors. That infusion came after two Fortress funds kicked in an additional $345 million in October 2008 to keep lenders at bay, according to a June 2009 investor update obtained by Bloomberg.

Bloomberg also reported that investors in Fortress's "Fund IV, Fund IV Co and FICO funds saw their collective $1.7 billion equity stake shrink to 4 cents on the dollar as of Oct. 31, 2009."

That puts Fortress and Intrawest in the same sort of relationship as many Americans find themselves and their homes: with a mortgage that's worth far more than their house.

So it's little wonder that there are periodic rumblings about new investors in Whistler Blackcomb or Intrawest. Early in the summer it was supposed to be "the Russians" who were interested. This week the Globe and Mail , citing unnamed sources, reported that the Ontario Teachers Pension Fund and oilman Murray Edwards, who owns Resorts of the Canadian Rockies, had also passed on the opportunity to buy Whistler Blackcomb. Now it's supposed to be an IPO, at a time when many IPOs have been postponed or cancelled.

If institutional investors and wealthy individual investors have declined to pay what Fortress wanted for Whistler Blackcomb - Fortress "...didn't like the valuations they got (from other buyers) so they will try the IPO market," the Globe quoted an unnamed source - why would retail investors pay more? What is their incentive?

From a traditional investment perspective Whistler Blackcomb is not that attractive. It's not growing. It doesn't own any real estate to speak of and it doesn't hold significant development rights. Its physical assets include a lease on Crown land, aging lifts and buildings and a new snowmaking system.

On the plus side there is Whistler Blackcomb's "brand" and reputation, which have been furthered by a successful Olympics. And the operation of the mountains, as far as we know, is a profitable, steady business.

So maybe, if there really is an IPO, the investment opportunity is not for the typical investor looking for a good return on their money but for someone with a long-term interest in the company, like the Whistler community.

There is little doubt, given the huge debt it still needs to pay off, that Fortress is looking for a partner to share the load. How much control that partner or partners would get may be one of the sticking points.

Nippon Cable still owns 23 per cent of Whistler Blackcomb. Reports earlier this year suggested the Japanese company is open to increasing its stake in Whistler Blackcomb. The principals of Fortress and Nippon Cable got together for a little skiing during the Olympics, so perhaps they are compatible.

Fortress seemed to fight hard to maintain control of Intrawest last winter when its creditors threatened to hold an auction for the company's assets. How close the situation ever came to an auction is open to debate. But there is a school of thought that Intrawest is better off in the hands of Fortress - whose principals are said to be quite enamoured with Whistler Blackcomb - than Fortress's creditors, some of whom are even more desperate for cash.

And then there's Vail Resorts, the resort operator and competitor formerly headed by Intrawest CEO Bill Jensen. Vail has reportedly been interested in Whistler Blackcomb but not other Intrawest resorts. It has the expertise and perhaps the money to reinvest in Whistler Blackcomb's infrastructure. But would Whistler Blackcomb complement Vail Resorts' existing operations, and vice versa?

Fortress needs new investment in Intrawest and/or Whistler Blackcomb, so a new partner or public offering seems inevitable. But how badly Fortress needs a cash infusion may be the key to who the partner is and on what terms.




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