There has been a lot of speculation in the last year about the fate of Fortress Investment Group, owners of Intrawest, the parent company of Whistler Blackcomb. Tuesday's announcement of the sale of Copper Mountain, one of Intrawest's suite of mountain resorts, is likely to add fuel to that speculation.
A year ago Fortress was scrambling to refinance the debt it took on with the purchase of Intrawest in 2006. Fortress reportedly paid $1.8 billion for Intrawest, and assumed nearly another $1 billion in debt.
October 2008 wasn't a great time to try and refinance, particularly a purchase as heavily leveraged as Intrawest. That refinancing deal came due at the end of last month, but the loan was extended with little fanfare.
It will come due again, but any suggestion that will mean Fortress struggles for another 11 th hour deal is pure speculation. We tend to forget the scale of Fortress and what it can do in the financial markets. In Whistler, Whistler Blackcomb is the biggest game in town, but in the Fortress galaxy it's just another star.
Intrawest is one of 10 companies in Fortress's $2.5 billion Fund IV account. Other companies in Fund IV include Spectrum, RailAmerica Inc. and Florida East Coast Rail. Apparently the whole Fund IV account is not performing well. According to Bloomberg, Fortress told investors in August the account was worth 25 per cent less than what it paid to acquire the companies.
Intrawest is the worst performing of the 10 companies in the fund. In August, according to a letter from Fortress to investors, obtained by Bloomberg, Intrawest was valued at $721 million.
How many other accounts Fortress has is difficult to determine, as only part of the company is public. But assets managed by Fortress at the end of its third quarter, reported Nov. 6, were $32 billion. That's down from $34.3 billion a year earlier.
However, assets, revenues and share prices may be less important to the handful of key players who control Fortress than management fees, incentive income and expense reimbursements. That's where the Fortress founders keep making money, regardless of how individual companies are performing.
Moreover, after a brutal 2008, Fortress is getting healthier. Reporting on Fortress's third quarter results earlier this month the Wall Street Journal said: "Fortress - which was one of the most-beaten down publicly traded private-investment firms - is now relatively healthy in its hedge fund and private-equity funds. The company doesn't have a lot of debt coming due short term in the private equity funds and many of its hedge funds have returned to their high-water marks."
Regarding Intrawest, Hayley Wolff, an analyst at Rochdale Securities LLC, told the Globe and Mail this week, "Fortress bought a good portfolio of assets, they just overpaid. They've pushed out the debt maturities a little bit but they need cash." She called the sale of Copper "a step in the right direction."
"It's unfortunate they've gotten to this stage, where they're overleveraged and not investing in the properties," Wolff added.
And therein lies one of the concerns for Whistler in the post-Olympic world. Intrawest is the worst performing company in one underperforming fund of 10 companies. To raise cash and improve Intrawest's "performance" Copper has been sold. (One real estate broker in Colorado with experience in resort transactions speculated that the price was probably in the neighbourhood of $100 million.)
However, the sale of Copper weakens Intrawest in the competitive Colorado ski market. Vail Resorts, which owns Vail, Beaver Creek, Breckenridge and Keystone, is the biggest player in Colorado. Intrawest was competitive through its ownership or management of Copper, Winter Park and Steamboat. Pass programs involving the three Colorado Intrawest resorts will continue through this winter but what happens in the future is unclear.
Whistler Blackcomb is historically the most profitable operation within Intrawest, so there would appear to be little motivation for Fortress to sell it. Profit in an underperforming group of companies is what Fortress seems to be most interested in, not the grooming of Ego Bowl or the coffee at Glacier Creek Lodge.
Those things matter to Dave Brownlie, to Doug Forseth and they should matter to all of us living in Whistler.
In fact, the grooming, the coffee, the ski school and the whole mountain experience should be of concern to the principals of Fortress and their investors if they intend to hang on to some or all of Intrawest. Whistler Blackcomb, and the eight other remaining mountain resorts in the Intrawest portfolio, are in the service business for the foreseeable future. Intrawest may have looked like a real estate company when Fortress bought it in 2006, but the model and the times have changed. Any profits will come from mountain operations, not from sales of new condos. Whether Fortress has the patience for that remains to be seen.
Just as importantly, with Intrawest remaining as Fortress's "most challenging Fund IV investment," it is unlikely there will be major reinvestments in new lifts or mountain operations at any of the nine remaining Intrawest mountain resorts in the near future.
So following the Olympics, when the community of Whistler sits down to contemplate its long-term plans and set its next goals, the operation of Whistler Blackcomb should be part of that discussion.
