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New directions for Intrawest?

A week after strategic announcement, analysts offer context
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"What could possibly be the motivation to not have the premier resort in North America?" Sheila Broughton, Pacific International Securities

Within hours of a press release being issued by Intrawest last week saying it was undertaking a strategic review the Whistler rumour-mill went into overdrive.

There were reports that the company was up for sale, that Whistler Blackcomb might be sold off, that investors were calling for change.

By last Thursday Standard and Poor placed the credit rating of the Vancouver resort operator and real estate developer on "credit watch." It said its action reflected the potential for Intrawest’s rating to be negatively affected if the company adopted a more aggressive capital structure no longer suitable for its current "BB" rating.

A week later the news of the review is being considered in a more strategic light with some arguing last week’s furor was a storm in a teacup driven in part by profit-seeking activist shareholders.

The Feb. 28 press release said Intrawest was initiating a review of strategic options available to the company for enhancing shareholder value, including, but not limited to a capital structure review, strategic partnerships or business combinations. The company said it had retained Goldman, Sachs & Co to assist in the review.

In fact Goldman Sachs has been involved with Intrawest since about September said Sheila Broughton, an equity analyst with Pacific International Securities Inc.

"(Intrawest) formalized its arrangement with Goldman Sachs in that press release," she said.

"Goldman Sachs is not just arriving at Intrawest now."

With news of the review came press coverage of a call by Pirate Capital LLC, a Norwalk, Conn. money manager that owns 12 per cent of Intrawest, to sell the company.

This served to fuel the rumour that the company was in play.

Intrawest chief executive Joe Houssian told any media outlet who called him last week that the "objective isn’t to sell off our assets."

That claim was supported by Whistler Blackcomb’s executive vice-president and chief operating Dave Brownlie in last week’s Pique Newsmagazine.

It is not unusual for management teams to look at engaging an investment banker to review their strategic options, said Gail Mifsud of Raymond James.

"From my point of view I believe that (Intrawest) management has been pro-active and has done a lot of the required things that needed to be done to result in increased share price," she said.

"Quite frankly, I think discussions about the potential sale of the company in terms of surfacing additional value are overblown. The reality is that you have a unique collection of real assets at the base of the mountains and you have ski and resort operations and at this point in time you have a real estate side of the business that ends up requiring a lot of capital."

Mifsud said the real estate side can act as a drag on the operations but selling the company would not resolve the issue, it would simply mean that a private investor would have more patience in realizing a profit.

Part of the challenge Intrawest has faced on the real estate side is that it now takes three to four years to realize profit on its developments, as they are large and complex compared to the single family home or quick condo units it previously developed.

Investors have voiced concern over the debt load Intrawest has carried because of its interest in real estate and the company has worked to address that by forming alliances with other companies.

Mifsud believes Intrawest needs a partner.

"Essentially, in my view, what Intrawest needs is an angel investor to come in and basically form a partnership with them…

"But I think (it needs to be) on a more global scale, encompassing all real estate that they develop and that partner will be able to then realize the pressure in terms of debt on the Intrawest balance sheet."

Both Broughton and Mifsud believe it unlikely that Intrawest would sell off Whistler Blackcomb separately.

Intrawest does not own all of Whistler Blackcomb. Nippon Cable owns 23 per cent.

"(It is) pretty clear you have tiered resorts (within Intrawest) and (Whistler Blackcomb) is one of the gems, so if you were to sell that resort what would be your motivation?" pondered Broughton. "What could possibly be the motivation to not have the premier resort in North America?

"I spend lots of time with Intrawest and they are certainly saying that they were a little surprised with the spin that was taken."

Said Mifsud: "(It is) not efficient to segregate the assets, quite frankly. "Whistler Blackcomb accounts for about 40 to 45 per cent of (Intrawest’s) ski resort EBITA, so if it sells Whistler, effectively what you would be left with would be a handful of other assets which don’t have as much intrinsic value as Whistler Blackcomb, so you wouldn’t be able to realize full value for the other assets."

(EBITA refers to earnings before interest, taxes and amortization).

In terms of a business plan it does make sense for Intrawest to remain active in real estate in and around its resort properties, as that way it can help control and guide the customer’s experience and keep the value of its offering high.

And it also makes sense for the company to be looking to grow, as that is the job of public companies – to always be looking for ways to increase the share value for its stockholders.

Broughton points to Intrawest’s on-going interest in China as a reflection of this growth strategy, and the strategic review plays into that as well.

"Having a strategic review (will) hopefully (give Intrawest) a good feeling about how they are going to finance that," she said.

Several options are open to the company, including just offering expert advice for a fee, entering into a joint venture, or coming up with capital for those projects itself.

To date Intrawest has not announced when the strategic review will be complete.