Everybody likes writing about their winners, but it is equally important to understand why failed predictions end up so.
Many, many, many years ago, I wrote about Whistler-Blackcomb’s (TSX: WB) IPO and about how I was quite leery about it.
With today’s acquisition offer by Vail Resorts, it should end this particular story – and was I ever wrong about the market valuation of the entity! WB went public in 2010 at $12/share, and they closed today at $36.63 a share, which would be about a 21% compounded annual gain for shareholders. I said when they got public “I might think about buying at $5.30/share”, but it never got close.
Why was I so incorrect with my projections? Putting a long story short, their resort operations ended up producing more profitable revenues than I originally anticipated, coupled with the fact that their capital expenditures remained below their ability to rake in cash flow – their net debt situation has been positive (i.e. net debt reduction) since they went public. With increasing profitability and decreasing financial leverage, I believe the partners of the Whistler-Blackcomb entity have done very well financially.
I never liked the fact that a good chunk of the publicly traded entity only represented a partial amount of the full operation – there was a huge amount of minority interest that would have siphoned a lot of economic upside. There were other residual risks (Whistler is quite developed as it is and there is significant political cost to further development in the area) that made me skeptical of the performance of the corporation. There was also the nagging feeling that the company was trying to cash out on the Vancouver 2010 Olympics.
The takeout price (a combination of roughly half cash, half stock in Vail Resorts) is higher than I would have ever expected such an offer to be. The acquisition is strategic in nature, so Vail Resorts should be able to achieve some sort of cost synergy with Whistler. That said, I’d be happy with the price received.
I have never owned nor shorted any shares of WB, and I am glad to have not!
Hi Sacha, it’s interesting, I recently wrote about WB and couldn’t make a case for owning it at what seemed to me, to be a pretty rich valuation (in excess of 35x average earnings over the last 4 years). I also believed that anyone making the case for multiple expansion starting at +35x given no free cash flow and a massive capital improvement project on the horizon was clearly nuts.
Lo and behold, along comes Vail, which ain’t exactly cheap itself (2008 was the last time it traded under 12x earnings), and it takes WB out buy utilizing a combination of cash and its own overvalued stock as currency in order to buy a Canadian income stream using USD $’s trading at a premium to Cdn $’s.
Just goes to show that no amount of “seemingly” sensible analysis on the little guy’s part is a substitute for management recognition (behind closed board room doors) of the strategic advantage of using over-valued stock as currency while stock remains over-valued.
It is probably also reflective on the financial decisions made in a low-interest rate environment.
Vail was probably thinking of empire-building concerns (get the asset now before somebody else does) and the sellers were thinking about cashing out at a very attractive valuation.
PS, I made an incorrect statement above, they did have free cash flow, but this free cash was consumed entirely by virtue of their dividend payout. My mistake (it’s Monday). My concern was how they were going to maintain the payout while embarking on transformational capx, but moot point now I suppose.