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!
Now that I have been thinking about some IPOs that I have covered in the past, we have the following:
Whistler Blackcomb (TSX: WB) – I stated in an earlier article that this is one to avoid and I might think about it at $5.30/share and so far nothing has changed this assessment.
Athabasca Oil Sands (TSX: ATH) I did not have a firm valuation opinion other than that the shares seemed to be overpriced at the offering price ($18/share) and stated the following (previous post):
Once this company does go public it would not surprise me that they would get a valuation bump, and other similar companies that already are trading should receive bumps as a result. I have seen this already occur, probably in anticipation of the IPO.
If you had to invest into Athabasca Oil Sands and not anywhere else, I would find it extremely likely there will be a better opportunity to pick up shares post-IPO between now and 2014.
While the valuation pop from the IPO did not materialize (unlike for LinkedIn investors!) the rest of the analysis was essentially correct – investors had the opportunity to pick up shares well below the IPO price (it bottomed out at nearly $10/share in the second half of 2010), although I don’t know whether the company represents a good value at that price or not. I didn’t particularly care because Athabasca Oil Sands has some other baggage that made it un-investable (in my not-so-humble opinion).
While I am reviewing my track record on this site, one of my other predictions dealt with BP, Transocean and Noble Drilling, that:
Over the course of the next 2 years, $10,000 invested in BP (NYSE: BP) at the closing price of June 16, 2010 will under-perform $10,000 evenly invested in Transocean (NYSE: RIG) and Noble (NYSE: NE). Assume dividends are not reinvested and remains as zero-yield cash.
At present, BP would have returned US$14,392.46 to investors, while RIG and NE would have returned US$14,198.52. If I had the ability to close this bet for a mild loss, I would – the political risk for the three companies in question have completely gravitated toward the “status quo” once again after the Gulf of Mexico drilling accident. Drilling capacity is likely to rise, depressing the value of the contractors and favouring BP in this particular bet.
The reorganized entity of Whistler Blackcomb went public and has been trading for one week:
It has been trading narrowly around its (reduced) $12 price. With the announcement of inclement weather in the Greater Vancouver area and the early opening of the ski resort, it has not resulted in a budge in the share price.
I earlier covered Whistler Blackcomb and was not terribly positive on them at their IPO price.
Whistler Blackcomb will be trading next week under ticker symbol WB in Toronto.
They priced their shares at $12 – down from the expected $15. The entity, assuming no exercise of the over-allotment, will have 37.8 million shares outstanding, so $12/share will have a capitalization of $454M.
The final prospectus was released on SEDAR yesterday and I went through it. What Fortress is leaving behind for the public is the empty husk of an entity that is heavily indebted, negative tangible equity on the balance sheet, and 97 cents of pre-capital expenditure cash flow to play with from the September 2009 fiscal year. 2010 will be a slightly worse year in terms of cash flow.
The biggest sham of this IPO is the dividend talk – 97.5 cents per share, based on a very flawed calculation on page 19 which will be very safe to say will not be sustained. Still, you will have enough retail investors that would be foolish enough to purchase shares strictly based on the 8.1% yield, but my guess is that this yield is not going to be sustainable in the medium term. They will have enough of a cash buffer ($29 million) to fund dividends beyond their cash generation, but it will not last long.
There is value in the shares, but certainly not at $12/share. This one is an easy avoid. I might take a look at the shares if they dip below about $5.30/share – they’ll likely get there once they cut distributions and/or have a bad season and/or are forced to recapitalize their $255 million debt.
There is more quantitative work that went behind this post, but for the sake of readability I have omitted most of it and stuck to the salient details of this IPO.
How this stock will trade will be interesting to watch – I suspect it will do a little better than $11.40/share (IPO proceeds minus fees) simply because it is an “income stock”.