The Intrawest empire

Will the real estate and leisure giant flourish under new operators, or fall like great civilizations of the past?

Joe Houssian is a history buff, and he likes to measure the life of his Vancouver-based Intrawest Corp. against the rise and fall of great civilizations. Intrawest's chairman, president and CEO claims the changing fortunes of empires put his own past and future into sharper perspective. But which ancient empire is Intrawest — a US$1.6-billion real estate and leisure juggernaut whose most prized asset is Whistler Blackcomb, site of the 2010 Winter Olympics — most like: Greek? Persian? Roman? Ottoman? When pressed for an answer, Houssian won't commit. He won't even divulge which civilization has the biggest pull on his imagination. “They're all interesting,” insists Houssian, 57.

Not exactly an illuminating answer, albeit in character for an entrepreneur who is the anti-Donald Trump when it comes to blowing his own horn in public. Still, how did Houssian feel when he announced this summer that Intrawest, a company he founded in 1976, will be acquired and privatized by New York-based hedge fund and asset management company Fortress Investment Group LLC, in a cash deal valued at US$2.8 billion, including debt? Did he feel like Eisenhower on VE-Day? Or more like Saddam Hussein at the beginning of Operation Iraqi Freedom — nervous about what would happen next? We won't know anytime soon, because Houssian has stopped giving interviews since making the announcement on a conference call with analysts and institutional shareholders, on Aug. 11.

Officially, he says he's pleased. But is Intrawest a cautionary tale? If so, it's one whose lesson might be: Beware how you finance your mega-dream. Spread yourself too thin — Intrawest is a public company without a controlling shareholder, held mainly by U.S. institutional investors — and you may suddenly have the rug pulled out from under you.

The alternative interpretation is that Intrawest made the best possible deal at the best possible time, when shares (TSX: ITW) were at their highest level in years. Fortress's US$35-a-share offer — a 20% and 32% premium over the price of Intrawest stock prior to the announcement of a strategic review and subsequent offer, respectively — has been praised by analysts and shareholders. (It's well above the 52-week low of US$23.19.) “I'm surprised Intrawest was able to make a deal for the whole company,” says analyst Will Marks of JMP Securities, in San Francisco. “I thought they were running out of options and would be forced to sell the company in parts.” Says one Toronto-based analyst who declined to be named: “It's an unbelievably high price, especially when you consider Intrawest's business is not doing well.”

Intrawest showed year-over-year improvement in fiscal 2006: income from continuing operations increased 130% to US$55.3 million on unchanged revenue of US$1.6 billion. But the company is coming off two bad years. Whistler Blackcomb, which accounts for about 40% of resort revenue, was rained out in fiscal 2005. And results took a hit from a strike at Mont Tremblant, Que., in fiscal 2006. Still, the broadly diversified leisure company, whose assets include interest in 10 North American mountain resorts and a controlling stake in luxury travel operator Abercrombie & Kent, has managed to bring its long-term debt of US$907 million under control. As a ratio of EBITDA (earnings before interest, taxes, depreciation and amortization), it's 3.1%, compared with 6.5% four years ago. “It's well within our target range,” says CFO John Currie, who adds this measure is the best indication of the company's health.

Rewind to Feb. 28, when Intrawest announced it had hired investment dealer Goldman, Sachs & Co. to conduct a review of its strategic options, with a view to maximizing shareholder value. The following day, Pirate Capital LLC of Norwalk, Conn. — Intrawest's biggest shareholder, with 18.2% of outstanding shares — issued a statement urging the company to put itself up for sale. Pirate claimed public markets could not adequately value Intrawest's landholdings, or fully appreciate its complex joint ventures. As a result, shareholders were being unfairly punished with a low valuation.

“Pirate Capital did not influence our decision whatsoever,” says Currie, who joined Intrawest in 1989 just as the company was preparing its initial public offering on the TSX and NYSE. “In those days, we were a traditional real estate developer with an interest in Blackcomb Mountain,” recalls Currie, noting one reason Intrawest went public was so Houssian's financial backers would have an opportunity to cash out over time. But he admits the markets have always struggled to understand Intrawest, in part because it combines resort and real-estate operations in a single entity. “It's difficult valuing both pieces, especially when they're intertwined,” says Currie. “We needed to look at alternative capital structures to create greater value for shareholders.”

More than 100 parties showed interest, but Intrawest got down to serious negotiation with 15. Currie says there were many offers to buy parts of the company or to form partnerships. “Fortress offered the highest value and the greatest certainty to shareholders,” says Currie. The deal still has to be approved by two-thirds of Intrawest's shareholders, at a special meeting on Oct. 17, but that is largely a formality. Indeed, Intrawest's most outspoken critic, Pirate Capital's founder, Thomas Hudson, has publicly lauded the Fortress bid as a “phenomenal opportunity.”

The question is: Who is Fortress? And what does it want with Intrawest?

The short answer: Fortress is a global investment management company with US$24 billion in equity contributed by institutional clients and high-net-worth individuals. Its interests include real estate, newspaper publishing, aircraft leasing, shipping and telecommunications. Fortress declined to be interviewed about its Intrawest acquisition. “We like to fly under the radar,” says managing director Lilly Donohue. When the deal was announced, however, the chairman of Fortress's management committee, Wesley Edens, stated in a press release that Fortress wishes to continue Intrawest's evolution into a leading global leisure company, along with the existing management team, employees and partners. That's more than a little ironic, when you consider that Wall Street asset managers are not in the business of buying or building dreams. They like to acquire undervalued companies, break them up or turn them around, then sell for a profit.

Prior to Fortress announcing its intentions, there was much talk about the valuation of Intrawest's real-estate portfolio (land held for future development and properties under development). The book value was US$746.7 million in fiscal 2006, but some U.S. analysts and institutional investors say it's worth a lot more. Pirate Capital has pegged the net present value of Intrawest's real estate at US$1.45 billion (resulting in a US$45-a-share valuation), and analyst Marks, with JMP Securities, has an estimate of US$1.7 billion.

Did Fortress buy Intrawest intending to unlock hundreds of millions in hidden value by selling its real estate portfolio? Or does it see synergy between Intrawest's and its own real estate holdings? “We haven't had our post-closing strategy session with Fortress,” says Intrawest's Currie. Analyst Chris Woronka of Deutsche Bank Securities, in New York says it's possible Fortress will make a quick buck auctioning Intrawest's small empire of real estate holdings. “They will probably sell some assets and pour capital into others,” says Woronka. “I'm not sure they're in for the long haul.” He adds Whistler Blackcomb is unlikely to be sold anytime soon, in part because infrastructure upgrades connected to the 2010 Olympics will make it only more valuable.

Whistler Blackcomb will likely remain a part of the new Intrawest, but it's anyone's guess as to whether Houssian and his senior management team plan to stay on. A visionary entrepreneur like Houssian reporting to a boss is a bit like Napoleon reporting to George III. Plus, he's going to be very rich when the deal closes. A combination of 1.89 million common shares, 1.23 million deferred share units and restricted share units, along with 1.3 million stock options, will net him US$126 million. The next highest payouts go to Daniel Jarvis, chief corporate development officer, who gets US$11 million; and Hugh Smythe, president of mountain operations, who gets US$7 million. “The future growth of Intrawest is largely dependent on retaining key folks and the relationships they have in various markets,” says Woronka. “It would be difficult to replicate the knowledge they have gleaned from decades of experience.”

So what historical pattern is the Fortress takeover of Intrawest supposed to fit? There are examples of one empire conquering another, with both becoming stronger as a result. (Alexander the Great conquered Egypt; his Macedonian generals adopted local customs, lived large as pharaohs and built great temples.) Modern times are complicated, however: there are rumours on Wall Street that Fortress may go public. The New York Times recently reported the company is studying the option as a means of retaining talent and resolving succession issues.

If that happens, it would be the first hedge fund IPO in North America. In the meantime, since Houssian is on the cusp of becoming super-rich, he may want to think about putting some money into Fortress — as a private investor interested in growing his fortune.