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Epic vs Ikon

slatham

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The Epic vs. Ikon M&A Battle That Will Transform Your Ski Season
2019-03-01 10:00:36.277 GMT


By Kyle Stock
(Bloomberg Businessweek) -- Even among the world’s most
polished ski resorts, Deer Valley—with its vast carpets of
flawlessly groomed snow spread across four Utah peaks—was always
conspicuously clubby. Skiers can pick up a free copy of the Wall
Street Journal on their way to the fire, while instructors eat
lunch in separate employee cafeterias, lest they mingle with the
guests. “The idea was to replicate the service and experience of
a five-star hotel,” says Bob Wheaton, who ran the resort for 22
years before stepping aside in January.

But when the lifts started cranking this season, things
looked a little different. Among the affluent families were
young couples and packs of Salt Lake City friends navigating the
runs for the first time. The reason: Deer Valley had suddenly
become a bulk-buy product. In 2017 a new conglomerate (later
dubbed Alterra Mountain Co.) bought 11 of America’s most popular
ski resorts and teamed with dozens more mountain owners to honor
a single-season lift ticket called the Ikon Pass. Compared with
buying a string of daily lift tickets for as much as $200 a pop,
the Ikon Pass (which ranges from $599 to $899) can pay for
itself in as few as three days. Only one other product is in
direct competition with Ikon: The Epic Pass from Vail Resorts
Inc. admits skiers to its aggressively expanding chain of 20
destinations including the company’s namesake ski area in
Colorado’s Rocky Mountains.
Together, Alterra’s and Vail’s passes can be swiped at 58
North American resorts, as well as a handful of resorts in
Oceania and Europe. The two competing conglomerates are trying
to turn occasional skiers into frequent skiers and frequent
skiers into serial skiers who incidentally buy a lot of
midmountain beers and slopeside hotel rooms. Deer Valley and
resorts like it have become a sort of research and development
lab forecasting possible futures for the long-struggling ski
industry.
Skiing isn’t necessarily a bad business—it’s just lumpy and
volatile, given natural cycles both economic and meteorological.
(Industry lifers jokingly refer to it as “snow farming.”) As a
result, ski resorts have historically attracted two types of
owners: affluent families willing to ride out some tough years
and investors looking to leverage chairlifts to sell condos. But
in 1997, a third approach emerged when Vail Resorts bought
nearby Keystone and Breckenridge in Colorado for $310 million
and prepared an initial public offering. The plan was to make
skiing a viable business on its own rather than a convoluted
real estate gambit. Vail would buy ski areas and improve them,
attracting more (and more affluent) skiers.
In 2008, Vail introduced the Epic Pass for unlimited lift
rides at all of its (then five) resorts for $579, roughly one-
third the cost of other existing passes. In providing such an
inexpensive end run around daily lift tickets, Vail seemed to be
leaving money on the table. But there was an important catch:
Pass sales were offered only before the season hit its stride,
closing right before Thanksgiving. By getting skiers to buy
early, the company locked in a mass of customers and raked in a
pile of revenue during its slowest months. Its season-pass
revenue increased 22 percent in the first year, from roughly $78
million to about $94 million.
Much of the strategy came from Rob Katz, a square-jawed
graduate of the Wharton School and a rising star at Apollo
Management LLP, the private equity firm that bought Vail out of
bankruptcy and steered it onto the stock market. As a New York
native, Katz had learned to ski on Hunter Mountain, a few hours
north of Manhattan, and as Apollo’s winter sports enthusiast
he’d slid onto the Vail board in 1996, at age 29; 10 years
later, he’d taken the chief executive officer job.
Gradually, Vail added resorts in different regions of the
country as a hedge against weather. If Colorado’s Rockies were
snow-starved, the company could make up the difference in
California’s Lake Tahoe region or Utah’s Wasatch Mountains. By
2017, Vail had 13 properties, including Whistler Blackcomb in
British Columbia, one of the most trafficked resorts in North
America. The cost savings weren’t great; Vail couldn’t share
much equipment or staff between mountains. But there was a
revenue upside—as the empire grew, it enjoyed a network effect.
Epic Pass holders traveled across the country, from Afton Alps
in Minnesota to Heavenly in California, while still staying at
Vail properties. Independent resorts teamed up in various
alliances to sell season-pass products, but these rickety
coalitions changed from year to year and never kept pace with
Vail.
In the 10 years since Vail began selling the Epic Pass, its
shares have nearly quadrupled. Last year, despite anemic
snowfall, the company still got almost half of its revenue from
lift tickets. For every daily visit by a skier, it collected
$168 and paid only $135 in expenses, a 20 percent profit margin.
“It’s been the ultimate Teflon stock,” said Stifel Financial
Corp. analyst Brad Boyer. In response, virtually every ski
executive drew up a plan to either join up with or compete
against Vail. Among them was Rusty Gregory, CEO of one of the
country’s busiest resorts, Mammoth Mountain.
Gregory first clicked into a pair of skis a couple of weeks
after finishing a final season as a University of Washington
linebacker. He put off graduate school to help skiers onto lifts
at Mammoth. “I was probably the most gregarious liftie on the
mountain,” he says. Gregory befriended Mammoth owner Dave McCoy
and was soon welding lift towers. Eventually he ran human
resources and negotiated with investment bankers to sell the
resort twice, most recently to Starwood Capital Group, a private
equity firm. Now, with a 15 percent ownership stake, he lives at
the Four Seasons Hotel Denver with his camper van parked out
front. (It won’t fit in the hotel’s garage.)
Gregory squeaked through the Great Recession more bullish
on skiing than ever. Even though people stopped buying slopeside
condos, they kept coming to ski. In 2016, having weathered the
worst of the storm, the industry’s private equity owners wanted
an exit. Starwood Capital was looking to sell Mammoth and its
sister resorts, Big Bear and June, and Fortress Investment Group
LLC was trying to offload its majority stake in Intrawest
Resorts Holding Inc., a conglomerate of seven mountains that
Vail had soundly whupped. It was a rare opportunity: 10 of North
America’s most popular winter playgrounds on the block at the
same time.

Ever the gregarious liftie, Gregory suggested Starwood
Capital join forces with the Chicago-based Crown family and KSL
Capital Partners LLC, a private equity firm led by two former
Vail executives. “It was the kind of thing that probably
wouldn’t have happened if we hadn’t been casually drinking beer
together for years,” he says. The descendants of the
industrialist Henry Crown owned a number of Colorado resorts
known for fine dining and being favored by celebrities. KSL
Capital, which owns California’s Squaw Valley, had previously
worked with the Crown family on developing Aspen Snowmass in
Colorado. In April 2017, KSL and the Crowns bought Intrawest for
$1.6 billion and folded in Mammoth, Big Bear, June, and Squaw
Valley on undisclosed financial terms. David Perry, longtime
chief operating officer of Aspen Skiing Co., took command of the
deal, with Gregory as a close confidant. Both men knew size
would equal safety, so they began calling their buddies, which
eventually led to the formation of Alterra.
In October, Alterra invited leaders of the continent’s
largest non-Vail resorts to New York City’s Gansevoort hotel.
Their pitch was, “If you won’t let us buy you, honor our season
pass, and we’ll split the revenue even-steven.” Under the
partnership agreements, a resort would be paid for each day a
skier swiped her Ikon Pass—either a negotiated fee or a “blended
rate” based on how many Ikon days were tallied over the course
of a winter. Stephen Kircher, president of Boyne Resorts, which
owns nine properties spread from Maine to Oregon, says the offer
went over well, particularly among ski areas that had been
fending off Vail for years. “I emailed them within about eight
seconds,” he says.
Soon after, Vail started making similar calls, offering to
host partners on its Epic Pass. “We were all in play,” says
Jerry Blann, who was then the president of Jackson Hole Mountain
Resort Corp. in Wyoming. Through the winter of 2017-18,
America’s biggest ski mountains were picking sides. Jackson Hole
went with Alterra, as did Sugarbush in Vermont, plus Boyne
Resorts and Powdr Corp.—two smaller conglomerates comprising 18
resorts, including Montana’s Big Sky and Vermont’s Killington.
By the time flurries starting falling this past fall, an
additional 11 resorts had signed on to the Ikon Pass, and
Alterra had purchased two more resorts.
Vail’s mergers-and-acquisitions squad was also working
overtime. The company snapped up five resorts over the summer
and fall of last year, including Stowe in Vermont and Colorado’s
Crested Butte. Telluride Ski & Golf Resort CEO Bill Jensen went
with Vail largely because it had a long track record managing a
number of resorts under one season pass. He figured his mountain
would lose up to 15 percent of its out-of-town business if he
didn’t align with one pass product or the other. “We’re a rural
place,” he says. “I have an entire community to think about, not
just the ski resort.”
Wheaton, the former Deer Valley president, estimates he’d
been turning down acquisition offers for the resort every two
weeks for almost a decade. Most of the time he wouldn’t even
bother to relay the bid to the families that owned the resort.
But Alterra’s offer, still undisclosed, was on a different
scale. “I thought, ‘Well, this is one I better call them about,’
” he says. “It was like, holy s---.”
On a crisp, sunny morning in late December, a massive snow-
grooming machine trundled up one of the slopes at Steamboat, an
Alterra resort northwest of Denver. The rig ground to a stop on
a midmountain plateau, cranked out some reggae, and started
slinging Mexican food. Taco Beast, as the machine is called, is
a paragon of Alterra’s approach to the ski business: a $300,000
experiment that resort managers didn’t bother running by
headquarters. By 2 p.m. the food truck had sold almost $2,000 in
tacos before crawling off to restock.
“We’re not selling widgets here—we’re creating
experiences,” Gregory says. He claims this approach was critical
in getting independent mountains to sign on to Alterra’s season
pass over Vail’s. Erik Forsell, the marketing chief, says the
best metaphor is the beer industry: If Vail is Budweiser,
Alterra wants to be a six-pack of craft brews.

At Vail, Katz bristles at the implication that the
company’s resorts are homogeneous. Sure, there’s still a small
band of crusty ski-town lifers driving around with “F*ck Vail”
bumper stickers, irate that their favorite lift was upgraded to
a high-speed quad or some jobs were moved to Denver. But that’s
a small demographic, and savings aren’t easy to come by in the
ski business, Katz notes. “There are plenty of things I hear
from guests that they think we should do better,” he says. “I
never hear that Breckenridge looks like or feels like or gets
confused with Vail or Park City or Whistler or Kirkwood or
Stowe.”
One thing Vail resorts have in common, besides matching
employee parkas, is technology. Every Vail pass or ticket is
embedded with a radio frequency identification chip, which is
automatically scanned like an E-ZPass at every one of the
company’s 430 lifts. Vail knows how much, where, and with whom
each guest skis. The data are used to predict how likely the
person is to return to a Vail resort. It’s a Big Data play in an
historically analog industry, and the machinery will only get
smarter every time Vail swallows another resort.
Right before Christmas, Alterra was still moving into its
new headquarters just east of downtown Denver. Cardboard boxes
and computer screens were stacked against panoramic windows
framing the Front Range and a handful of breweries and weed
stores. “You’ll have to excuse us,” Gregory said. “We’re kind of
building the airplane as we’re flying it.” Alterra won’t say how
many Ikon Passes it sold, but orders were ahead of expectations
by 30 percent, and the company was on track to book $1.5 billion
in annual revenue.
In a suburb 18 miles north, Vail headquarters was more
organized but arguably less chipper. On Dec. 6 shares of the
company had plummeted by almost 18 percent when it reported
season pass sales slightly lower than expectations. A few weeks
later, shares fell an additional 13 percent when Vail said it
welcomed smaller-than-expected crowds leading up to the December
holidays. Boyer, the analyst at Stifel, lowered his target price
on Vail. “There is that ‘Eff Vail’ crowd out there, and those
folks embraced Ikon from the start,” he says. “It’s definitely a
competitive threat.” Even so, Vail pass sales have increased by
an average of 13 percent a year for the past six years, and the
company is on the cusp of selling 1 million season passes for
the first time, thanks in part to a new sales program aimed at
service members and military veterans.
Vail’s growth is impressive relative to the industry at
large. The number of U.S. skiers (about 9 million last year) and
how many days they log on a mountain (53 million) have changed
very little in the past two decades, according to the National
Ski Areas Association. Meanwhile, the $8.4 billion industry
faces an existential crisis on two fronts: climate change’s
feast-or-famine cycles of snowfall and a tide of baby boomers
heading for the permanently aprés-ski scene of hip replacements
and retirement homes.
Nor has skiing shed its stigma as an expensive pastime.
Alterra and Vail may be exacerbating the problem as they
increase daily rates to nudge people into buying a season-long
lift ride. “In the eyes of a potential new skier, that’s what
skiing costs,” says Evan Reece, CEO of online lift-ticket
marketplace Liftopia Inc.
Reece spends his days trying to persuade resorts to price
daily tickets the way airlines price seats, fluctuating
constantly based on a range of factors including weather and how
far in advance someone is purchasing. It’s an economically
proven way to maximize value and get novices on the hill at a
discount; it’s also a tough sell. Reece worries that as the
industry rewards the loyalty of its core customers, fewer people
will give skiing a try. “There’s some amount of the market
that’s going to vaporize overnight if the industry keeps
doubling down on season passes,” he says.
Katz says the focus on regulars helps the industry: “The
more days we can get out of somebody, the more likely it is that
they’ll continue skiing.” He says he’s heartened that
participation has held stable, a contrast to the hordes of
weekend warriors giving up on golf.
In mid-December, Gregory flew into Deer Valley to see how
things were going. After a conference call, he loped up to the
lift to meet Wheaton, who’d delayed his retirement and signed on
as a sort of roaming consultant for Alterra. They’re two
unlikely ski bums turned even less likely ski executives.
Wheaton, a native of Detroit, is short with a rancher’s belly.
Gregory, who paid for his few finance courses by welding
bridges, hulks with a linebacker’s head. On the lift ride up,
they were sanguine about the future of their industry. Who
wouldn’t love this? they wondered, as the sun saturated the
Wasatch Range. “I can tell you one thing,” Wheaton said, “we’re
not done shopping, and Vail’s not either.”
Disembarking, the men tucked their chins to the wind,
leaned into the descent, and carved sinuous turns with near-
perfect form. In the parlance of the sport they love, they
ripped, zipping past crowds of new guests at speeds that seemed
almost reckless.
 

billo

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Pretty sure cutting and pasting an entire article is illegal and could get this forum sued. Why not just link it?
 

slatham

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Pretty sure cutting and pasting an entire article is illegal and could get this forum sued. Why not just link it?

Oh please....

Its on the Bloomberg terminal, not on a web site yet so there is no link.
 

BenedictGomez

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Pretty sure cutting and pasting an entire article is illegal and could get this forum sued. Why not just link it?

It's rather annoying visually, but I think AlpineZone is safe from the wrath of Michael Bloomberg.
 

Domeskier

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Sure, joke about it now, but who's going to run this site when Nick gets tossed in jail?
 
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