Acquisition of Peak Resorts by Vail Resorts: a sensible acquisition (NYSE: MTN)
July 22 was shaping up to be a big day for Vail Resorts (MTN) and Peak Resorts (SKIS) shareholders, with news that the former will acquire the latter in an all-cash transaction valuing Peak Resorts at a premium of 115.7. % on the $5.10 per unit the business closed the day before. This development may scare Vail shareholders who may believe that the company may be paying too much for the smaller rival, but even though Peak Resorts’ financial situation is not fantastic if Vail’s plans turn out to be right , the transaction is less sensitive for the buyer.
An overview of the transaction
According to the press release issued by Vail Resorts, its purchase of Peak Resorts is priced at $11 per unit, payable in cash at closing. That translates to a stock price for the company of around $264 million, but that’s not the only way to look at the deal. Peak Resorts’ net debt at the end of its most recent quarter was $199.60 million. This translates to an EV (enterprise value) on the business of $463.60 million.
Following the acquisition, Vail Resorts investors will see their number of ski resorts increase by 17, with locations ranging from major markets like Boston and New York to smaller markets like Cleveland and Columbus (both in the Ohio). In addition to these cash expenditures, the Vail Resorts management team said they will continue to invest in Peak Resorts operations, with one-time capital expenditures aimed at improving the guest experience amounting to $15 million dollars over a two-year period. In addition to these expenses, the company estimates that ongoing capital expenditures will average approximately $10 million per year going forward. While that might sound like a lot, it’s pretty low considering Peak Resorts’ capital expenditures last year were $30.52 million and the company spent $97.51 million on capital expenditures. investment over the five years ending with its 2019 fiscal year (or approximately $19.50 million per year), some of which were inherently growth-oriented.
A wise purchase
When I started to review the fundamentals of Peak Resorts, I thought it would be difficult for Vail Resorts management to justify this transaction, but upon further evaluation, I believe my justification was flawed. In the graph below you can see some selected financial data on Peak Resorts. The data presented includes company revenue and EBITDA. As you can see by looking at this, the past few years have seen strong growth for the company, with revenue growing from $104.86 million to $184.43 million. EBITDA has been nearly flat for three of the five years, but in 2019 it was $49.77 million.
*Created by author
Some of this improvement both up and down for Peak Resorts comes from M&A-driven growth, but some user-driven metrics showed an increase in customer willingness and ability to to spend. In the graph below, for example, Peak Resorts showed that although the ride was bumpy, revenue/skiers/visits increased and revenue/visits increased. In 2015, for example, revenue/skier/visit was $67.45. Today, that figure is around $87.32. During the same period, revenue per visit increased from $61.34 to $76.11.
*Created by author
According to the Vail Resorts management team, by fiscal year 2021 (which ends in July 2021), the first full year the company will own Peak Resorts, the company is expected to bring them $60 million in EBITDA. per year. Although management did not provide further data, it said that this would be partly due to synergies, both on the cost side and on the revenue side. The cost side is easy enough to understand: with its greater presence in the market, Vail Resorts will be able to realize greater economies of scale on various products that the company needs to survive than if Peak Resorts were an entity. separate, and the company will disappear. with all the overlapping functions that the parent company can do.
On the revenue side of synergies, one possible option could be the expansion of the company’s Epic Pass program. With Epic Pass, Epic Local Pass, and Military Epic Pass, Vail Resorts offers visitors seasonal packages. These pass options will be made available to guests at any of 17 locations currently owned by Peak Resorts, essentially serving as an extension to the company’s existing offerings. The best part is that the passes work at all Vail Resorts owned and operated resorts, so it really is an attractive and reasonably affordable way to access a network of resorts to visit regularly.
Assuming management is correct on the projected EBITDA associated with Peak Resorts, the transaction seems logical. With the financials we know today, the EV/EBITDA multiple of the purchase will be 7.7 without the one-time $15 million investment allocation and around 8 with it. While that’s one way of looking at the transaction, perhaps a better way might be to compare it based on free cash flow instead since we have an idea of what that might be.
You see, at the end of its last fiscal year, Peak Resorts spent about $15.79 million in interest charges. Taking that out of the EBITDA figure, we get $44.21 million, which is basically comparable to cash flow from operations. At the end of its most recent quarter, Vail Resorts had cash and cash equivalents (including restricted cash of $8.88 million) of $68.51 million. I don’t think the company is likely to allocate a substantial portion of its own cash to the purchase, so it looks like the company will pay for Peak Resorts using its credit facilities, which are currently carrying rates of interest between 3.73% and 3.78%. % per year. To simplify things, let’s assume that the rate will be around 4% on the $264 million. This represents a further reduction in cash flow of $10.56 million, which brings us to cash flow of $33.65 million. Now subtract the estimated annual maintenance investment figure of $10 million and we have free cash flow from the agreement worth approximately $23.65 million.
Considering the stock price paid for Vail Resorts, we arrive at a price/free cash flow multiple of 11.2 if we exclude the one-time investment of $15 million. Including it will slightly increase our multiple to 11.8. The corresponding price/operating cash flow multiples for the purchase are 7.8 and 8.3, respectively. All in all, this data suggests to me that even if Vail Resorts didn’t pick Peak Resorts for a song, it got a perfectly reasonable deal, while Peak Resorts shareholders should be thrilled with the huge bonus that they received.
At present, investors in Peak Resorts should be delighted while investors in Vail Resorts should be, at the very least, reasonably pleased with this development that has just taken place. Even though the transaction isn’t a home run for Vail Resorts, it seems like a logical move that will expand its market presence while proving to be cash flow accretive. Obviously, if the synergies aren’t realized and EBITDA is well below the $60 million forecast, that picture could change, but until we see the data as it comes arrive, guessing along these lines would be tantamount to doubting the management of Vail Resorts and baseless speculation about the outcome of the case.